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, 2002
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 Identification No.)
incorporation or organization)
100 Sylvan Road, Woburn, Massachusetts 01801
(Address of principal executive offices
Registrant's telephone number, including area code: (781)904-5000
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(Former name, former address, former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 1, 2002, the Company had outstanding 17,340,292 shares of common
stock, $.01 par value per share.
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
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
This Quarterly Report contains forward-looking statements that involve risks and
uncertainties, including without limitation, statements regarding the expected
increase in subscriber base, average minutes of use (MOU) and Prepaid Wireless
Services revenues, increase in MOUs resulting in increased volume discounts for
carriers, leveraging fixed costs to yield higher Prepaid Wireless Services gross
margins in 2002, reduction of unregistered roaming revenues, engineering,
research and development, sales and marketing, general and administrative and
depreciation and amortization expenses, the increase of days sales outstanding
(DSO) and the source of funds for capital investments. The Company's actual
results may differ significantly from the results discussed in the
forward-looking statements.
Any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these words.
There are a number of important factors that could cause actual events or the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth under the captions "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Certain Factors That May Affect Future
Results" and "Quantitative and Qualitative Disclosures About Market Risk" of
this Quarterly Report on Form 10-Q. The factors discussed herein do not reflect
the potential future impact of any mergers, acquisitions or dispositions. The
Company does not assume any obligation to update any forward-looking statements
made herein.
BOSTON COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
June 30, December 31,
------------- ----------------
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2002 2001
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ASSETS
Current assets:
Cash and cash equivalents $32,603 $37,646
Short-term investments 21,564 22,607
Accounts receivable, net of allowance for billing adjustments and
doubtful accounts of $1,388 in 2002 and $1,169 in 2001 12,185 10,782
Inventory 594 1,036
Deferred income taxes 2,395 2,352
Prepaid expenses and other assets 1,826 1,490
- ------------------------------------------------------------------------------------------------- ------------- ----------------
Total current assets 71,167 75,913
Property and equipment:
Telecommunications systems & software 78,305 70,566
Furniture and fixtures 616 612
Building and leasehold improvements 1,934 1,895
Systems in development 6,863 3,027
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- ------------------------------------------------------------------------------------------------- ------------- ----------------
87,718 76,100
Less allowance for depreciation and amortization 44,831 37,305
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- ------------------------------------------------------------------------------------------------- ------------- ----------------
42,887 38,795
Goodwill 1,641 1,641
Other assets 200 204
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Total assets $115,895 $116,553
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,468 $1,428
Accrued expenses 11,101 11,353
Deferred revenue 1,896 2,489
Income taxes payable 657 673
Current maturities of capital lease obligations 108 740
- ------------------------------------------------------------------------------------------------- ------------- ----------------
- ------------------------------------------------------------------------------------------------- ------------- ----------------
Total current liabilities 17,230 16,683
Commitments and contingencies:
Deferred income taxes 3,040 3,040
Shareholders' equity:
Preferred Stock, $.01 par value, 2,000,000 shares authorized, none issued and outstanding -- --
Common Stock, voting, par value $.01 per share, 35,000,000 shares
authorized; 17,339,459 and 17,293,281 shares issued and outstanding in 2002 and 2001,
respectively 173 173
Additional paid-in capital 99,918 99,600
Treasury Stock (273,420 and 101,420 shares in 2002 and 2001, respectively), at cost (2,131) (673)
Accumulated deficit (2,335) (2,270)
- ------------------------------------------------------------------------------------------------- ------------- ----------------
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Total shareholders' equity 95,625 96,830
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Total liabilities and shareholders' equity $115,895 $116,553
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See accompanying notes.
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
- ------------------------------------------------------------------- ---------------- --------------- ---------------- --------------
- ------------------------------------------------------------------- ---------------- --------------- ---------------- --------------
REVENUES:
Prepaid Wireless Services $14,321 $12,442 $26,460 $26,467
Roaming Services 1,691 3,211 3,274 6,552
Prepaid Systems 1,360 1,464 2,680 3,087
- ------------------------------------------------------------------- ---------------- --------------- ---------------- --------------
17,372 17,117 32,414 36,106
EXPENSES:
Cost of Prepaid Wireless Services revenues * 4,092 3,839 7,961 7,773
Cost of Prepaid Wireless Services revenues - special charge - - 3,297 -
Cost of Roaming Services revenues * 1,589 2,763 3,041 5,657
Cost of Prepaid Systems revenues * 588 712 1,291 1,435
Engineering, research and development 2,104 1,933 4,077 4,206
Sales and marketing 977 1,096 2,106 2,540
General and administrative 1,523 1,618 2,941 3,337
Depreciation and amortization 4,493 3,954 8,621 7,820
- ------------------------------------------------------------------- ---------------- --------------- ---------------- --------------
- ------------------------------------------------------------------- ---------------- --------------- ---------------- --------------
15,366 15,915 33,335 32,768
- ------------------------------------------------------------------- ---------------- --------------- ---------------- --------------
- ------------------------------------------------------------------- ---------------- --------------- ---------------- --------------
Operating income (loss) 2,006 1,202 (921) 3,338
Interest income, net 401 590 812 1,346
- ------------------------------------------------------------------- ---------------- --------------- ---------------- --------------
- ------------------------------------------------------------------- ---------------- --------------- ---------------- --------------
Income (loss) before income taxes 2,407 1,792 (109) 4,684
Provision (benefit) for income taxes 962 716 (44) 1,872
- ------------------------------------------------------------------- ---------------- --------------- ---------------- --------------
- ------------------------------------------------------------------- ---------------- --------------- ---------------- --------------
Net income (loss) $1,445 $1,076 $(65) $2,812
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Basic net income per common share:
Net income $0.08 $0.06 $0.00 $0.17
Weighted average common shares outstanding 17,064 17,057 17,111 17,038
Diluted net income per share:
Net income $0.08 $0.06 $0.00 $0.16
Weighted average common shares outstanding 17,495 17,623 17,111 17,660
- ------------------------------------------------------------------- ---------------- --------------- ---------------- --------------
* exclusive of depreciation, which is shown separately below See accompanying
notes.
BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended June 30,
2002 2001
- ------------------------------------------------------------------------------- --------------- ---------------
OPERATING ACTIVITIES
Net income (loss) $(65) $2,812
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 8,621 7,820
Deferred income taxes (43) 861
Non-recurring charge 3,297 ---
Changes in operating assets and liabilities:
Accounts receivable (1,403) 2,214
Inventory 442 128
Prepaid expenses and other assets (332) (154)
Accounts payable, accrued expenses and deferred revenue (2,102) (6,536)
Income taxes payable (16) (141)
- ------------------------------------------------------------------------------- --------------- ---------------
- ------------------------------------------------------------------------------- --------------- ---------------
Net cash provided by operations 8,399 7,004
INVESTING ACTIVITIES
Purchases of property and equipment (12,713) (4,891)
Sales of short-term investments 3,293 3,096
Purchases of short-term investments (2,250) (5,200)
- ------------------------------------------------------------------------------- --------------- ---------------
- ------------------------------------------------------------------------------- --------------- ---------------
Net cash used in investing activities (11,670) (6,995)
FINANCING ACTIVITIES
Proceeds from exercise of stock options and employee stock purchase plan 318 579
Repurchase of common stock (1,458) ---
Repayment of capital leases (632) (482)
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Net cash provided by (used in) financing activities (1,772) 97
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Increase (decrease) in cash and cash equivalents (5,043) 106
Cash and cash equivalents at beginning of period 37,646 50,499
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Cash and cash equivalents at end of period $32,603 $50,605
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See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three and six-month periods ended June 30, 2002
are not necessarily indicative of the results that may be expected for
the year ending December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 2001.
2. Special Charges
In the fourth quarter of 2000, the third quarter of 2001 and the first
quarter of 2002, the Company recorded special charges of $2.6 million,
$3.6 million and $3.3 million, respectively, principally to accrue for
legal expenses estimated by the Company's outside counsel to be incurred
in the defense of a patent infringement suit brought by Freedom Wireless.
There can be no assurances that the Company's expenses to defend the
Freedom Wireless suit will not exceed the Company's estimate. The Company
believes that the claims made by Freedom Wireless are without merit and
is vigorously defending the action. The components of the legal charges
and payments are as follows (in thousands):
Initial Additional Additional
charges Payments 12/31/00 charges Payments 12/31/01 charges Payments 6/30/02
Balance Balance Balance
------- -------- -------- ---------- ------- -------- -------- ------- --------
Cash charges:
Legal fees primarily
for
Freedom Wireless $2,600 $114 $2,486 $3,629 $3,427 $2,688 $3,297 $2,655 $3,330
suit ====== ==== ====== ====== ====== ====== ====== ==== ======
3. Earnings Per Share
The following table sets forth the computation of basic and diluted
net income per share for:
Three months ended Six months ended
June 30, June 30,
(in 000's, except per share amounts) 2002 2001 2002 2001
--------------------------------------------------------- ----------- ------------- ---------- ------------
Numerator for basic and diluted earnings per share:
Net income (loss) $1,445 $1,076 $(65) $2,812
Denominator:
Denominator for basic net income per share 17,064 17,057 17,111 17,038
Effect of dilutive employee stock options 431 566 --- 622
--------------------------------------------------------- ----------- ------------- ---------- ------------
--------------------------------------------------------- ----------- ------------- ---------- ------------
Denominator for diluted net income per share 17,495 17,623 17,111 17,660
--------------------------------------------------------- ----------- ------------- ---------- ------------
--------------------------------------------------------- ----------- ------------- ---------- ------------
Basic net income per common share 0.08 0.06 0.00 $0.17
--------------------------------------------------------- ----------- ------------- ---------- ------------
Diluted net income per common share $0.08 $0.06 $0.00 $0.16
--------------------------------------------------------- ----------- ------------- ---------- ------------
4. Inventory
Inventories consisted of the following at:
(in 000's) June 30, 2002 December 31, 2001
-------------------------------- ----------------------- ----------------------
Purchased parts $453 $130
Work-in-process 141 906
-------------------------------- ----------------------- ----------------------
$594 $1,036
-------------------------------- ----------------------- ----------------------
5. Segment Reporting
(in 000's except percentages)
Prepaid
Three months ended Wireless Roaming Prepaid
June 30, Services Services Systems Eliminations Total
-------------------------------- ------------- ------------ ------------- ---------------- --------------
2002
Revenues $14,321 $1,691 $5,586 $(4,226) $17,372
Gross margin 10,229 102 2,419 (1,647) 11,103
Gross margin percentage 71% 6% 43% 64%
2001
Revenues $12,442 $3,211 $1,800 ($336) $17,117
Gross margin 8,603 448 886 (134) 9,803
Gross margin percentage 69% 14% 49% 57%
Prepaid
Six months ended Wireless Roaming Prepaid
June 30, Services Services Systems Eliminations Total
-------------------------------- ------------- ------------ ------------- ---------------- --------------
2002
Revenues $26,460 $3,274 $8,033 $(5,353) $32,414
Gross margin (1) 15,202 233 3,477 (2,088) 16,824
Gross margin percentage (1) 57% 7% 43% 52%
2001
Revenues $26.467 $6,552 $4,229 ($1,142) $36,106
Gross margin 18,694 895 2,032 (380) 21,241
Gross margin percentage 71% 14% 48% 59%
(1) The results for the six months ended June 30, 2002 include a
special charge of $3.3 million principally for estimated legal
expenses expected to be incurred in connection with the Freedom
Wireless patent infringement suit which is classified as a cost of
Prepaid Wireless Services.
6. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141 (FAS 141),
"Business Combinations" and No. 142 (FAS 142) "Goodwill and Other
Intangible Assets," effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill is no longer amortized but is subject
to annual impairment tests in accordance with FAS 142.
The Company adopted the new rules on accounting for goodwill in the first
quarter of 2002. The Company has performed the first of the required
impairment tests of goodwill and determined that its goodwill was not
impaired upon the adoption of FAS 142. The goodwill is attributable to the
Prepaid Wireless Services segment. The effect of no longer amortizing
goodwill under FAS 142 is as follows:
Three months ended Six months ended
(in 000's, except per share amounts) June 30, June 30,
2002 2001 2002 2001
--------------------------------------------------------- ----------- ------------- ---------- ------------
--------------------------------------------------------- ----------- ------------- ---------- ------------
Reported net income (loss) $1,445 $1,076 $(65) $2,812
Goodwill amortization --- 151 --- 302
--------------------------------------------------------- ----------- ------------- ---------- ------------
--------------------------------------------------------- ----------- ------------- ---------- ------------
Adjusted net income (loss) 1,445 1,227 (65) 3,114
--------------------------------------------------------- ----------- ------------- ---------- ------------
--------------------------------------------------------- ----------- ------------- ---------- ------------
Basic earnings per share
--------------------------------------------------------- ----------- ------------- ---------- ------------
--------------------------------------------------------- ----------- ------------- ---------- ------------
Reported net income 0.08 0.06 0.00 0.16
Goodwill amortization --- 0.01 --- 0.02
--------------------------------------------------------- ----------- ------------- ---------- ------------
--------------------------------------------------------- ----------- ------------- ---------- ------------
Adjusted net income 0.08 0.07 0.00 0.18
--------------------------------------------------------- ----------- ------------- ---------- ------------
--------------------------------------------------------- ----------- ------------- ---------- ------------
Diluted earnings per share
--------------------------------------------------------- ----------- ------------- ---------- ------------
--------------------------------------------------------- ----------- ------------- ---------- ------------
Reported net income 0.08 0.06 0.00 0.16
Goodwill amortization --- 0.01 --- 0.02
--------------------------------------------------------- ----------- ------------- ---------- ------------
--------------------------------------------------------- ----------- ------------- ---------- ------------
Adjusted net income $0.08 $0.07 $0.00 $0.18
--------------------------------------------------------- ----------- ------------- ---------- ------------
In June, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (FAS 143), which addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It also applies to legal obligations associated with the
retirement of tangible long-lived assets that result from acquisition,
construction, development and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. The Company is required to adopt FAS
143 in the first quarter of fiscal 2003 and is currently in the process of
evaluating the impact on its consolidated financial statements.
7. Contingencies - Legal
In March 2000, a suit was filed by Freedom Wireless, Inc. in the United States
District Court for the Northern District of California against the Company and a
number of wireless carriers, including customers and former customers of the
Company. Upon motion by the Company, the suit was transferred to the United
States District Court in Massachusetts in October, 2000 and is pending in that
court. The suit alleges that the defendants infringe two patents held by Freedom
Wireless, Inc. and seeks injunctive relief and damages in an unspecified amount.
The Company has an obligation to indemnify the other defendants for damages they
may incur with respect to any infringement. The suit is currently in the
discovery phase. The Company does not believe that it infringes these patents
and believes that it has meritorious defenses to the action.
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 sole supplier for a certain system component in 1997 and
early 1998. The Company subsequently changed suppliers. The suit alleges that
the Company breached the confidentiality clause of the contract and interfered
with actual and prospective contracts with other customers. The Supplier
initially claimed misappropriation of trade secrets and sought an injunction,
but it has since dropped these claims. The Supplier has subsequently dropped the
claim of tortious interference with contract and added a claim of fraudulent
misrepresentation. The Supplier seeks damages in excess of $1 million. The
Company believes that the claim is without merit. Discovery has been completed
and motions for summary judgment are pending before the Court.
On January 4, 2002, a carrier customer sent a letter to the Company stating that
it is entitled to indemnification from the Company in respect to certain claims
pending in a patent infringement case brought by Ronald A. Katz Technology
Licensing, L.P. against the carrier customer in the United States District Court
for the Eastern District of Pennsylvania. In the suit, the plaintiff claims
infringement of 14 patents by the defendants, and seeks damages in an
unspecified amount. The letter asserts that the Company must indemnify the
carrier customer to the extent any of the claims in the complaint may relate to
the services provided by the Company to the carrier customer pursuant to the
Prepaid Wireless Calling Service Agreement and any other agreements between the
carrier customer and the Company. The Company is reviewing the matter and has
engaged outside counsel to represent it. At this stage, it is not possible to
determine whether there is a valid claim for indemnification, or the likely
outcome of such claim.
On July 26, 2002, a carrier customer sent a letter to the Company notifying the
Company of the pendency of a lawsuit by one Philip S. Jackson against the
carrier customer and seven other companies in the United States District Court
for the Northern District of Illinois, alleging patent infringement by the
defendants, in using, selling or offering to sell automated interactive
telephone systems, voice messaging services or answering devices. The letter
asserts that the Company must indemnify the carrier customer to the extent any
of the claims in the complaint may relate to the services provided by the
Company to the carrier customer pursuant to the Prepaid Wireless Calling Service
Agreement and any other agreements between the carrier customer and the Company.
The suit seeks damages in an unspecified amount. The Company is reviewing the
matter. At this stage it is not possible to determine whether there is a valid
claim for indemnification, or the likely outcome of such claim.
From time to time, as a normal incidence of the nature of the Company's
business, various claims, charges and litigation are asserted or commenced
against the Company arising from, or related to, contractual matters, patents,
trademarks, personal injury, and personnel and employment disputes. As to such
claims and litigation, the Company can give no assurance that it will prevail.
However, the Company does not believe that these matters (other than that
disclosed) will have a material adverse effect on the Company's consolidated
financial position, although an adverse outcome of any of these matters could
have a material adverse effect on the Company's consolidated results of
operations or cash flows in the quarter or annual period in which one or more of
these matters are resolved.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Results of Operations
The Company's total revenues increased 2% from $17.1 million for the three
months ended June 30, 2001 to $17.4 million for the three months ended June 30,
2002 and decreased 10% from $36.1 million for the six months ended June 30, 2001
to $32.4 million for the six months ended June 30, 2002. During the three-month
period, the increase was primarily attributable to a 15% increase in the
Company's Prepaid Wireless Services revenues offset by a 47% decline in the
revenues of the Company's non-core business, Roaming Services, and a 7% decrease
in Prepaid Systems revenues, excluding inter-segment sales. For the six month
period, the decrease primarily resulted from a 50% decline in the revenues of
the Company's Roaming Services business and a 13% decrease in Prepaid Systems
revenues, excluding inter-segment sales.
The Company generated operating income of $2.0 million during the three months
ended June 30, 2002 compared to operating income of $1.2 million for the
corresponding period in 2001. The Company had an operating loss of $921,000 for
the six months ended June 30, 2002 and operating income of $3.3 million for the
corresponding period in the prior year. Excluding the effects of special charges
in the six months ended June 30, 2002 the Company generated operating income of
$2.4 million. For the three-month period, the increase in operating income was
primarily due to increased Prepaid Wireless Services revenues and gross margin,
partially offset by decreased Roaming Services revenues and gross margin and
increased depreciation expense. For the six-month period, the decrease in
operating income was due to a special charge of $3.3 million relating primarily
to legal expenses for the Freedom Wireless patent infringement suit, decreased
Roaming Services revenues and gross margin and increased depreciation expense,
partially offset by decreased sales and marketing and general and administrative
expenses. The specifics of each segment's revenues and gross margins are
discussed in greater detail below.
Segment Data
(in thousands except percentages)
Prepaid
Three months ended Wireless Roaming Prepaid
June 30, Services Services Systems Eliminations Total
-------------------------------- ------------- ------------ ------------- ---------------- --------------
2002
Revenues $14,321 $1,691 $5,586 $(4,226) $17,372
Gross margin 10,229 102 2,419 (1,647) 11,103
Gross margin percentage 71% 6% 43% 64%
2001
Revenues $12,442 $3,211 $1,800 ($336) $17,117
Gross margin 8,603 448 886 (134) 9,803
Gross margin percentage 69% 14% 49% 57%
Prepaid
Six months ended Wireless Roaming Prepaid
June 30, Services Services Systems Eliminations Total
-------------------------------- ------------- ------------ ------------- ---------------- --------------
2002
Revenues $26,460 $3,274 $8,033 $(5,353) $32,414
Gross margin (1) 15,202 233 3,477 (2,088) 16,824
Gross margin percentage (1) 57% 7% 43% 52%
2001
Revenues $26.467 $6,552 $4,229 ($1,142) $36,106
Gross margin 18,694 895 2,032 (380) 21,241
Gross margin percentage 71% 14% 48% 59%
(1) The results for the six months ended June 30, 2002 include a
special charge of $3.3 million principally for estimated legal
expenses expected to be incurred in connection with the Freedom
Wireless patent infringement suit, which is classified as a cost
of Prepaid Wireless Services.
Prepaid Wireless Services
Prepaid Wireless Services revenues increased 15% from $12.4 million for the
three months ended June 30, 2001 to $14.3 million for the three months ended
June 30, 2002 and remained consistent at $26.5 million for the six months ended
June 30, 2001 and 2002, respectively. The revenue increase for the three month
period ended June 30, 2002 compared to the prior year was primarily a result of
a 67% increase in the average minutes of use (MOUs) per subscriber from 57 at
June 30, 2001 to 95 at June 30, 2002. The higher MOUs resulted primarily from an
increase in the Company's digital subscribers and increased usage in response to
the Company's carrier customers promoting more competitively priced and
full-featured prepaid offerings. Although revenues increased in the three-month
period ended June 30, 2002, the revenues for the six-month period ended June 30,
2002 revenues were consistent with the same period in the prior year due
primarily to the loss of Rogers AT&T and AT&T Wireless as customers in the first
quarter of 2001. The Company expects that its subscriber base, average MOUs and
revenues will increase as existing and prospective carrier customers
aggressively market the Company's full-featured, prepaid offerings which appeal
to higher quality digital subscribers who tend to talk more on their prepaid
phones. The Company expects that the anticipated revenue growth will be
tempered, however, as carriers who generate higher MOUs avail themselves of
volume pricing discounts offered by the Company. The Company's subscribers
remained consistent at 2.2 million at June 30, 2001 and June 30, 2002. While the
subscriber base has grown since June 30, 2001, this increase was offset by the
write off of 600,000 non-performing subscribers at December 31, 2001. The
Company's new line of business announced on July 16, 2002, bcgi Payment
Services, is comprised of a suite of end-to-end, integrated solutions for
assisted and self-serve payment transactions. The operating results for Payment
Services will be included as part of Prepaid Wireless Services.
Gross margin for Prepaid Wireless Services increased from 69% of such revenues
for the three months ended June 30, 2001 to 71% of such revenues for the three
months ended June 30, 2002, resulting primarily from higher revenues. Including
a special charge of $3.3 million for legal expenses, the gross margin for
Prepaid Wireless Services was 57% of Prepaid Wireless Services revenues for the
six months ended June 30, 2002. Excluding special charges, the gross margins
were consistent at 71% and 70% of Prepaid Wireless Services revenues for the six
months ended June 30, 2001 and 2002, respectively. The charge for legal expenses
consists primarily of estimated probable fees and expenses that the Company
expects to incur in the defense of the patent infringement suit brought by
Freedom Wireless and represents management's best estimate based upon the
current facts and circumstances. The Company expects that as subscribers and
MOUs grow, it will be able to resume leveraging its fixed cost infrastructure to
yield higher gross margins in subsequent quarters in 2002.
Roaming Services
Roaming Services revenues decreased 47% from $3.2 million for the three months
ended June 30, 2001 to $1.7 million for the three months ended June 30, 2002 and
decreased 50% from $6.6 million for the six months ended June 30, 2001 to $3.3
million for the six months ended June 30, 2002. The decrease in Roaming Services
revenues in 2002 was primarily attributable to consolidation in the industry and
advancements in handset technology that have improved registered roaming
capabilities. The Company anticipates that these trends will continue and,
therefore, Roaming Services revenues are expected to continue to decrease at
similar rates compared to prior periods.
Gross margins for Roaming Services decreased from 14% for the three months ended
June 30, 2001 to 6% for the three months ended June 30, 2002 and from 14% of
Roaming Services revenues for the six months ended June 30, 2001 to 7% for the
six months ended June 30, 2002. The decrease primarily resulted from lower
revenues and the resulting lower absorption of fixed costs.
Prepaid Systems
Prepaid Systems revenues, excluding inter-segment revenues, decreased 7% from
$1.5 million for the three months ended June 30, 2001 to $1.4 million for the
three months ended June 30, 2002 and decreased 13% from $3.1 million for the six
months ended June 30, 2001 to $2.7 million for the same period in 2002. The
decrease in Prepaid Systems revenues, excluding inter-segment revenues,
primarily resulted from a decrease in sales of voice mail systems that were
discontinued in December 2001. Gross Prepaid Systems revenues increased 211%
from $1.8 million in the three months ended June 30, 2001 to $5.6 million in the
three months ended June 30, 2002 and increased 90% from $4.2 million in the six
months ended June 30, 2001 to $8.0 million in the six months ended June 30,
2002. The increase in revenues was primarily due to increased inter-segment
revenues to support the growth of the Prepaid Wireless Services business.
Gross margins for Prepaid Systems, excluding inter-segment revenues, increased
from 51% of Prepaid Systems revenues in the second quarter of 2001 to 57% of
such revenues in the second quarter of 2002 and decreased from 54% of such
revenues for the six months ending June 30, 2001 to 52% of such revenues for the
corresponding period in 2002. For the three-month period, the increase resulted
primarily from system upgrades that were sold to existing customers and which
typically yield higher margins. For the six-month period, the decrease was
primarily attributable to the discontinuance of voice mail sales and, to a
lesser extent, lower recurring service revenues that typically yield higher
margins.
Operating Data
Three months ended June 30,
2002 2001
- ------------------------------------------------------------- -------------------------- -----------------------------
% of Total % of Total
($ in thousands) Total Revenues Total Revenues
- ------------------------------------------------------------- ----------- -------------- ------------- ---------------
Total revenues $17,372 100% $17,117 100%
- -------------------------------------------------------------
Engineering, research and development 2,104 12% 1,933 11%
- -------------------------------------------------------------
Sales and marketing 977 6% 1,096 6%
- -------------------------------------------------------------
General and administrative 1,523 9% 1,618 9%
- -------------------------------------------------------------
Depreciation and amortization 4,493 26% 3,954 23%
- -------------------------------------------------------------
Six months ended June 30,
2002 2001
- ------------------------------------------------------------- -------------------------- -----------------------------
% of Total % of Total
($ in thousands) Total Revenues Total Revenues
- ------------------------------------------------------------- ----------- -------------- ------------- ---------------
Total revenues $32,414 100% $36,106 100%
- -------------------------------------------------------------
Engineering, research and development 4,077 13% 4,206 12%
- -------------------------------------------------------------
Sales and marketing 2,106 6% 2,540 7%
- -------------------------------------------------------------
General and administrative 2,941 9% 3,337 9%
- -------------------------------------------------------------
Depreciation and amortization 8,621 27% 7,820 22%
- -------------------------------------------------------------
Engineering, research and development expenses
Engineering, research and development expenses primarily include the salaries
and benefits for software development and engineering personnel associated with
the development, implementation and maintenance of existing and new services.
Engineering, research and development expenses increased from 11% of total
revenues for the three months ended June 30, 2001 to 12% for the three months
ended June 30, 2002, and from 12% of total revenues for the six months ended
June 30, 2001 to 13% of total revenues for the six months ended June 30, 2002.
The increases primarily resulted from the devotion of additional resources to
expanding and enhancing the features and functionality of the Company's IVSN and
transaction processing platform, in addition to resources devoted to the
Company's Payment Services initiatives. The decrease in absolute dollars for the
six month period in 2002 resulted from increased capitalization of costs as more
efforts were focused on developing and deploying new features and functionality.
The Company spent $5.7 million and $5.8 million on engineering, research and
development (including capitalized software and labor costs) for the six months
ended June 30, 2001 and 2002, respectively. The Company intends to continue to
increase its engineering, research and development expenditures in absolute
dollars to support ongoing and future development and enhancements of its
prepaid and other wireless services.
Sales and marketing expenses
Sales and marketing expenses include direct sales and product management
salaries and benefits, commissions, travel and entertainment expenses, in
addition to the cost of trade shows, direct mail and other promotional expenses.
As a percentage of total revenues, sales and marketing expenses remained
consistent at 6% for the three months ended June 30, 2001 and 2002,
respectively, and decreased from 7% to 6% for the six months ended June 30, 2001
and 2002, respectively. In absolute dollars, sales and marketing expenses
decreased as the Company continued to effectively manage its costs. Sales and
marketing expenses are expected to increase in absolute dollars for the
remaining quarters of 2002 to support the Company's expected growth in Prepaid
Wireless Services and bcgi Payment Services.
General and administrative expenses
General and administrative expenses include salaries and benefits of employees
and other expenses that provide administrative support to the Company. As a
percentage of total revenues, general and administrative expenses remained
consistent at 9% of total revenues for the three and six months ended June 30,
2001 and 2002. In absolute dollars, general and administrative expenses
decreased as the Company continued to effectively manage its costs. General and
administrative costs are expected to remain consistent in absolute dollars in
the remaining quarters of 2002.
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 was amortized over eight years during 2001 but
is no longer being amortized in accordance with FAS 142. Depreciation and
amortization expense increased from 23% to 26% of total revenues for the three
months ended June 30, 2001 and 2002, respectively, and increased from 22% to 27%
of total revenues for the six months ended June 30, 2001 and 2002, respectively.
The increases in 2002 were primarily due to additional capital being deployed to
support the Company's Prepaid Wireless Services existing and projected new
business. The Company expects that depreciation and amortization expense will
increase during the remaining quarters of 2002, as more capital is deployed to
support the anticipated growth and continued enhancements in Prepaid Wireless
Services.
Interest income, net
Net interest income decreased 32% from $590,000 for the three-month period ended
June 30, 2001 to $401,000 for the three months ended June 30, 2002 and 38% from
$1.3 million in the six-month period ended June 30, 2001 to $812,000 in the
six-month period ended June 30, 2002. Interest income was earned primarily from
investments, which were provided by cash generated from operations, the sale of
the Teleservices business and the proceeds from the Company's public offerings.
The decline in interest income in 2002 resulted from lower interest rates in the
marketplace and from the lower cash and short-term investment balances.
Provision for income taxes
The income tax rate remained consistent at 40% for the three and six-month
periods ended June 30, 2001 and 2002.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments decreased 11% to $54.2 million
at June 30, 2002 compared to $60.3 million at December 31, 2001. Net cash
provided by operations of $8.4 million for the six months ended June 30, 2002
resulted from depreciation and amortization of $8.6 million and non-recurring
charges of $3.3 million. These amounts were partially offset by a decrease of
$2.1 million in accounts payable and accrued expenses due to the timing of
payments and an increase of $1.4 million in the Company's accounts receivable
due to increased revenues. The Company's DSO improved from 87 days at March 31,
2002 to 69 days at June 30, 2002 due to the timing of payments received. The
Company's data warehousing and reporting system improvements, which should
reduce the time it takes to generate invoices, are still underway and therefore
are expected to cause an increase in the DSO in the third quarter.
The Company's investing activities utilized $11.7 million of net cash for the
six months ended June 30, 2002. The Company expended $12.7 million in the six
months ended June 30, 2002, primarily for telecommunications systems equipment
and software for expansion of the Company's IVSN and transaction processing
platform, which was primarily offset by $1.0 million in net sales of short-term
investments. 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 its Prepaid Wireless Services and
other enhanced services. The source of funds for these investments are expected
to be from cash flows anticipated to be generated from operations or the
Company's short-term investments. The Company's financing activities utilized
$1.8 million in net cash during the six months ended June 30, 2002, principally
due to the repurchase of 172,000 shares of the Company's common stock.
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.
Significant Accounting Policies
Revenue Recognition
The Company earns prepaid wireless services revenues by processing prepaid
wireless minutes and earns roaming services revenues by processing wireless
calls for unregistered wireless subscribers who have roamed outside of their
service area. These revenues are recognized when the service is provided and are
recorded net of estimated billing adjustments and outages. The Company
recognizes revenue from the sale of prepaid systems at the time the systems are
shipped unless there is acceptance criteria for which the Company does not
recognize revenue until acceptance occurs. Installation revenue is deferred
until the entire installation is complete. Maintenance revenue is deferred and
recognized over the term of the relevant maintenance agreement.
Legal Costs
The Company accrues costs of settlements, damages and, under certain conditions,
costs of defense when such costs are probable and estimable; otherwise, such
costs are expensed as incurred. As discussed in Note 2 to the Consolidated
Financial Statements, the Company has accrued its best estimate of the probable
cost of current litigation. The estimate has been developed in consultation with
the Company's outside counsels who are handling the cases. There can be no
assurances that the Company's expenses will not exceed the Company's estimate.
Research and Development, Software Development Costs and Costs Capitalized
for Internal Use
Research and development costs are charged to expense as incurred. However,
costs incurred for the development of computer software or deployment of assets
for internal use are capitalized in accordance with FASB 86 and SOP 98-1,
respectively. The direct labor and related overhead costs of development of
computer software are capitalized when technological feasibility has been
established. The direct labor, travel and related overhead costs to deploy
assets for internal use are capitalized until the asset is placed in service.
The capitalized costs are subject to an ongoing assessment of recoverability
based on anticipated future undiscounted net cash flows and changes in hardware
and software technologies.
Amortization of capitalized software development costs begin when the product is
made available for general release and amortization of internal use costs begins
when the related asset is first placed in service. These costs are amortized on
a straight-line basis over a three-year period.
Impairment of Long Lived Assets
The Company reviews the carrying value of its long-lived assets to assess the
recoverability of these assets in accordance with Financial Accounting Standards
Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. The Company records impairment losses when events and circumstances
indicate that the assets might be impaired, and the undiscounted operating cash
flows estimated to be generated by those assets are less than the carrying
amounts of those assets. The impairment loss is measured by comparing the fair
value of the assets to their carrying values. Fair value is determined by either
quoted market prices or the discounted cash flow method, whichever is more
appropriate under the circumstances involved.
Allowance for Bad Debts
The Company evaluates the collectability of its accounts receivable based on a
combination of factors. In circumstances where the Company is aware of a
specific customer's inability to meet its financial obligations (e.g. bankruptcy
filings, substantial downgrading of credit scores), the Company records a
specific reserve for bad debts against amounts due to reduce the net recognized
receivable to the amount the Company reasonably believes will be collected. For
all other customers, the Company recognizes reserves for bad debts based on the
length of time the receivables are past due and on historical experience. If
circumstances change (e.g. higher than expected defaults or an unexpected
material adverse change in a major customer's ability to meet its financial
obligations), the Company's estimates of the recoverability of amounts could be
adversely affected.
Certain Factors That May Affect Future Results
Historically, a significant portion of the Company's revenues in any particular
period has been attributable to a limited number of customers in the wireless
telecommunications business. This concentration of customers is expected to
intensify in 2002 compared to the prior year due to the increased MOUs of some
of the Company's largest customers, the loss of Rogers AT&T and AT&T Wireless in
the prior year and carrier consolidation. The Company's revenues and earnings
may also fluctuate from quarter to quarter, based on the volume of minutes of
usage generated and the rates per minute paid to the Company by these customers.
In addition, financial and operating difficulties of the Company's customers may
have an adverse impact on the Company's future revenues and financial and
operating results. A loss of business from any of the Company's major customers,
including a decrease in business due to factors outside the Company's control,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The market for services to wireless carriers is highly competitive and subject
to rapid change as new technologies are continually introduced in the wireless
marketplace. A number of companies currently offer one or more of the services
offered by the Company. Many wireless carriers are also providing, or can
provide in-house, the services that the Company offers or similar services that
are marketed to the same consumer base as the Company's services. 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 important factor in the future success of the Company's Prepaid
Wireless Services will be the Company's ability to provide, at competitive
prices, more functionality and features than those typically available in other
competitive offerings. An increase in competition or the inability of the
Company to provide, at competitive prices, more functionality and features,
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. In addition, if the Company does not continue to upgrade
its software and hosting environment as new wireless technologies evolve,
including but not limited to 2.5G and 3G technologies, the Company could risk
the loss of existing and prospective customers.
Certain Prepaid Wireless Services contracts will expire in 2002 and beyond.
There can be no assurances that the Company will be successful in renewing any
of these contracts. Many wireless carriers are also providing, or can provide
in-house, the services that the Company offers or similar services that are
marketed to the same consumer base as the Company's services. If any of these
contracts are not renewed, the Company's business, financial condition and
results of operations could be materially adversely affected. Also, when and if
each of the contracts is renewed, some contractual rates per minute will likely
be lower than in previous years. If subscriber levels and minutes of usage
decline, revenue and gross margins could be adversely affected due to these
lower rates. These contracts are not exclusive and therefore do not prevent the
Company's customers from using competitors' prepaid platforms. In 2001, two of
the Company's former customers, AT&T Wireless and Rogers AT&T Wireless, did not
renew their prepaid contracts and brought their prepaid programs in-house. There
can be no assurances that other customers will not follow suit and elect not to
use the Company's services to offer prepaid wireless services and the Company
may not be able to replace these revenues.
The Company has expended significant amounts of capital to support the
agreements it has secured with its carrier customers. Because Prepaid Wireless
Services revenues are principally generated by prepaid subscriber MOUs, the
Company's revenues can be impacted by the ability of carriers to successfully
market and sell prepaid services and the timing of when such carriers promote
prepaid services. Revenues from the Company's Prepaid Wireless Services business
are dependent on the Company's ability to retain subscribers on the network and
generate additional MOUs. However, there can be no assurance that the Company's
churn rate (percentage of total subscribers that terminate service on the
network) will not increase. Any such increase could result in reductions in
related subscribers and, therefore, revenues.
The Company is currently devoting significant resources toward the support and
enhancement of its Prepaid Wireless Services and systems to enhance system
reliability and expand its IVSN and hosting environment. The Company has
experienced network outages that have resulted in reductions in revenue due to
penalty clauses contained in certain of the Company's carrier customer
contracts. There can be no assurance that the Company will successfully support
and enhance its IVSN and transaction processing platform effectively to avoid
system outages and any associated loss in revenue or damage to the Company's
reputation. Nor can there be any assurances that the market for the Company's
Prepaid Wireless Services will continue to develop, or that the Company's IVSN
and transaction processing platform will successfully support current and future
growth. If the Company is not successful in supporting current and future
growth, if the market for the Company's Prepaid Wireless Services does not
continue to develop or if outages intensify either in frequency or duration,
there could be a material adverse effect on the Company's business, operating
results and financial condition.
The Company's success and ability to compete is dependent in part upon its
proprietary technology and its ability to protect such technology. The Company
continues to defend its proprietary technology against patent infringement
litigation, including the Freedom Wireless lawsuit. There can be no assurances
that the Company's expenses to defend the Freedom Wireless suit will not exceed
the Company's estimate. If the Company is found to infringe on the Freedom
Wireless patent or if other patent infringement judgments are entered against
the Company or unauthorized copying or misuse of the Company's technology were
to occur to any substantial degree, the Company's business, financial condition
and results of operations would be materially adversely affected.
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, computer viruses or similar
events. Although the Company has built redundancy into its network with its
Waltham, Massachusetts second data processing site and other redundant features,
there are still parts of the network that are not redundant at this time. In
addition, the Waltham site may not protect the Company from a natural disaster
within the greater Boston, Massachusetts area. 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 has experienced fluctuations in its quarterly operating results and
such fluctuations may continue and could intensify. The Company's quarterly
operating results may vary significantly depending on a number of factors
including variations in prepaid subscriber additions, prepaid subscriber churn,
customer rates per minute and MOU's, the timing of the introduction or
acceptance of new services offered by the Company or its competitors (including
Virgin Mobile's recent launch of a U. S. prepaid program), changes in the mix of
services provided by the Company, the timing or occurrence of Cingular Wireless'
anticipated subscriber conversions to the Company's platform, the loss of
customers, seasonal trends, network outages, variations in the level of prepaid
system sales, 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 growth in recent years, this growth has recently slowed. There can
be no assurance that wireless carriers will adopt prepaid programs, including
the Company's Prepaid Wireless Services offering, or that wireless carriers will
continue to use the Company's services. In addition, prepaid wireless services
are relatively new services in new markets. If the growth in Prepaid Wireless
Services does not materialize 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 continues to invest in new features and additional technologies
including bcgi Payment Services (bcgi Mobile Commerce Payment Services, bcgi ATM
Recharge and the Distribution Technology Partners Program), Short Message
Service (SMS) billing and other new applications to expand and enhance its
real-time transaction processing services business. There can be no assurances
that there will be a market for these technologies, that the Company will be
successful in marketing and selling these technologies in the marketplace or
that the Company will be able to leverage its existing infrastructure to provide
these services in a cost effective manner. In addition, the failure of any of
these features or technologies may result in 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 expects that demand for its Roaming Services will continue to
decline as consolidation in the wireless industry reduces the number of
unregistered roamers and as handset technology continues to improve registered
roaming capabilities. Although the Company has been successful in both reducing
costs to support Roaming Services and in maintaining profitability, there can be
no assurance that the Company will be successful in reducing costs at a greater
rate than the decline in revenue going forward or that the Roaming Services
business will continue to generate profits for the Company.
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 to
adapt existing services or systems to keep pace with changes in the wireless
industry. 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. Furthermore, a rapid shift away from the use of
wireless services in favor of other services could offset 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.
The Company has expanded its operations rapidly, creating significant demands on
the Company's management, 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 operational changes 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, sometimes licensed from single 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, 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.
If the hardware and software do not function as specified or if the Company can
no longer license software from certain vendors or otherwise obtain the
software, the Company's business, financial condition and results of operations
could be materially and adversely affected. In addition, Worldcom, Inc., who
currently provides certain telecommunications services to the Company, has filed
for Chapter 11 bankruptcy. Although the Company has backup and redundancy plans
in place, if there are any significant decreases in service levels, or if
Worldcom is no longer able to provide certain services to the Company, the
Company's business, financial condition and results of operations could be
materially and adversely affected during the transition period to a replacement
carrier.
The Company currently prices and sells all of its systems to international
customers in U.S. dollars. In addition, many Prepaid Systems customers are
multinational corporations that are publicly traded in the U.S. or the United
Kingdom. All payments are received in U.S. dollars which protects the Company
from foreign currency fluctuations. 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. In addition, under the current economic conditions, many
corporations are reducing their capital budgets dramatically. Any such
reductions in the capital budgets of the Company's customers could reduce demand
for the Company's Prepaid Systems offerings.
The Company has a number of patents pending to protect its proprietary
technology in the United States and internationally. If these patents are not
approved, the Company's technology may not be protected from infringement by
third parties and the Company may be subject to additional patent infringement
lawsuits or royalty payments to use the technology, which could have a material
adverse affect on the Company's business, financial condition and results of
operations.
On November 7, 2000, the Company sold the assets of its Teleservices business to
Teletech Holdings, Inc. for $15 million including the assumption of certain
liabilities, with potential additional cash payments to the Company of up to $15
million through 2005, based upon achievement of predetermined revenue targets.
In 2001, the Teleservices business did not achieve the predetermined revenue
targets nor did the Company earn any additional cash payments. There can be no
assurances that the Teleservices business will be successful in meeting the
predetermined revenue targets to help the Company earn any of the remaining
potential cash payments available.
Proposals to intensify or reduce government regulations of the wireless
telephone industry continue to be discussed at both the federal and state
levels. Such changes may decrease the growth of the wireless telephone industry,
result in new competitors or industry consolidation, limit the number of
potential customers for the Company's services or impede the Company's ability
to offer competitive services to the wireless market or otherwise have a
material adverse effect on the Company's business, financial condition and
results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company maintains an investment portfolio in accordance with its Investment
Policy. The primary objectives of its Investment Policy are to preserve
principal, maintain proper liquidity to meet operating needs and maximize
yields. Although the Company's investments are subject to credit risk, the
Company's Investment Policy specifies credit quality standards for its
investments and limits the amount of credit exposure from any single issue,
issuer or type of investment. While the Company's investments are also subject
to interest rate risk and will decrease in value if market interest rates
increase, the Company typically holds all of its investments until maturity.
However, since the investments are typically held to maturity and are generally
conservative in nature and of relatively short duration, interest rate risk is
mitigated. The Company does not use derivative financial instruments for either
hedging foreign currency exposure risk or speculative trading purposes.
Accordingly, the Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments which would
require disclosure under this item.
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
In March 2000, a suit was filed by Freedom Wireless, Inc. in the United States
District Court for the Northern District of California against the Company and a
number of wireless carriers, including customers and former customers of the
Company. Upon motion by the Company, the suit was transferred to the United
States District Court in Massachusetts in October, 2000 and is pending in that
court. The suit alleges that the defendants infringe two patents held by Freedom
Wireless, Inc. and seeks injunctive relief and damages in an unspecified amount.
The Company has indemnification obligations with respect to the other
defendants. The suit is currently in the discovery phase. The Company does not
believe that it infringes these patents and believes that it has meritorious
defenses to the action.
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 sole supplier for a certain system component in 1997 and
early 1998. The Company subsequently changed suppliers. The suit alleges that
the Company breached the confidentiality clause of the contract and interfered
with actual and prospective contracts with other customers. The Supplier
initially claimed misappropriation of trade secrets and sought an injunction,
but it has since dropped these claims. The Supplier has subsequently dropped the
claim of tortious interference with contract and added a claim of fraudulent
misrepresentation. The Supplier seeks damages in excess of $1 million. The
Company believes that the claim is without merit. Discovery has been completed
and motions for summary judgment are pending before the Court.
On January 4, 2002, a carrier customer sent a letter to the Company stating that
it is entitled to indemnification from the Company in respect to certain claims
pending in a patent infringement case brought by Ronald A. Katz Technology
Licensing, L.P. against the carrier customer in the United States District Court
for the Eastern District of Pennsylvania. The plaintiff claims infringement of
14 patents by the defendants in the case, and seeks damages in an unspecified
amount. The letter asserts that the Company must indemnify the carrier customer
to the extent any of the claims in the complaint may relate to the services
provided by the Company to the carrier customer pursuant to the Prepaid Wireless
Calling Service Agreement and any other agreements between the carrier customer
and the Company. The Company is reviewing the matter and has engaged outside
counsel to represent it. At this stage it is not possible to determine whether
there is a valid claim for indemnification, or the likely outcome of such claim.
On July 26, 2002, a carrier customer sent a letter to the Company notifying the
Company of the pendency of a lawsuit by one Philip S. Jackson against the
carrier customer and seven other companies in the United States District Court
for the Northern District of Illinois, alleging patent infringement by the
defendants, in using, selling or offering to sell automated interactive
telephone systems, voice messaging services or answering devices. The letter
asserts that the Company must indemnify the carrier customer to the extent any
of the claims in the complaint may relate to the services provided by the
Company to the carrier customer pursuant to the Prepaid Wireless Calling Service
Agreement and any other agreements between the carrier customer and the Company.
The suit seeks damages in an unspecified amount. The Company is reviewing the
matter. At this stage it is not possible to determine whether there is a valid
claim for indemnification, or the likely outcome of such claim.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held the 2002 Annual Meeting of Shareholders (the "Annual Meeting")
on May 23, 2002. At the Annual Meeting, the following actions were taken:
1. The shareholders elected Paul J. Tobin, Brian E. Boyle and E.Y.
Snowden as Class III Directors of the Company to serve
three-year terms. The table below outlines the voting results:
Number of Shares/Votes
For Withheld
Paul J. Tobin 14,231,148 1,528,703
Brian E. Boyle 14,212,429 1,529,422
E.Y. Snowden 14,212,678 1,529,173
In addition, Frederick J. von Mering, Paul R. Gudonis,
Jerrold D. Adams, Gerald Segel and Rajendra Singh 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 14,391,524 shares of Common
Stock for, 1,348,044 shares of Common Stock against and 2,283 shares of
Common Stock abstained.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
NONE
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 14, 2002 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)
STATEMENT PURSUANT TO 18 U.S.C.ss.1350
Pursuant to 18 U.S.C. ss.1350, each of the undersigned certifies that
this Quarterly Report on Form 10-Q for the period ended June 30, 2002
fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that the information contained in
this report fairly presents, in all material respects, the financial
condition and results of operations of Boston Communications Group,Inc.
Date: August 14, 2002 /s/ E. Y. Snowden
E.Y. Snowden
Chief Executive Officer
Date: August 14, 2002 /s/ Karen A. Walker
Karen A. Walker, Vice President,
Financial Administration and Chief
Financial Officer