-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V2nQTVeLSQ01NP4KCyIlNLtnbgDw+dDp0QhvU96+QpFpBxPMyy+kJTshVzTwaaT/ 6KCEtpnT5h+IIC3BR2RwOQ== 0000927016-98-001103.txt : 19980324 0000927016-98-001103.hdr.sgml : 19980324 ACCESSION NUMBER: 0000927016-98-001103 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTON COMMUNICATIONS GROUP INC CENTRAL INDEX KEY: 0001012887 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 043026859 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28432 FILM NUMBER: 98571128 BUSINESS ADDRESS: STREET 1: 100 SYLVAN RD STREET 2: STE 100 CITY: WOBURN STATE: MA ZIP: 01801-1830 BUSINESS PHONE: 6174763570 MAIL ADDRESS: STREET 1: 100 SYLVAN RD STREET 2: STE 100 CITY: WOBURN STATE: MA ZIP: 01801-1830 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 333-4128 BOSTON COMMUNICATIONS GROUP, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) MASSACHUSETTS 04-3026859 - ----------------------------------------------------- ------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 100 SYLVAN ROAD, SUITE 100, WOBURN, MASSACHUSETTS 01801 - ----------------------------------------------------- ------------------- (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code: (617) 692-7000 ------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- Indicate by check mark whether 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The approximate aggregate value of the voting stock held by non- affiliates of the registrant, computed by reference to the closing sales price of such stock quoted on the Nasdaq National Market on March 3, 1998, was $147,371,248. The number of shares outstanding of the Registrant's common stock, $.01 par value per share, as of March 3, 1998 was 16,261,655. DOCUMENTS INCORPORATED BY REFERENCE The following document is incorporated by reference in the following part of this Form 10-K: information required by Part III (Items 10, 11, 12 and 13) of this Annual Report on Form 10-K is incorporated from the Proxy statement relating to the 1998 Annual Meeting of Stockholders of the Company. ITEM 1. BUSINESS BACKGROUND GENERAL Boston Communications Group provides innovative roaming services, prepaid wireless services, teleservices and prepaid and voice systems to wireless telephone carriers throughout North and South America. The Company's ROAMERplus/TM/ roaming service provides carriers with the ability to cost- effectively generate revenues from subscribers who are not covered under traditional roaming agreements by arranging payment for roaming calls and paying carriers for the airtime used. BCG is the leading provider of roaming services to the unregistered roaming market. The Company's Teleservices Division provides customer support teleservices to wireless carriers which allows them to outsource all or a portion of their customer service activities, and are designed to help wireless carriers retain subscribers, reduce costs and manage growth. The Company's Prepaid Division provides carriers with prepaid wireless services through its C2C(R) Network, which enables carrier subscribers to use their wireless phone as if they were a post-pay subscriber, thereby expanding service offerings to new and existing subscribers without the added billing costs and collection risk. The Systems Division markets a voice processing platform with enhanced features for providing prepaid wireless, voice messaging and fax mail services to wireless and wireline carriers throughout North America and South America. The Systems Division also manufactures prepaid systems which are used to support the Company's C2C Network. In the fourth quarter of 1997 the Company formally reorganized its corporate structure into four divisions, Roaming Services, Teleservices, Prepaid Wireless Services and Systems. Wireless telephone service has been one of the fastest growing areas of the telecommunications industry over the last twelve years. The Cellular Telecommunications Industry Association ("CTIA") estimates that the number of wireless subscribers in the United States increased from approximately 340,000 in December 1985 to approximately 56 million in March 1998. This represents an increase in market penetration from under 1% to over 20% of the United States population. The CTIA also estimates that aggregate annual service revenues from wireless subscribers grew from approximately $482.4 million in 1985 to approximately $26.4 billion in 1996. A number of factors have contributed to this growth, including the build-out of the wireless network infrastructure, the decreasing cost of wireless telephones, the increasing mobility of the United States population, technological improvements in the size and battery life of wireless telephones and greater acceptance of wireless telephone use. Significant growth in the wireless telephone market is expected to continue in the future, particularly given the emergence of "personal communications services" (PCS) as a new form of wireless service. Industry sources forecast that the number of cellular and PCS subscribers will grow to 94 million by the end of the year 2000, representing a market penetration of approximately 30% of the United States population, and estimate that the aggregate annual services revenue from wireless subscribers alone will be over $35 billion. In August 1997, the Company completed a public offering and sold 3 million shares of its common stock which raised net proceeds of approximately $35.8 million. The net proceeds will continue to be used for capital and other expenditures in connection with the expansion of the C2C Network. In addition, the Company purchased the remaining 20% of Wireless Americas Corporation (WAC) for $1.4 million, bringing the Company's ownership to 100% of WAC's capital stock. WAC was subsequently merged into Voice Systems Technology Inc. (VST). The Company was organized as a Massachusetts corporation in August, 1988 and introduced its ROAMERplus roaming service in 1991. The Company introduced teleservices in 1993 and its prepaid wireless service in 1996. The Company's systems were introduced in 1996 with the acquisition of VST. The Company's principal office is located at 100 Sylvan Road, Suite 100, Woburn, Massachusetts 01801 and its telephone number is (617) 692-7000. -2- DESCRIPTION OF BUSINESS SERVICES ROAMING SERVICES DIVISION The Company's roaming service is being used by approximately 94 wireless carriers that collectively hold licenses for over 1,100 markets in the United States, Canada and Mexico. BCG services 9 of the 10 largest wireless carriers, by number of subscribers, in the United States. The Company's ROAMERplus service provides carriers with the ability to generate revenues from unregistered roamers in their service area. When an unregistered roamer places a call in the carrier's service area, the carrier's mobile switching center forwards the call, at the Company's expense, to the Company's proprietary digital call processing system. The roamer may complete the call by charging the call to a telephone calling card, a commercial credit card or as a collect call. In October, 1997 the Company finalized an agreement with AT&T to allow holders of AT&T calling cards the ability to charge ROAMERplus calls to those cards. A majority of all incoming traffic is initially handled by an automated call processing system, which prompts the caller for billing and calling information. The Company's specially trained service representatives handle all remaining calls as well as calls requiring additional operator assistance. In order to implement the Company's ROAMERplus service, a carrier need only make a minor software change in its switches. BCG pays for transport of the calls to its facilities and for completion of the calls. Under its agreements with carriers, which typically have a term of one year, BCG pays the serving carrier for the airtime that the roamer uses and charges the roamer for the call. The charge for the call appears directly on a telephone or credit card bill, with BCG (typically, under the trade name "Wireless Roaming") as the vendor. ROAMERplus eliminates collection and fraud risk for the carrier because BCG takes responsibility for collection from the customer. The Company manages this collection and fraud risk by utilizing its own proprietary fraud control systems as well as external systems, and validating the caller's credit before completing the call. TELESERVICES DIVISION The Company designed and began providing teleservices in 1993 in response to the industry's need for 24-hour, 365 day customer service. The Company's teleservices program allows a carrier's subscriber to obtain information on rate plans, phone operations and service center locations, as well as instructions on roaming features and promotions. Subscribers also may make billing inquiries, initiate address and rate plan changes, and obtain other customer assistance. The Company's service centers also assist carriers in billing and collections. Most carriers using BCG's teleservices use these services for off-hours and overflow subscriber support. However, the Company's services range from narrowly defined, short-term projects to the provision of all of the carrier's customer service activities. The Company currently provides teleservices to fifteen wireless customers. Certain wireless carriers that have contracted for the Company's prepaid wireless services have also engaged the Company to provide teleservices for the carrier's prepaid subscribers. The Company provides most of its teleservices from its service center in Woburn, Massachusetts. The Company designed this facility to provide highly efficient, rapid customer response through the deployment of state-of-the-art switching technologies with client/server architecture and open, automatic call delivery platforms. Each customer service representative utilizes database interfaces, customized for each carrier, to facilitate subscriber inquiry response, technical problem resolution, program/feature clarification, on-line follow-up and performance reporting. These customized interfaces can be programmed to give the Company complete access to a particular carrier's subscriber databases. Administration of call center floor personnel is facilitated by the use of forecasting, scheduling and monitoring systems that allow floor supervisors to observe numerous aspects of the call center's performance in a graphical format, including information on call duration, compliance with contract standards and operator performance. -3- BCG has identified additional specific teleservices needs in the wireless industry and has developed services to meet those needs. These services allow the carriers to better manage the demands of hiring, training, managing and retaining a large number of customer service representatives for specialized service projects that often place significant increased demands on the capacity of customer service centers. For example, BCG provides teleservice support to carriers who are currently supporting prepaid subscribers on the C2C Network. BCG's wireless-trained representatives are available to effectively answer subscriber questions that are not handled by C2C's automated customer service application. Additional specialized teleservices include LAWBUST, the Cellular Telephone Industry Association's program developed by BCG and CTIA to assist law enforcement officials and carriers in combating wireless fraud through on-line access to the CTIA's proprietary database and other techniques. BCG also provides special support services to carriers including dealer support, lead management, phone number and NPA-NXX area code changes and third party verification services. The Company offers extensive in-house classroom and on-the-job training programs for its teleservices personnel, including instruction on a full breadth of call handling techniques and service quality. In addition, carrier-specific training allows the teleservices staff to disseminate information on a particular carrier's services, as well as to update and edit information in the carrier's databases. BCG intends to continue to market and invest in its teleservices technology in order to provide additional service offerings. PREPAID WIRELESS SERVICES DIVISION The Company introduced its C2C Network-based prepaid wireless service offering in early 1996 and was offering the service in 153 U.S. Metropolitan Service Areas (MSA's) as of December 31, 1997. The C2C Network permits a wireless carrier to automatically switch a prepaid subscriber's call to the C2C Network where information regarding the status of that subscriber's prepaid account is maintained. A subscriber establishes an account with the wireless carrier by prepaying a specific dollar amount to be credited toward future service. Subsequently, each call that is initiated or received by the subscriber is routed to the C2C Network and rated in real time based on the telephone number called, carrier usage charges, taxes and applicable surcharges. When the remaining balance is reduced to a minimal amount, the subscriber is able to replenish the account by purchasing additional prepaid service from the carrier with cash or a credit card. The C2C Network can complete the call and debit the account automatically without requiring the subscriber to enter a debit card number or other information. As a result, a prepaid subscriber receives service substantially similar to a subscriber using traditional billing arrangements, including the ability to make outgoing and receive incoming calls, as well as to roam into other markets through the Company's ROAMERplus service. Carriers compensate BCG for network usage by contracting at a per minute rate for prepaid subscriber usage based on connection time between the carrier's mobile switching center and the C2C Network voice node. The Company's existing contracts to provide prepaid wireless services through the C2C Network are generally two or three years. The C2C Network consists of a central computer database linked by a high speed, wide area frame relay network to geographically distributed proprietary call processing subsystems, called voice nodes. Each voice node is capable of serving more than one carrier and consists of a computer controlled telecommunications switch and an interactive voice response unit that provides high quality personalized voice prompts. These voice nodes are linked to the carriers' mobile switching centers via dedicated telephone facilities. The distributed node architecture is designed to be modular and scaleable while remaining efficient and cost-effective. The centralized database enables prepaid users to make calls while roaming in other service areas where the C2C Network is in place. During 1997, the Company deployed an additional 29 C2C nodes in various markets across the United States, bringing the total number of C2C nodes deployed to 50 as of December 31, 1997. In that time the Company increased the total MSA's commercially available and in use by prepaid subscribers to 153 from -4- 57 at December 31, 1996. Carriers are currently in the process of implementing BCG prepaid systems in an additional 33 U.S. MSA's which, when combined with the MSA's where prepaid service is now available, will cover over 70% of the U.S. population. In October, 1997 the Company entered into a Letter of Agreement with Rogers Cantel, a Canadian wireless telephone carrier, for the provision of prepaid wireless service in all of Rogers Cantel's Canadian markets. In September, 1997 the Company finalized an agreement with AT&T Wireless Services (AWS) to provide wireless prepaid service in markets serviced by AWS. The Company currently provides C2C to several other carriers, including AirTouch Communications, Bell Atlantic Mobile, Bell South Cellular Corp., LA Cellular, Southern New England Telephone Corp., Southwestern Bell Mobile Systems, Western Wireless' PCS Division and Frontier Cellular in addition to several wireless resellers. The Company is continuing to install, at its expense, the voice nodes and data links that make up the C2C Network in order to support additional market areas under existing carrier contracts and commitments. As of February 28, 1998 the Company was supporting over 340,000 prepaid subscribers on behalf of carriers who have deployed a BCG prepaid system in the United States and Canada. SYSTEMS DIVISION The Systems Division sells systems for prepaid wireless calling on a turn-key basis primarily to international customers. It also markets systems for voice messaging, fax mail and other enhanced service applications to Original Equipment Manufacturers (OEM's) and wireless and wireline carriers throughout North America. Since establishing this division, the Company has made significant prepaid system sales in Mexico, Venezuela, Peru and Ecuador. To support its systems and on-going sales efforts in Mexico, in 1997 the Company established a Mexican subsidiary, BCG de Mexico, S.R.L which employs technicians and other support staff throughout Mexico. In October, 1997 the Company entered into a two-year agreement with Motorola, Inc. through the Latin America Division of its Cellular Subscriber Sector for the marketing and distribution by Motorola of the Company's systems in Central America, South America and Puerto Rico. ENGINEERING, RESEARCH AND DEVELOPMENT BCG believes that its future success will depend in large part on its ability to enhance existing services and develop new services in response to changing market, customer or technological requirements of the wireless telephone industry. An important factor in the future success of the Company's prepaid wireless service will be the Company's ability to provide, at competitive prices, more functionality and features than those typically available in other competitive offerings. The Company has developed proprietary software to enable its call processing platform to handle custom signaling interfaces to various types of wireless switches, specialized call rating requirements of prepaid wireless services, and interfaces to wireless administration and management information systems. The Company is developing a number of enhanced services that it intends to make available to prepaid and traditional subscribers through the C2C Network. These enhanced services will be designed to enable carriers to generate additional sources of revenue from subscribers, in addition to providing carriers with more extensive internal reporting capabilities. The Company spent approximately $839,000, $3.2 million and $5.4 million on engineering, research and development in 1995, 1996, and 1997, respectively. The Company expects to continue to devote substantial resources to its engineering, research and development activities in future years. -5- SALES, MARKETING AND DISTRIBUTION The Company's sales strategy is to establish and maintain long-term relationships with its customers. The Company utilizes a consultative sales process to understand and define customer needs and determine how those needs can be addressed by the Company's services. BCG seeks to build upon its existing customer relationships by integrating and cross-selling its different service offerings. The Company's sales cycle varies for different services and can be up to 12 months for the Company's teleservices and prepaid services. The Company's sales force currently consists of 11 sales representatives supervised by two senior sales executives. The Company's sales representatives generally have significant experience in the wireless industry, either as former employees of wireless carriers or in selling products and services to wireless carriers. The Company typically assigns each sales representative to a single group of wireless telephone carriers in order to support the development and maintenance of long-term customer relationships. The sales representatives are supported by product specific account and service managers who also typically have experience in the wireless industry and manage the accounts on a daily basis after the completion of the initial sale. Most sales representatives are strategically located in the carriers major geographic regions, however, the Company's other sales, marketing and product management activities are supported from its Woburn, Massachusetts facility, and from its Tulsa, Oklahoma Systems Division location. The Company's direct sales strategy is complemented by a marketing program that includes participation in industry trade shows and advertising. Because the Company's customers are a readily identifiable group, the Company seeks to gain wide exposure through carefully selected events and activities specific to the wireless telephone industry. Product and account management groups have been established for the prepaid wireless and systems divisions. Each group focuses on understanding the prepaid market and providing carriers with valuable information regarding prepaid marketing and subscriber trends, distribution techniques and marketing success factors. The Company works closely with the carriers and the industry to disseminate and integrate this information into their prepaid programs to help generate and retain prepaid subscribers. In addition, these departments focus on identification of new features and functionality which drive incremental prepaid business. Distribution of prepaid services is a integral piece of the prepaid wireless service business because it provides consumers with numerous channels to purchase or replenish prepaid service. The Company continues to improve distribution options for prepaid cards on behalf of the wireless carriers by seeking arrangements with national distributors, retailers, resellers and alternative channels to increase market penetration and exposure. CUSTOMER BASE The Company provides its services to wireless carriers of varying size, expertise and capabilities. The Company currently provides one or more of its services to approximately 94 wireless carriers in the United States, Canada and Mexico, including 9 of the 10 largest cellular carriers in the United States. Historically, a significant portion of the Company's revenues in any particular period has been attributable to a limited number of customers. Net revenues attributable to the Company's ten largest customers accounted for approximately 84.6%, 82.4% and 74.5% of the Company's total revenues in 1995, 1996, and 1997, respectively. Ameritech Cellular Services, Inc., Bell Atlantic Mobile, Southwestern Bell Mobile Systems and Bell South Cellular Corp. accounted for approximately for 14.8%, 12.3%, 6.4% and 11.4%, respectively, of total revenues in 1996 and for 11.6%, 11.6%, 10.6% and 4.7%, respectively, of total revenues in 1997. For the year ending December 31, 1997, the Company's Systems Division generated $11.1 million in prepaid and voice system revenues. Of this revenue, 43.9% represented sales to support prepaid service in several Mexican markets on behalf of Tel-Cel, Mexico's largest wireless carrier and 41.5% of the revenue represented system sales to three other customers. -6- COMPETITION 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. Trends in the wireless telephone industry, including greater consolidation and technological or other developments that make it simpler or more cost-effective for wireless carriers to provide certain services themselves, could affect demand for the Company's services and could make it more difficult for the Company to offer a cost-effective alternative to a wireless carrier's in-house capabilities. In addition, the Company anticipates continued growth in the wireless carrier services industry, and consequently, the entrance of new competitors in the future. BCG's principal competitor in unregistered roaming market is National Telemanagement Corporation (NTC) and in the prepaid network market, Brite Voice Systems, GTE Telecommunications Services, Inc. and NTC. In the teleservices market, BCG competes with a variety of companies that have inbound and outbound service centers. The Systems Division's principal competitors in the voice processing systems market include Boston Technology, Inc., Octel Communications Corp. and Centigram Communications Corp. The Systems Division competes primarily with Atlas Telecommunications and Brite Voice Systems in the turnkey prepaid system business. The Company believes that the principal competitive factors in the wireless carrier services industry include the ability to identify and respond to customer needs, quality and breadth of service offerings, price and technical expertise. The Company's ability to compete also depends in part on a number of competitive factors outside its control, including the ability to hire and retain employees, the development by others of products and services that are competitive with the Company's products and services, the price at which others offer comparable products and services and the extent of its competitors' responsiveness to customer needs. There can be no assurance that the Company will be able to continue to compete successfully with its existing competitors or with new competitors. GOVERNMENT REGULATION The Federal Communications Commission ("FCC"), under the terms of the Communications Act of 1934, as amended, including the Telecommunications Act of 1996, regulates interstate communications and use of radio spectrum, including entry, exit, rates and terms of operation. BCG presently neither operates any facilities utilizing radio spectrum nor has any facilities-based services involving interstate communications. Consequently, it is not required to and does not hold any licenses or other authorizations issued by the FCC. However, the wireless carriers that constitute the Company's customers are regulated at both the federal and state levels. Such regulation may decrease the growth of the wireless telephone industry, affect the development of the PCS market, 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 and results of operations. At the same time, the Telecommunications Act of 1996, a deregulatory measure, may cause changes in the industry, including entrance of new competitors and industry consolidation, which could in turn affect the Company's cost of doing business or otherwise have a material effect on the Company's business, financial condition and results of operations. EMPLOYEES As of December 31, 1997, the Company had a total of 860 full-time and part-time employees. Of these employees, 616 serve in call center and related functions, 139 serve in technical support and technology development, 44 serve in sales, marketing, product and account management and 61 serve in administration and management. None of the Company's employees are represented by a labor union. The Company believes that its employee relations are good. -7- BACKLOG As of December 31, 1997, the Company's backlog of firm orders for its systems was $640,000. The Company includes in backlog only those orders for which it has received completed purchase orders and for which delivery has been specified within 12 months. Most orders are subject to cancellation by the customer. Because of the possibility of customer changes in delivery schedules, cancellation of orders and potential delays in product shipments, the Company's backlog as of any particular date may not be representative of actual sales for any succeeding period. ITEM 2. PROPERTIES The Company leases space at its four principal locations: Burlington and Woburn, Massachusetts, Tulsa, Oklahoma and Mexico City, Mexico. The Woburn location serves as a service center operations facility for teleservices and ROAMERplus services. The Woburn location also has separate facilities that house the Company's network operations center as well as the Company's executive headquarters, engineering, sales and finance personnel. The Company is in the process of negotiating additional lease space in its Woburn location in order to accommodate the additional direct and indirect personnel required to support the growth and expansion of its teleservices and C2C businesses. The Burlington site was utilized for service center operations for teleservices and ROAMERplus services throughout 1997 and into early 1998. Its operations are expected to be fully consolidated into the Woburn facility in the first half of 1998. It is anticipated that unused portions of the Burlington location will be subleased. The Tulsa facility is used for the manufacturing and assembly of systems and related sales efforts. The Mexico City office serves as the headquarters of its technical service operation in Mexico. The Company also has 30 other leased facilities throughout the United States which are used to house the Company's voice nodes and certain equipment for the C2C Network. ITEM 3. LEGAL PROCEEDINGS On November 20, 1997, AWS sent a letter to the Company stating that it believes that it is entitled to indemnification from the Company in respect to a certain claim presently pending in a case brought by Ronald A. Katz Technology Licensing, L.P. and MCI Telecommunications Corporation against AT&T Corp. in the United States District Court for the Eastern District of Pennsylvania. The letter asserts that Count 13 of the complaint, which relates in part to prepaid wireless service, gives rise to an obligation on the part of the Company to indemnify AWS with respect to that count. The amount in question is undetermined. The suit against AT&T Corp. was filed on July 8, 1997. The contract between the Company and AWS pursuant to which the Company presently provides prepaid services to AWS, and upon which AWS's claim for indemnification is based, was not executed until October 15, 1997. For this and other reasons, the Company believes that the claim is without merit. To date, no legal action has been brought against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company, through solicitation of proxies or otherwise, during the last quarter of the year ended December 31, 1997. -8- EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company and their ages and positions are as follows:
Name Age Position ---- --- -------- Paul J. Tobin 54 Chairman of the Board Brian E. Boyle 49 Vice Chairman E.Y. Snowden 43 President & Chief Executive Officer, Director Frederick E. von Mering 44 Vice President, Finance and Administration, Director
Mr. Tobin has served as Chairman of the Board of Directors of the Company since February 1996. He also served as the Company's President and Chief Executive Officer from March, 1997 to February, 1998 and from 1990 until February 1996. Prior to joining the Company, Mr. Tobin served as President of Cellular One Boston/Worcester from July 1984 to January 1990 and as a Regional Marketing Manager for Satellite Business Systems, a joint venture of IBM, Comsat Corp. and Aetna Life & Casualty from April 1980 to June 1984. Mr. Tobin received his undergraduate degree in economics from Stonehill College and his M.B.A. in marketing and finance from Northeastern University. Mr. Tobin also serves as a member of the Board of Trustees at Stonehill College. Mr. Boyle has served as Vice Chairman of the Company since February 1996 and as Chairman, New Wireless Services of the Company from January 1994 to February 1996. From July 1990 to September 1993, Mr. Boyle served as Chief Executive Officer of Credit Technologies, Inc., a supplier of customer application software for the wireless telephone industry. Prior to 1990, Mr. Boyle founded and operated a number of ventures servicing the telecommunications industry, including APPEX Corp. (now EDS Personal Communications Division of EDS Corporation, a global telecommunications service company) and Leasecomm Corp., a micro-ticket leasing company. Mr. Boyle earned his B.A. in mathematics from Amherst College and his B.S., M.S. and Ph.D. in electrical engineering and operations research from M.I.T. Mr. Boyle is also a Director of Saville Systems PLC, a provider of customized billing solutions to telecommunications providers, as well as of several private companies. Mr. Snowden has served as the Company's President and Chief Executive Officer since February, 1998. Prior to joining the Company, Mr. Snowden served as President and Chief Operating Officer of American Personal Communications, L.P. d/b/a Sprint Spectrum where he oversaw the launch of the Nation's first PCS network. From 1991 to 1994, Mr. Snowden was Area Vice President, Personal Communication & Intelligent Network Services at Pacific Bell, Inc. From 1988 to 1990, Mr. Snowden was a Principal at Mehta Burkett & Company, Inc. a merchant banking firm. From 1986 to 1988, Mr. Snowden was an executive at Universal Optical Company, Inc. where he held the positions of Chief Executive Officer and President & Chief Operating Officer. Prior to 1986, Mr. Snowden was employed by various organizations including The Beta Group, Boston Consulting Group, Inc. and Price Waterhouse LLP. Mr. Snowden earned his B.S. in Mathematical Sciences from Stanford University and his M.B.A. from Harvard Graduate School of Business Administration. Mr. von Mering has served as the Company's Vice President, Finance and Administration since 1989. Prior to joining the Company, Mr. von Mering served as Regional Vice President and General Manager for the paging division of Metromedia, Inc., a communications company, from 1980 to 1986. From 1975 to 1979, Mr. von Mering was employed at Coopers & Lybrand LLP. Mr. von Mering earned his B.A. degree in accounting from Boston College and his M.B.A. from Babson College. Each officer serves at the discretion of the Board of Directors. There are no family relationships among any of the Directors and executive officers of the Company. -9- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS MARKET INFORMATION FOR COMMON STOCK Boston Communications Group, Inc.'s Common Stock is traded on the Nasdaq National Market, under the symbol BCGI. The following table reflects the range of high and low selling prices of the Company's common stock for the periods indicated since the date on which the Common Stock commenced trading.
1996 1997 ------ ------ HIGH LOW HIGH LOW -------- ------- ------- ------ First Quarter -- -- $ 7 1/8 $ 3 7/8 Second Quarter $ 17 $ 14 15 1/16 4 1/8 Third Quarter 14 1/4 12 17 1/4 12 1/4 Fourth Quarter 16 1/8 4 3/8 19 8 1/2
HOLDERS At March 16, 1998, there were approximately 5,100 holders of Common Stock. DIVIDENDS The Company has never paid a cash dividend on its Common Stock. The Company currently intends to retain all of its earnings to finance future growth and, accordingly, does not anticipate paying any cash dividends in the forseeable future. ITEM 6. SELECTED FINANCIAL DATA The following tables should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this report.
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1993 1994 1995 1996(1) 1997 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenues $ 8,694 $ 18,334 $ 34,220 $ 50,651 $ 68,099 Operating income (loss) (269) 405 2,129 610 (2,389) Income (loss) from continuing operations(2) (332) 288 3,008 599 (1,116) Income (loss) from discontinued operations (92) 1,507 (165) -- -- Net income (loss) (424) 1,795 2,843 599 (1,116) Net income (loss) available to common shareholders (1,454) 779 1,893 148 (1,116) Basic net income (loss) per common share(3): (0.56) 0.24 0.57 0.02 (0.08) Diluted net income (loss) per common share(3): (0.56) 0.22 0.22 0.01 (0.08) CONSOLIDATED BALANCE SHEET DATA: Cash and short-term investments 681 204 253 21,421 33,704 Working capital 695 1,098 2,082 26,433 38,210 Property and equipment, net 1,262 2,699 4,884 12,906 38,087 Total assets 6,889 8,867 13,614 51,959 93,385 Redeemable preferred stock 14,930 14,947 15,896 -- -- Shareholders' equity (deficit) $(11,370) $(10,591) $ (8,698) $ 42,893 $ 80,104 Dividends per common share -- -- -- -- --
(1) In February 1996, the Company acquired VST for Common Stock and cash with an aggregate value of approximately $2.5 million. -10- (2) In 1995, the Company reversed the deferred tax asset valuation allowance, resulting in a tax benefit of $1.8 million. In addition, in 1994 and 1995, the Company realized benefits from net operating loss carryforwards of $382,000 and $840,000, respectively. See Note 6 of Notes to Consolidated Financial Statements. (3) See Note 2 of Notes to Consolidated Financial Statements ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The management's discussion and analysis of financial condition and results of operations have been included as Appendix A to this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data have been included in Appendix B to this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -11- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The sections entitled "Election of Directors" and Reports Under Section 16(a) of the Exchange Act appearing in the Company's proxy statement for the annual meeting of stockholders to be held on May 21, 1998, sets forth certain information with respect to the directors of the Company and reports filed by certain persons under Section 16(a) of the Exchange Act and are incorporated herein by reference. Certain information with respect to persons who are or may be deemed to be executive officers of the Company is set forth under the caption "Executive Officers of the Company" in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The sections entitled "Executive Compensation", "Employment Agreements with Named Executive Officers" and "Report of the Compensation Committee" appearing in the Company's proxy statement for the annual meeting of stockholders to be held on May 21, 1998, set forth certain information with respect to the compensation of management of the Company and are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Security Ownership of Certain Beneficial Owners and Management" appearing in the Company's proxy statement for the annual meeting of stockholders to be held on May 21, 1998, set forth certain information with respect to the ownership of the Company's Common Stock and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The sections entitled "Executive Compensation", "Employment Agreements with Named Executive Officers," and "Certain Transactions" appearing in the Company's proxy statement for the annual meeting of stockholders to be held on May 21, 1998, set forth certain information with respect to certain business relationships and transactions between the Company and its directors and officers and are incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K (A)(1) FINANCIAL STATEMENTS The following consolidated financial statements of Boston Communications Group, Inc. are included as Appendix B attached hereto: Consolidated Balance Sheets-December 31, 1997 and 1996. Consolidated Statements of Operations-Fiscal years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Stockholders' Equity-Fiscal years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows-Fiscal years ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. -12- (2) FINANCIAL STATEMENT SCHEDULES Index to Consolidated Financial Statement Schedules For the three years 1997, 1996 and 1995: Schedule II - Valuation and Qualifying Accounts All other Schedules have been omitted because the required information is shown in the consolidated financial statements or notes thereto or they are not applicable. (3) The Exhibits listed in the Exhibit Index immediately preceding the Exhibits are filed as part of this Annual Report on Form 10-K. (B) REPORTS ON FORM 8-K None -13- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on the 20/th/ day of March, 1998. BOSTON COMMUNICATIONS GROUP, INC. By: /s/ E.Y. Snowden -------------------------- E. Y. SNOWDEN PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ E.Y. Snowden President, Chief March 20, 1998 - ------------------------------ Executive Officer E. Y. Snowden and Director /s/ Fritz E. von Mering Vice President, March 20,1998 - ------------------------------ Finance and Fritz E. von Mering Administration, Director (Principal Financial and Accounting Officer) /s/ Paul J. Tobin Chairman of the March 20, 1998 - ------------------------------ Board of Directors Paul J. Tobin -14- SIGNATURE TITLE DATE --------- ----- ---- /s/ Brian E. Boyle Vice Chairman of the March 20, 1998 - ------------------------------ Board of Directors Brian E. Boyle /s/ Jerrold D. Adams Director March 20, 1998 - ------------------------------ Jerrold D. Adams /s/ Craig L. Burr Director March 20, 1998 - ------------------------------ Craig L. Burr /s/ Paul R. Gudonis Director March 20, 1998 - ------------------------------ Paul R. Gudonis /s/ Gerald Segel Director March 20, 1998 - ------------------------------ Gerald Segel /s/ Mark J. Kington Director March 20, 1998 - ------------------------------ Mark J. Kington -15- APPENDIX A -16- Management's Discussion and Analysis of Financial Condition and Results of Operations Overview - -------- Boston Communications Group provides innovative roaming services, prepaid wireless services, teleservices and prepaid and voice systems to wireless telephone carriers throughout North and South America. The Company's Roaming Services Division provides carriers with ROAMERplus/TM/ call processing services which give carriers the ability to generate revenues from subscribers who are not covered under traditional roaming agreements by arranging payment for roaming calls and paying carriers for the airtime used. BCG is the leading provider of roaming services to the unregistered roaming market. The Company's Teleservices Division provides customer support teleservices to wireless carriers which allow carriers to outsource all or a portion of their customer service activities, and are designed to help carriers retain subscribers, reduce costs and manage growth. The Company's Prepaid Division provides carriers with its prepaid wireless service, C\\2\\C(R), which enables carrier subscribers to use their wireless phone as if they were a post-pay subscriber, thereby expanding service offerings to new and existing subscribers without the added billing costs and collection risk. The Systems Division markets a voice processing platform with enhanced features for providing prepaid wireless, voice messaging and fax mail services to wireless and wireline carriers throughout North America and South America. The Systems Division also manufactures prepaid systems which are sold directly to carriers and are used to support the Company's C\\2\\C network. The Company has achieved significant growth in revenues over the past five years, with total revenues increasing from $8.7 million for the year ended December 31, 1993 to $68.1 million for the year ended December 31, 1997. Total revenues for 1997 represent a 34.3% increase over the $50.7 million in revenues generated in 1996. The increase in revenues in 1997 over 1996 was primarily the result of higher revenues generated from prepaid wireless services and system sales which together account for 78.2%, or $13.6 million of the year to year increase. Operating loss for 1997 was $2.4 million, compared to 1996 operating income of $610,000. The operating loss was primarily due to expenses associated with the additional investment to support the expansion of the C\\2\\C network. The expansion is in response to new carrier agreements, as well as existing carrier customers who added new markets to the C\\2\\C network. To support carrier agreements, the Company increased the number of nodes deployed for the C\\2\\C network from 21 in 1996 to 50 at the end of 1997. However, revenues generated from these new carriers and markets were not sufficient to offset the costs associated with the expansion, including capital, telecommunications, and personnel. The lag in revenues was due to both the timing of deployments as well as delays in certain carrier marketing and distribution programs. The Company expects that it will continue to incur additional capital and personnel costs to support the C\\2\\C network due to continued expansion as well as ongoing development to support enhancements and new features. These costs and other costs to support the C\\2\\C network will continue to be a significant percentage of revenue until the subscriber base and usage revenues grow sufficiently to cover operating costs. -17- In August 1997, the Company completed a public offering and sold 3 million shares of its common stock, raising net proceeds of approximately $35.8 million. The proceeds are being utilized to support expenditures associated with the C\\2\\C network, including capital and other operating costs and for general corporate purposes, including working capital. A portion of the net proceeds may also be used for the acquisition of businesses, products and technologies which are complimentary to those of the Company. The Company currently has no plans, commitments or negotiations with respect to any such transactions. -18- Results of Operations - --------------------- The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items in the Company's Consolidated Statements of Operations:
PERCENTAGE OF TOTAL REVENUES YEAR ENDED DECEMBER 31, 1997 1996 1995 - ---------------------------------------------------------------- Revenues: Roaming services 47.7% 63.6% 74.4% Teleservices 25.0 26.5 25.6 Prepaid wireless services 11.0 0.6 0.0 System sales 16.3 9.3 0.0 - ---------------------------------------------------------------- Total revenues 100.0 100.0 100.0 - ---------------------------------------------------------------- Expenses: Cost of service revenues 64.9 72.3 76.3 Cost of system revenues 9.1 5.1 0.0 Engineering, research and development 8.0 6.4 2.5 Sales and marketing 7.5 5.8 5.7 Management fees 0.0 0.6 2.9 General and administrative 5.1 4.5 3.8 Depreciation and amortization 8.1 4.1 2.6 Impairment of long-lived assets 0.8 0.0 0.0 - ---------------------------------------------------------------- Total expenses 103.5 98.8 93.8 - ---------------------------------------------------------------- Operating income (loss) (3.5) 1.2 6.2 Interest income (expense) 1.6 1.2 (0.4) - ---------------------------------------------------------------- Income (loss) from continuing operations before income taxes (1.9) 2.4 5.8 Provision (benefit) for income taxes (0.3) 1.2 (3.0) - ---------------------------------------------------------------- Income (loss) from continuing operations (1.6) 1.2 8.8 Loss from discontinued operations 0.0 0.0 (0.6) - ---------------------------------------------------------------- Net income (loss) (1.6) 1.2 8.2 Accretion of dividends on redeemable preferred stock 0.0 0.9 2.7 - ---------------------------------------------------------------- Net income (loss) available to common shareholders (1.6)% 0.3% 5.5% - ----------------------------------------------------------------
-19- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Years Ended December 31, 1997 and 1996 Service and system revenues - --------------------------- Total revenues increased 34.3% from $50.7 million in the year ended December 31, 1996 to $68.1 million in the year ended December 31, 1997. Roaming services revenues remained stable in 1997 at $32.5 million compared to $32.2 million for the year ended December 31, 1996. Although there were fewer suspensions of inter-carrier automatic roaming agreements by the carriers in 1997, BCG was able to offset this decrease in unregistered roaming traffic by expanding its billing options and maintaining its market presence. Teleservices revenues increased 26.9% from $13.4 million in the year ended December 31, 1996 to $17.0 million in the year ended December 31, 1997. This increase was primarily attributable to new and additional services provided to existing and new carrier customers. Included in these additional revenues are billing inquiry services offered to the carrier's C2C prepaid customers. Prepaid wireless service revenues increased from $312,000 in the year ended December 31, 1996 to $7.5 million in the year ended December 31, 1997. As of December 31, 1997, 50 C2C network nodes were deployed in various markets throughout the United States compared to 21 as of December 31, 1996. At the end of 1997, these nodes were processing calls for approximately 290,000 subscribers. System revenues increased 136.2% from $4.7 million in 1996 to $11.1 million in the year ended December 31, 1997. The increase in system revenues was attributable to prepaid systems sold to new and existing customers in Mexico and South America in 1997. Cost of service revenues - ------------------------ Cost of service revenues consist primarily of wireless network and landline transmission costs in addition to the personnel costs associated with operator assisted roaming service calls, teleservice calls and C2C operations. Cost of service revenues decreased as a percentage of service revenues from 79.6% to 77.5% in the years ended December 31, 1996 and 1997, respectively. The decrease in cost of service revenues as a percentage of service revenues was primarily due to significant increases in revenue generated by C2C to better absorb its operating costs and, to a lesser extent, increased labor efficiencies in roaming services and teleservices. Cost of system revenues - ----------------------- Cost of system revenues represent the cost of prepaid and voice systems sold by the Systems Division. Cost of system revenues as of December 31, 1997 totaled $6.2 million or 55.9% of system revenues and increased from $2.6 million or 54.9% of system revenues in the prior year. The reduction in the gross margin resulted from a change in the mix of system sales towards international prepaid sales which typically yield a lower margin. 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 68.8% from $3.2 million in the year ended December 31, 1996 to $5.4 million in the year ended December 31, 1997 and increased as a percentage of revenues from 6.4% to 8.0% in the years ended December 31, 1996 and 1997, respectively. This increase was principally due to costs, including recruiting fees and other personnel costs, associated with the Company's hiring of new personnel to support ongoing development and enhancements, implementation and deployment of the C2C network, and to a lesser extent, additional personnel and related costs to support the expansion of teleservices and system sales. The Company intends to continue to increase its engineering, research and development expenditures to support future development and enhancements of its prepaid and other wireless services and systems. -20- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Sales and marketing expenses - ---------------------------- Sales and marketing expenses include direct sales and product management salaries, commissions, travel and entertainment expenses, in addition to the cost of trade shows, advertising and other promotional expenses. Sales and marketing expenses increased 75.9% from $2.9 million in the year ended December 31, 1996 to $5.1 million in the year ended December 31, 1997, and increased as a percentage of revenues from 5.8% to 7.5% in the years ended December 31, 1996 and 1997, respectively. The increase in sales and marketing expenses was due to additional expenditures to support the concentrated efforts of the systems division to expand internationally and the overall growth in the system sales. These costs include additional sales and product management personnel, commissions and other related expenses. Additional personnel, recruiting, commissions and other personnel costs were also incurred to support sales and marketing efforts in the prepaid service and teleservice divisions. The Company expects to increase expenditures for sales, marketing and product management in the future. Management fees - --------------- Management fees of $252,000 for the year ended December 31, 1996, represent the costs associated with payroll and certain benefit costs of senior management personnel responsible for the operations of the Company payable under the terms of a Management Agreement with Boston Communications Capital Corporation. The Management Agreement was terminated on March 31, 1996. As a result of the termination, the entire payroll and related costs of these senior management personnel now are being directly incurred by the Company and are recorded as general and administrative expenses. General and administrative expenses - ----------------------------------- General and administrative expenses include salaries and benefits and other expenses that provide administrative support to the Company. General and administrative expenses increased 52.2% from $2.3 million in the year ended December 31, 1996 to $3.5 million in the year ended December 31, 1997. General and administrative expenses increased as a percentage of revenues from 4.5% to 5.1% in the years ended December 31, 1996 and 1997, respectively. The rise in general and administrative expenses was primarily attributable to additional employees and related recruiting expenses to support the Company's growth along with a full year of costs associated with being a publicly traded company. In addition, the increase relates to the costs of senior management personnel that were classified as management fees through March 31, 1996. 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 seven years. Goodwill related to acquisitions is being amortized over eight years. Depreciation and amortization expense increased 162% from $2.1 million in the year ended December 31, 1996 to $5.5 million in the year ended December 31, 1997. This increase was due primarily to the depreciation of additional technical equipment and software to support the rapid expansion and continuing development of the Company's prepaid wireless network. In addition, the amortization of goodwill from the Company's acquisitions and depreciation of technical equipment and software purchased for the teleservices business resulted in greater depreciation and amortization expense in 1997. Depreciation and amortization expense are expected to increase in 1998 due to increased capital expenditures for telecommunications systems to support the continued expansion and enhancement of the C2C network. -21- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Impairment of long-lived assets - ------------------------------- The Company recognized a pre-tax charge of $569,000 in the year ended December 31, 1997 for a one-time write-down of assets that are no longer being used to support the Company's operations. Interest income (expense) - ------------------------- Interest income increased from $589,000 in the year ended December 31, 1996 to $1.1 million in the year ended December 31, 1997. Interest income was earned from investments of the proceeds of the Company's public offerings and was offset slightly by interest expense from the Company's capital leases. Provision (benefit) for income taxes - ------------------------------------ The income tax expense of $600,000 for the year ended December 31, 1996 yielded a 50% income tax rate. The income tax benefit of $188,000 for the year ended December 31, 1997 yielded a 14% income tax benefit. The higher rate in 1996 and lower benefit in 1997 resulted primarily from the non-deductibility of goodwill from the Company's acquisitions. The effective income tax rate is expected to continue to be greater than 40% in 1998 due to the continued impact of non- deductible goodwill. The Company has recorded a net deferred tax asset for net operating loss carryforwards based on management's assessment that it is more likely than not that future results of operations will be sufficient to realize this asset. Income (loss) from continuing operations - ---------------------------------------- The Company recognized income from continuing operations of $610,000 in the year ended December 31, 1996 and a loss of $2.4 million in the year ended December 31, 1997. The decrease in income from continuing operations reflects the increased depreciation, telecommunication and personnel costs associated with the deployment and operation of the C2C network. The additional expenditures were greater than the increase in C\\2\\C revenue due to delays in the carrier marketing and distribution of prepaid services. -22- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Years Ended December 31, 1996 and 1995 Service and system revenues - --------------------------- Total revenues increased 48.2% from $34.2 million in the year ended December 31, 1995 to $50.7 million in the year ended December 31, 1996. Roaming service revenues increased 26.8% from $25.4 million for the year ended December 31, 1995 to $32.2 million for the year ended December 31, 1996, due primarily to increased revenues generated by higher call volumes from existing carrier customers. The increase in roaming service revenues generated from existing carrier customers resulted from the general growth in the number of wireless subscribers, increased roaming by wireless subscribers and increased frequency in the suspension of inter-carrier roaming agreements between wireless carriers due to greater incidents of wireless fraud. Teleservices revenues increased 52.2% from $8.8 million in the year ended December 31, 1995 to $13.4 million in the year ended December 31, 1996. This increase was primarily attributed to new and additional services provided to existing customers and new carrier customers. Prepaid wireless services revenues in 1996 of $312,000 were generated in markets where C2C was commercially available. As of December 31, 1996, 21 C2C network switches were deployed in various markets throughout the United States. Of these switches, fifteen were fully operational and processing live transactions by the end of the year. System revenues of $4.7 million in 1996 consist principally of prepaid and voice systems sold by VST and Wireless Americas Corporation (WAC), both acquired by the Company in 1996. Cost of service revenues - ------------------------ Cost of service revenues increased as a percentage of service revenues from 76.3% to 79.6% in the years ended December 31, 1995 and 1996, respectively. The increase in cost of service revenues as a percentage of service revenues was primarily due to the high initial operating costs as subscribers are added and usage is generated on the C2C network and, to a lesser extent, due to higher per minute cellular network charges for roaming service revenues. Cost of system revenues - ----------------------- Cost of system revenues totaling $2.6 million represent costs associated with systems sold in 1996. Engineering, research and development expenses - ---------------------------------------------- Engineering, research and development expenses increased 281.4% from $839,000 in the year ended December 31, 1995 to $3.2 million in the year ended December 31, 1996 and increased as a percentage of revenues from 2.5% to 6.4% in the years ended December 31, 1995 and 1996, respectively. This increase was principally due to costs associated with the Company's hiring of new personnel to support the development, implementation and deployment of the C2C network for its prepaid service, and to a lesser extent, additional personnel to support the expansion of its teleservices. Sales and marketing expenses - ---------------------------- Sales and marketing expenses increased 52.6% from $1.9 million in the year ended December 31, 1995 to $2.9 million in the year ended December 31, 1996, and increased as a percentage of revenues from 5.7% to 5.8% in the years ended December 31, 1995 and 1996, respectively. The increase in sales and marketing expenses was due primarily to additional expenditures to support the more sales intensive prepaid service business and to support concentrated sales and marketing efforts related to teleservices. -23- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Management fees - --------------- Management fees of $1.0 million and $252,000 for the years ended December 31, 1995 and 1996, respectively, represent the costs associated with payroll and certain benefit costs of senior management personnel. General and administrative expenses - ----------------------------------- General and administrative expenses increased 76.9% from $1.3 million in the year ended December 31, 1995 to $2.3 million in the year ended December 31, 1996. Total general and administrative expenses increased as a percentage of revenues from 3.8% to 4.5% in the years ended December 31, 1995 and 1996, respectively. This increase was primarily attributable to an increased number of employees and related expenses to support the Company's growth and to the costs of senior management personnel that were classified as management fees through March 31, 1996. Depreciation and amortization expense - ------------------------------------- Depreciation and amortization expense increased 136.2% from $889,000 in the year ended December 31, 1995 to $2.1 million in the year ended December 31, 1996. This increase was due primarily to amortization of goodwill from the Company's two acquisitions and depreciation of additional technical equipment and software to support the Company's roaming services, teleservices and prepaid wireless services. In addition, the expansion of the Company's call centers and Systems assembly facility resulted in increased depreciation of furniture, equipment and leasehold improvements. Interest income (expense) - ------------------------- Interest expense was $151,000 in the year ended December 31, 1995 and interest income was $589,000 in the year ended December 31, 1996. Interest expense in 1995 resulted from interim period borrowings under the Company's Account Purchase Agreement which was terminated in 1996. Interest income was earned in 1996 from investments of the proceeds of the Company's initial public offering (IPO) and was partially offset by interest expense from the Account Purchase Agreement and capital leases. Provision (benefit) for income taxes - ------------------------------------ The income tax benefit of $1.0 million for the year ended December 31, 1995 was attributable to the Company's reversal of its valuation reserve. The income tax expense of $600,000 for the year ended December 31, 1996 yielded a 50% income tax rate. The income tax rate in 1996 was due primarily to the non-deductibility of goodwill from the VST and WAC acquisitions. Income (loss) from continuing operations - ---------------------------------------- The Company recognized income from continuing operations of $2.1 million in the year ended December 31, 1995 and $610,000 in the year ended December 31, 1996. The decrease in income from continuing operations reflects the increased depreciation, telecommunication costs and personnel costs associated with the deployment of the C2C network and the expansion of the Company's facilities. This decrease in income from continuing operations in 1996 was partially offset by operating profit earned by VST from system sales. Loss from discontinued operations - --------------------------------- The loss of $165,000 from discontinued operations in the year ended December 31, 1995 represents the loss from operations of $129,000 associated with the Company's cellular sales and service business and the loss on sale of that business of $36,000. -24- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Selected Quarterly Operating Results - ------------------------------------ The following table sets forth certain unaudited quarterly results of operations of the Company for the eight quarters in the two year period ended December 31, 1997, including such amounts expressed as a percentage of revenues. This quarterly information is unaudited, has been prepared on the same basis as the audited Consolidated Financial Statements and, in the opinion of the Company's management, reflects all necessary adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The quarterly operating results are not necessarily indicative of future results of operations.
THREE MONTHS ENDED MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1996 1996 1996 1996 1997 1997 1997 1997 - ----------------------------------------------------------------------------------------------------------------------- (In Thousands) Revenues: Roaming services $ 7,214 $ 8,327 $ 8,873 $ 7,820 $ 7,012 $ 8,048 $ 9,241 $ 8,160 Teleservices 3,847 3,303 3,272 2,991 3,789 4,375 4,369 4,476 Prepaid wireless services -- 69 42 201 790 1,513 2,571 2,665 System sales 92 1,141 1,726 1,733 4,028 2,417 1,852 2,793 - ----------------------------------------------------------------------------------------------------------------------- Total revenues 11,153 12,840 13,913 12,745 15,619 16,353 18,033 18,094 Expenses: Cost of service revenues 8,311 9,465 9,763 9,067 9,419 10,882 11,954 11,925 Cost of system revenues 37 553 1,076 910 2,640 1,095 814 1,652 Engineering, research and development 419 744 957 1,101 1,029 1,168 1,593 1,643 Sales and marketing 558 638 680 1,073 1,063 1,230 1,358 1,438 Management fees 252 -- -- -- -- -- -- -- General and administration 482 621 607 618 649 824 833 1,164 Depreciation and amortization 359 477 557 716 890 1,203 1,534 1,919 Impairment of long-lived assets -- -- -- -- -- -- -- 569 - ----------------------------------------------------------------------------------------------------------------------- Total expenses 10,418 12,498 13,640 13,485 15,690 16,402 18,086 20,310 - ----------------------------------------------------------------------------------------------------------------------- Operating income (loss) 735 342 273 (740) (71) (49) (53) (2,216) Interest income (expense) (6) (75) 341 329 262 135 254 434 - ----------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes 729 267 614 (411) 191 86 201 (1,782) Provision (benefit) for income taxes 300 123 283 (106) 98 43 100 (429) - ----------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations $ 429 $ 144 $ 331 $ (305) $ 93 $ 43 $ 101 $ (1,353) =======================================================================================================================
-25- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) AS A PERCENTAGE OF TOTAL REVENUES
- ----------------------------------------------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30 DEC. 31, 1996 1996 1996 1996 1997 1997 1997 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues: Roaming services 64.7% 64.8% 63.8% 61.4% 44.9% 49.2% 51.2% 45.1% Teleservices 34.5 25.7 23.5 23.5 24.3 26.8 24.2 24.7 Prepaid wireless services -- 0.5 0.3 1.6 5.0 9.2 14.3 14.7 System sales 0.8 9.0 12.4 13.5 25.8 14.8 10.3 15.5 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Expenses: Cost of service revenues 74.5 73.7 70.1 71.1 60.3 66.6 66.3 65.9 Cost of system revenues 0.3 4.3 7.7 7.1 16.9 6.7 4.5 9.1 Engineering, research and development 3.8 5.8 6.9 8.7 6.6 7.1 8.8 9.1 Sales and marketing 5.0 5.0 4.9 8.4 6.8 7.5 7.5 8.0 Management fees 2.3 -- -- -- -- -- -- -- General and administrative 4.3 4.8 4.4 4.9 4.2 5.0 4.6 6.4 Depreciation and amortization 3.2 3.7 4.0 5.6 5.7 7.4 8.5 10.6 Impairment of long-lived assets -- -- -- -- -- -- -- 3.1 - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 93.4 97.3 98.0 105.8 100.5 100.3 100.2 112.2 - ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 6.6 2.7 2.0 (5.8) (0.5) (0.3) (0.2) (12.2) Interest income (expense) (0.1) (0.6) 2.4 2.6 1.7 0.8 1.4 2.4 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes 6.5 2.1 4.4 (3.2) 1.2 0.5 1.2 (9.8) Provision (benefit) for income taxes 2.7 1.0 2.0 (0.8) 0.6 0.2 0.6 (2.3) - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 3.8% 1.1% 2.4% (2.4)% 0.6% 0.3% 0.6% (7.5)% - -----------------------------------------------------------------------------------------------------------------------------------
-26- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company has experienced fluctuations in its quarterly operating results and anticipates that such fluctuations will continue and could intensify. 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, changes in regulations affecting the wireless industry, changes in the Company's operating expenses, personnel changes, and general economic conditions. In particular, the Company's roaming services revenues are affected by the frequency and volume of use of the Company's roaming services, which may be influenced by seasonal trends, as well as changes in demand during particular periods due to a higher or lower incidence of temporary suspension of inter-carrier roaming agreements in certain markets. Teleservices revenues may be influenced by the requirements of one or more of the Company's significant teleservices customers, including engagement of the Company for implementing or assisting in implementing special projects of limited duration. Because a significant portion of the Company's operating expenses are committed in advance, the Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, unexpected revenue shortfalls could cause significant variations in operating results from quarter to quarter and could have a material adverse effect on the Company's results of operations. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indication of likely future performance. During 1997, the Company made significant investments in personnel and infrastructure to support the ongoing development and deployment of the C2C network. These strategic investments have negatively impacted earnings and the Company expects that these strategic investments will continue to negatively impact earnings in the short-term. Liquidity and Capital Resources - ------------------------------- Cash, cash equivalents and short-term investments increased from $21.4 million in 1996 to $33.7 million in 1997. The increase was due primarily to proceeds of $35.8 million from the Company's public offering in 1997. Net cash provided by operations was $4.4 million in 1997 due primarily to $5.5 million in depreciation and amortization expense, resulting from a significant investment in telecommunications systems and equipment, offset by a net loss of $1.1 million in 1997. The Company's investing activities utilized $19.6 million of net cash in 1997. The proceeds of the public offering were invested in short-term investments to finance the growth of the business. In addition, $1.4 million was paid to purchase the remaining 20% interest in WAC. The Company expended $28.6 million to purchase property and equipment to support the expansion and growth of its business. These purchases included $21.5 million of telecommunications systems equipment and software to support the expansion of the Company's C2C network. The Company anticipates that over the next 12 months significant capital investments will be made to support service enhancements and additional nodes to support the C2C network. The Company's financing activities generated net cash of $37.9 million in 1997. Through a public offering, the Company raised proceeds of $35.8 million, which are being utilized for capital expenditures for the C2C network and for general corporate purposes, including working capital. A portion of the net proceeds may also be used for the acquisitions of businesses, products and technologies which are complimentary to those of the Company. The Company currently has no plans, commitments or negotiations with respect to any such transactions. The Company entered into capital leases in 1997 to finance $3.2 million of telecommunications equipment and software to expand and enhance teleservices and prepaid wireless services. The Company believes that its 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 18 months. The Company has begun to review its computer systems for Year 2000 compliance and has designed a plan to test whether their systems will conform to Year 2000 requirements. The Company is expensing all costs associated with these system changes and does not anticipate that these costs will have a material impact on its financial position or results of operations. Although management does not expect Year 2000 issues to have a material impact on its business or results of operations, there can be no assurance that there will not be interruptions of operations or other limitations of system functionality. -27- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Certain Factors That May Affect Future Results - ---------------------------------------------- This Annual Report contains forward-looking statements that involve risks and uncertainties including statements regarding increased research and development expenditures, costs of deploying and supporting the C2C network, increased expenditures for sales and marketing and greater costs of depreciation and amortization. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. A number of uncertainties exist that could affect the Company's future operating results, including, without limitation, technological changes in the Company's industry, the ability of the Company to continue to successfully support its C2C network, the ability of the Company's carrier customers to successfully market and sell C2C prepaid wireless services, the Company's ability to retain existing customers and attract new customers, increased competition and general economic factors. Historically, a significant portion of the Company's revenues in any particular period 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 historically has provided its services almost exclusively to wireless carriers. Although the wireless telecommunications market has experienced significant growth in recent years, there can be no assurance that such growth will continue at similar rates, or at all, or that wireless carriers will continue to use the Company's services. In addition, prepaid wireless and PCS services are relatively new services in new markets, and if these markets do not grow as expected or if the carriers in these markets do not use the Company's services, the Company's business, financial condition and results of operations would be materially and adversely affected. The Company's future success depends, in large part, on the continued use of its existing services and systems, the acceptance of new services in the wireless industry and the Company's ability to develop new services and systems 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 enhancement and deployment of its prepaid wireless services and systems, including continued expansion of its C2C network. There can be no assurance that the Company will successfully support and enhance the C2C network effectively, that the market for the Company's prepaid service will continue to develop, or that the Company's C2C network will successfully support current and future growth. Furthermore, the Company has expanded significant amounts of capital to support the C\\2\\C agreements it has secured with its carrier customers. Because C\\2\\C revenues are principally generated by prepaid subscriber minutes of use, the Company's C\\2\\C revenues can be impacted by the carrier's ability to successfully market and sell prepaid services. In addition, teleservices revenues associated with billing inquiry support for C\\2\\C customers are becoming a more significant portion of teleservices revenues and therefore these revenues are dependent upon the size and growth of the C\\2\\C subscriber base. The Company has expanded its operations rapidly creating significant demands on the Company's administrative, operational, development and financial personnel and other resources. Additional expansion by the Company may further strain the Company's management, financial and other resources. There can be no assurance that the Company's systems, procedures, controls and existing space will be adequate to support expansion of the Company's operations. If the Company's management is unable to manage growth effectively, 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. -28- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. -29- APPENDIX B -30- CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, 1997 1996 - ------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 23,601 $ 923 Short-term investments 10,103 20,498 Accounts receivable, net of allowance for billing adjustments and doubtful accounts of $1,304 in 1997 and $1,242 in 1996 12,445 11,060 Inventory 1,550 1,189 Deferred income taxes 1,564 1,334 Prepaid expenses 630 495 - ------------------------------------------------------------------------------------------------------- Total current assets 49,893 35,499 Property and equipment: Telecommunication systems 34,907 9,169 Furniture and equipment 5,739 3,359 Leasehold improvements 1,725 903 Systems in development 3,639 2,658 - ------------------------------------------------------------------------------------------------------- 46,010 16,089 Less allowances for depreciation and amortization 7,923 3,183 - ------------------------------------------------------------------------------------------------------- 38,087 12,906 Goodwill, net 4,067 3,159 Other assets 1,338 395 - ------------------------------------------------------------------------------------------------------- Total assets $ 93,385 $51,959 - ------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 2,786 $ 1,371 Accrued expenses 7,304 7,205 Income taxes payable 466 490 Current maturities of capital lease obligations 1,127 -- - ------------------------------------------------------------------------------------------------------- Total current liabilities 11,683 9,066 Capital lease obligations, net of current maturities 1,598 -- Commitments and contingencies 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, 16,273,947 shares in 1997 and 12,725,749 shares in 1996 issued and outstanding 163 127 Additional paid-in capital 91,029 52,738 Treasury Stock (46,420 shares at cost) (372) (372) Accumulated deficit (10,716) (9,600) - ------------------------------------------------------------------------------------------------------- Total shareholders' equity 80,104 42,893 - ------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 93,385 $51,959 - -------------------------------------------------------------------------------------------------------
See accompanying notes. -31- CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------- Revenues: Roaming services $32,461 $32,234 $25,446 Teleservices 17,009 13,413 8,774 Prepaid wireless services 7,539 312 -- System sales 11,090 4,692 -- - --------------------------------------------------------------------------------------------- 68,099 50,651 34,220 Expenses: Cost of service revenues 44,180 36,606 26,100 Cost of system revenues 6,201 2,576 -- Engineering, research and development 5,433 3,221 839 Sales and marketing 5,089 2,949 1,934 Management fees -- 252 1,008 General and administrative 3,470 2,328 1,321 Depreciation and amortization 5,546 2,109 889 Impairment of long-lived assets 569 -- -- - --------------------------------------------------------------------------------------------- 70,488 50,041 32,091 - --------------------------------------------------------------------------------------------- Operating income (loss) (2,389) 610 2,129 Interest income (expense) 1,085 589 (151) - --------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes (1,304) 1,199 1,978 Provision (benefit) for income taxes (188) 600 (1,030) - --------------------------------------------------------------------------------------------- Income (loss) from continuing operations (1,116) 599 3,008 Discontinued operations: Loss from operations -- -- (129) Loss on disposal -- -- (36) - --------------------------------------------------------------------------------------------- Loss from discontinued operations -- -- (165) - --------------------------------------------------------------------------------------------- Net income (loss) (1,116) 599 2,843 Accretion of dividends on redeemable preferred stock -- (451) (950) - --------------------------------------------------------------------------------------------- Net income (loss) available to common shareholders $(1,116) $ 148 $ 1,893 - --------------------------------------------------------------------------------------------- Basic net income (loss) available to common shareholders: Continuing operations $ (0.08) $ 0.02 $ 0.62 Net income (loss) $ (0.08) $ 0.02 $ 0.57 Shares used in computing basic net income (loss) per share 14,007 8,352 3,336 Diluted net income (loss) available to common shareholders: Continuing operations $ (0.08) $ 0.01 $ 0.24 Net income (loss) $ (0.08) $ 0.01 $ 0.22 Shares used in computing diluted net income (loss) per share 14,359 10,884 8,692 - ---------------------------------------------------------------------------------------------
See accompanying notes. -32- CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SHAREHOLDERS' EQUITY ------------------------------------------------------------------- REDEEMABLE CONVERTIBLE PREFERRED STOCK TREASURY STOCK PREFERRED STOCK COMMON STOCK ---------------------------------------------------------------------- SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS SHARES DOLLARS - -------------------------------------------------------------------------------------------------- Balance at January 1, 1995 11,871 $ 14,946 -- -- 850 $ 1 3,335,985 $ 33 Accretion of dividends on Redeemable Preferred Stock -- 950 -- -- -- -- -- -- Net income -- -- -- -- -- -- -- -- - -------------------------------------------------------------------------------------------------- Balance at December 31, 1995 11,871 15,896 -- -- 850 1 3,335,985 33 Conversion of Convertible Preferred Stock -- -- -- -- (850) (1) 5,004,608 50 Accretion of dividends on Redeemable Preferred Stock -- 451 -- -- -- -- -- -- Redemption of Redeemable Preferred Stock and Accreted Dividends (11,871) (16,347) -- -- -- -- -- -- Issuance of Common Stock -- -- -- -- -- -- 4,183,928 42 Exercise of Common Stock options -- -- -- -- -- -- 201,228 2 Treasury Stock Purchase -- -- 46,420 (372) -- -- -- -- Net income -- -- -- -- -- -- -- -- - -------------------------------------------------------------------------------------------------- Balance at December 31, 1996 -- -- 46,420 (372) -- -- 12,725,749 127 Issuance of Common Stock and options -- -- -- -- -- -- 3,000,000 30 Exercise of Common Stock options -- -- -- -- -- -- 548,198 6 Net loss -- -- -- -- -- -- -- -- - -------------------------------------------------------------------------------------------------- Balance at December 31, 1997 -- $ -- 46,420 $(372) -- $-- 16,273,947 $163 - -------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------- ACCRETIONS OF DIVIDENDS ADDI- ON REDEEM- SHARE- TIONAL ABLE PRE- ACCU- HOLDERS' PAID IN FERRED MULATED EQUITY CAPITAL STOCK DEFICIT (DEFICIT) - ------------------------------------------------------------------------------ Balance at January 1, 1995 $ 1,016 $(3,075) $(8,566) $(10,591) Accretion of dividends on Redeemable Preferred Stock -- (950) -- (950) Net income -- -- 2,843 2,843 - ------------------------------------------------------------------------------- Balance at December 31, 1995 1,016 (4,025) (5,723) (8,698) Conversion of Convertible Preferred Stock (49) -- -- -- Accretion of dividends on Redeemable Preferred Stock -- (451) -- (451) Redemption of Redeemable Preferred Stock and Accreted Dividends -- 4,476 (4,476) -- Issuance of Common Stock 51,745 -- -- 51,787 Exercise of Common Stock options 26 -- -- 28 Treasury Stock Purchase -- -- -- (372) Net income -- -- 599 599 - -------------------------------------------------------------------------------- Balance at December 31, 1996 52,738 -- (9,600) 42,893 Issuance of Common Stock and options 35,769 -- -- 35,799 Exercise of Common Stock options 2,522 -- -- 2,528 Net loss -- -- (1,116) (1,116) - ------------------------------------------------------------------------------ Balance at December 31, 1997 $91,029 $ -- $(10,716) $ 80,104 - ------------------------------------------------------------------------------
See accompanying notes. -33- CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Income (loss) from continuing operations $ (1,116) $ 599 $ 3,008 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 5,546 2,109 888 Deferred income taxes (230) 466 (1,800) Impairment of long-lived assets 569 -- -- Changes in operating assets and liabilities, excluding effects of discontinued operations and business acquisitions: Accounts receivable (1,385) (3,208) (2,655) Inventory (361) (1,128) -- Prepaid expenses and other assets (151) (547) (51) Accounts payable and accrued expenses 1,514 524 1,225 Income taxes payable (24) (297) 679 - -------------------------------------------------------------------------------------------------- 4,362 (1.482) 1,294 Loss from discontinued operations -- -- (166) Adjustments to reconcile loss from discontinued operations: Loss on disposal of discontinued operations -- -- 37 Cash flow related to results of operations until disposal date -- -- 803 - -------------------------------------------------------------------------------------------------- -- -- 674 - -------------------------------------------------------------------------------------------------- Net cash provided by (used in) operations 4,362 (1,482) 1,968 INVESTING ACTIVITIES Acquisition of businesses, net of cash acquired (1,398) (846) -- Purchase of short-term investments (12,976) (26,937) -- Sale of short-term investments 23,371 6,439 -- Purchase of property and equipment (28,552) (8,093) (2,993) Net proceeds from sale of lines of business -- -- 1,074 - -------------------------------------------------------------------------------------------------- Net cash used in investing activities (19,555) (29,437) (1,919) FINANCING ACTIVITIES Proceeds from exercise of stock options 2,528 28 -- Proceeds from issuance of stock 35,799 49,787 -- Repurchase of redeemable preferred stock -- (16,347) -- Purchase of treasury stock -- (372) -- Repayment of long-term capital leases (456) (1,507) -- - -------------------------------------------------------------------------------------------------- Net cash provided by financing activities 37,871 31,589 -- - -------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 22,678 670 49 - -------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 923 253 204 - -------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 23,601 $ 923 $ 253 - -------------------------------------------------------------------------------------------------- See accompanying notes.
-34- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The Company Boston Communications Group, Inc. (the Company) develops, markets and provides specialized roaming services, teleservices and prepaid wireless services to the wireless telephone industry. The Company also manufactures prepaid and voice system equipment. 2. SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition The Company earns revenues by providing teleservices, processing prepaid wireless calls and processing wireless calls for individuals who have roamed outside of their service area. Revenue is recognized when the service is provided and is recorded net of estimated chargebacks and other billing adjustments. The Company recognizes revenue from the sale of systems at the time the systems are shipped. Principles of Consolidation The financial statements include 100% of the accounts and operations of the Company and all of its majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Investments The Company accounts for its marketable securities under the Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Instruments in Debt and Equity Securities." The Company has classified all of its securities as available-for-sale, and are thus reported at fair market value. Interest on all securities is reported as interest income. Investments with maturities between three and twelve months are considered short-term investments. The Company's short-term investments consist of debt securities such as corporate notes and marketable direct obligations of the United States Treasury. The following is a summary of available-for-sale securities(in thousands):
December 31, 1997 1996 - -------------------------------------------------- Corporate notes $10,103 $ 3,965 U.S. Treasury bills -- 16,533 - -------------------------------------------------- Total short-term investments $10,103 $20,498 ==================================================
Estimates 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, the disclosure of contingent 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. Concentrations of Credit Risk The Company's roaming customers are individuals who place wireless calls from service areas which are not covered by traditional roaming agreements. These calls are forwarded by wireless carriers to the Company for processing. Each transaction is small in size and the Company minimizes credit risk by validating appropriate billing information. Teleservices are provided to wireless carriers located throughout the country. The Company's prepaid wireless services provide carriers, throughout the United States and Canada, with an alternative billing facility for their wireless customers. Accounts are not activated until payment is received by the carrier. The Company sells its voice systems in North America and its prepaid systems in North and South America and Europe. -35- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company has roaming, teleservice and prepaid wireless service agreements with, and sells its systems to numerous carriers, 10 of which accounted for 84.6%, 82.4% and 74.5% of the Company's total revenues for the years ended December 31, 1995, 1996 and 1997, respectively. The following table summarizes sales in excess of 10% of total revenues, as a percentage of total revenues, to major customers:
YEAR ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------- Ameritech Cellular 11.6% 14.8% 15.0% Bell Atlantic Mobile 11.6 12.3 13.9 Southern New England Telephone Corp. -- -- 11.9 Southwestern Bell Mobile Systems, Inc. 10.6 -- -- BellSouth Cellular Corp. -- 11.4 --
Inventory Inventory, which consists of computer hardware and electronic components, is recorded at the lower of cost (first-in, first-out method) or market. Inventory is categorized as follows at December 31, (in thousands):
1997 1996 - --------------------------------- Raw materials $1,114 $ 984 Work in process 127 129 Finished goods 309 76 - --------------------------------- $1,550 $1,189 =================================
Property and Equipment Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which range from 3 to 7 years. Systems in development represent the cost of purchased hardware and software to be used in switching equipment not yet placed into service and will be depreciated between 3 and 5 years. Interest paid on funds borrowed to finance the purchase of telecommunications systems is capitalized while in development. During 1997, $46,000 in interest was capitalized. In accordance with Financial Accounting Standards Board No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that the carrying amount of an asset cannot be fully recovered, an impairment loss is recognized. During 1997, the Company recorded an impairment loss of $569,000 for equipment which could no longer be used in its business. The Company intends to sell these assets in 1998 and has adjusted the net book value of the equipment to the estimated sales value of $955,000. Goodwill Goodwill represents the excess of cost of acquired businesses over the fair market value of all net assets acquired. Goodwill is being amortized on a straight-line basis over an eight year period. Accumulated amortization totaled $296,000 and $786,000 as of December 31, 1996 and 1997, respectively. Engineering, Research and Development Costs associated with engineering, research and development are expensed as incurred. -36- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its stock- based compensation plans, rather than the alternative fair value accounting method provided for under Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," as this alternative requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, since the exercise price of options granted under these plans equals the market price of the underlying stock on the date of grant, no compensation expense is required. Net Income (Loss) Per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Pursuant to the previous requirements of the Securities and Exchange Commission (SEC), common shares and common share equivalents issued by the Company during the twelve-month period prior to the initial public offering of the Company's common stock had been included in the calculations as if they were outstanding for all periods prior to the offering in June 1996 whether or not they were anti-dilutive. In February 1998, the SEC issued Staff Accounting Bulletin 98 which, among other things, conformed prior SEC requirements to Statement 128 and eliminated inclusion of such shares in the computation of earnings per share. All earnings per share amounts for all periods have been presented and where appropriate, restated to conform to the Statement 128 and SEC requirements. Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years beginning after December 15, 1997. The Company believes that the adoption of these new accounting standards will not have a material impact on the Company's consolidated financial statements. 3. DISCONTINUED OPERATIONS On March 31, 1995, the Company sold the net assets of its cellular sales and service subsidiary for $573,000. The results of the discontinued operations for the year ended December 31, 1995 are summarized below: (In thousands) - ----------------------------- Revenues $1,001 - ----------------------------- Operating loss $ (129) - ----------------------------- Loss on disposal $ (36) - ----------------------------- -37- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. ACQUISITIONS In February 1996, the Company acquired the net assets of Voice Systems Technology Inc. (VST), a company which develops and markets prepaid and voice processing systems, for approximately $2.5 million ($500,000 cash and 265,373 shares of common stock). VST had revenues and net income for the 11 months ended February 29, 1996 of $2.1 million and $9,000, respectively. The acquisition has been accounted for under the purchase method of accounting and the results of operations have been included in the Company's results of operations from the date of acquisition. The allocation of the purchase price is based on the fair market value of assets and liabilities acquired and the excess over those amounts is accounted for as goodwill. The allocation of the purchase price is as follows:
(in thousands) - ----------------------------------------------- Property and equipment $ 106 Accounts receivable, net 51 Other current assets 68 Accounts payable and accrued expenses (312) Other current liabilities (59) Goodwill 2,683 - ----------------------------------------------- $2,537 ===============================================
On January 31, 1996, the Company acquired 17.5% of the stock in WAC for $35,000. WAC marketed and sold prepaid equipment in Latin America. On October 23, 1996, the Company acquired an additional 62.5% of the stock of WAC for $916,500. The purchase has been reflected in the Company's consolidated balance sheet. Results of WAC's operations from the date of acquisition through December 31, 1996 have been included in the Company's consolidated results. The following unaudited pro forma information has been prepared assuming that these acquisitions had taken place at the beginning of the respective period. The unaudited pro forma information includes adjustments for interest expense that would have been incurred to finance the purchase, amortization of goodwill resulting from the purchase, elimination of the effect of transactions between the Company and WAC and income taxes. There is no impact to 1995 from the WAC transaction as WAC operations began in 1996. The unaudited pro forma financial information is not necessarily indicative of the results of operations as if the transactions had been effected on the assumed dates (in thousands, except per share data):
DECEMBER 31, 1996 1995 - --------------------------------------------------- (UNAUDITED) Net revenues $51,873 $36,288 - --------------------------------------------------- Net income available to common stockholders $ 1 $ 1,558 - --------------------------------------------------- Net income per common share $ 0.00 $ 0.17 ===================================================
In August 1997, the Company paid $1.4 million to purchase the final 20% interest in WAC and recorded this amount as goodwill, which is being amortized over eight years. WAC was subsequently merged into VST. -38- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31, (In thousands) 1997 1996 - ------------------------------------------------------------------------------- Billing adjustments and chargebacks $1,216 $1,240 Cellular airtime 1,544 2,447 Payroll 1,183 931 Telecommunication costs 779 442 Deferred revenue 426 105 Billing services 351 296 Other 1,805 1,744 - ------------------------------------------------------------------------------- $7,304 $7,205 ===============================================================================
6. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, 1997 1996 - --------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 884 $ 712 Allowance for doubtful accounts, billing adjustments and chargebacks 747 801 Minimum tax credit carryforwards 128 128 Accrued expenses and other 665 298 Asset impairment 200 ---- - --------------------------------------------------------------------------- Total deferred tax assets 2,624 1,939 Deferred tax liabilities: Tax over book depreciation and amortization expense (1,060) (605) - --------------------------------------------------------------------------- Total deferred tax liabilities (1,060) (605) - --------------------------------------------------------------------------- Net deferred tax assets $ 1,564 $1,334 ===========================================================================
-39- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The provision (benefit) for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ----------------------------------------------------------- Current: Federal $ - $ 51 $ 110 State 42 83 660 - ----------------------------------------------------------- 42 134 770 Deferred: Federal (209) 423 (1,530) State (21) 43 (270) - ----------------------------------------------------------- (230) 466 (1,800) - ----------------------------------------------------------- Income tax provision (benefit) $(188) $ 600 $(1,030) ===========================================================
The Company had fully reserved for its deferred tax assets through December 31, 1994. Based upon management's assessment that future operating results were more likely than not to generate operating income to recognize the deferred tax asset, a substantial portion of the valuation allowance was reversed. The Company utilized $2.6 million in 1995 and $2.0 million in 1996 of federal net operating loss carryforwards to offset taxable income. The valuation allowance decreased $3.1 million and $162,000 during 1995 and 1996, respectively, due primarily to the utilization of net operating loss carryforwards and to the reversal of a significant portion of the valuation allowance. At December 31, 1997, the Company has approximately $2.6 million of net operating loss carryforwards for federal income tax return purposes available for use in future years that expire beginning in 2006. A reconciliation of the statutory rate to the effective rate is as follows:
YEAR ENDED DECEMBER 31, 1997 1996 1995 - ---------------------------------------------------------------------------- Federal provision (benefit) at statutory rate (34)% 34% 34% State income provision, net of federal benefit (6) 6 6 Permanent differences 26 12 1 Change in valuation allowance -- -- (65) Benefit of net operating loss (0) (2) (28) - ---------------------------------------------------------------------------- (14)% 50% (52)% - ----------------------------------------------------------------------------
Income taxes paid were $68,000 in 1995, $352,000 in 1996 and $83,000 in 1997. -40- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. Capital Stock Common Stock On April 26, 1996, the Company authorized 35,000,000 shares of a new class of common stock and effected a recapitalization of the Company (the "1996 Recapitalization"). All outstanding shares of the Company's class A, B, C and D common stock were exchanged for an aggregate of 3,335,985 shares of Common Stock. In addition, the terms and conditions of the Company's three classes of convertible preferred stock were modified, without changing the total number of shares of Common Stock into which the preferred stock can be converted. The convertible preferred shares were converted to 5,004,608 shares of Common Stock upon the closing of the initial public offering. Public Offerings In 1996, the Company sold in its initial public offering (IPO) 3,918,555 shares of its common stock yielding net proceeds of $49.8 million. The proceeds were used to redeem preferred stock and to repay an existing line of credit and capital leases. Upon the closing of the IPO, the Company redeemed all 11,871 outstanding shares of redeemable preferred stock at a redemption price of $1,000 per share. In addition, the Company paid approximately $4.5 million in accreted dividends on the redeemable preferred stock. In 1997, the Company sold in a public offering 3,000,000 shares of its common stock yielding net proceeds of $35.8 million. The proceeds are being used for capital and other expenditures in connection with the expansion of the C2C network. In addition, the Company used $1.4 million of the net proceeds to purchase the remaining 20% interest in WAC. Preferred Stock The Board of Directors are authorized, subject to certain limitations prescribed by law, without further shareholder approval, to issue from time to time up to an aggregate of 2,000,000 shares of Preferred Stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company. The Company has no present plans to issue any shares of Preferred Stock. Stock Option Plan The Company's 1996 Stock Option Plan (the 1996 Plan) was adopted by the Board of Directors and approved by the stockholders of the Company in 1996. The 1996 Plan provides for the grant of stock options to employees, officers and directors, consultants and advisors to, the Company and its subsidiaries. Under the 1996 Plan, the Company may grant options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") ("incentive stock options"), or options not intended to qualify as incentive Stock options ("non-statutory options"). Incentive stock options may only be granted to employees of the Company. A total of 1,264,792 shares of Common Stock may be issued upon the exercise of options granted under the 1996 Plan. The maximum number of shares with respect to which options may be granted to any employee under the 1996 Plan shall not exceed 200,000 shares of Common Stock during any calendar year. The 1996 Plan replaces the 1994 Stock Option Plan which granted 355,738 options and was terminated in 1996. All options granted have 10 year terms and generally vest and become exercisable over four or five years. In 1997 the Company's 1998 Stock Option Plan (the 1998 Plan) was adopted by the Board of Directors, subject to the approval of the stockholders of the Company. A total of 600,000 shares of common stock may be issued upon the exercise of options granted under the 1998 Plan, which generally vest and become exercisable over four or five years. No options were granted under this plan in 1997. In 1996, the Company granted non-qualified options to purchase 653,278 and 93,551 at exercise prices of $5.75 and $10.00, respectively, which were deemed fair market value as determined by the Company. -41- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1996 and 1997: risk-free interest rates of 5.9% and 6.4%, respectively, no dividend yield, the volatility factor of the expected market price of the Company's common stock was 0.5 and a weighted-average expected life of the option of 5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except for per share information):
DECEMBER 31, 1997 1996 - ------------------------------------------------------------- Pro forma net loss $(3,474) $(1,086) - ------------------------------------------------------------- Pro forma net loss per share $ (0.24) $ (0.10) - -------------------------------------------------------------
Stock option information is as follows:
1997 1996 1995 - -------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE - -------------------------------------------------------------------------------------------------- Outstanding -- beginning of year 1,666,359 $ 8.86 355,758 $ 0.14 324,629 $0.14 Granted 1,124,342 5.87 1,548,329 9.76 31,129 0.14 Exercised (538,630) 4.62 (201,228) 0.14 -- -- Canceled (834,417) 11.18 (36,500) 13.61 -- -- - -------------------------------------------------------------------------------------------------- Outstanding--end of year 1,417,654 $ 6.74 1,666,359 $ 8.86 355,758 $0.14 ==================================================================================================
The following table summarizes the stock options outstanding and exercisable as of December 31, 1997:
- -------------------------------------------- OPTIONS OPTIONS EXERCISE EXERCISABLE OUTSTANDING PRICE - -------------------------------------------- -- 42,243 $ 0.14 362,224 1,054,378 4.88 - 7.00 24,691 88,691 9.38 - 12.50 31,000 232,342 $12.75 - 14.50 - -------------------------------------------- 417,915 1,417,654 ============================================
-42- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) There are 91,859 options available for grant at December 31, 1997. There were 683,165 options exercisable at December 31, 1996 at a weighted-average exercise price of $5.65. The weighted-average fair value of options granted during 1996 and 1997 was $4.69 and $3.44, respectively. The weighted-average contractual life of options outstanding at December 31, 1996 and 1997 was 9.2 years. Employee Stock Purchase Plan The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors and approved by the shareholders of the Company in April 1996. The Purchase Plan authorizes the issuance of up to a total of 225,000 shares of Common Stock to participating employees. Certain employees of the Company who have been employed by the Company for a minimum of twelve months, including directors of the Company who are employees, are eligible to participate in the Purchase Plan. On the first day of a designated payroll deduction period (the "Offering Period"), the Company will grant to each eligible employee who has elected to participate in the Purchase Plan an option to purchase shares of Common Stock as follows: the employee may authorize an amount (up to a maximum of 10% of such employee's regular pay) to be deducted by the Company from such pay during the Offering Period. On the last day of the Offering Period, the employee is deemed to have exercised the option, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the Purchase Plan, the option price is an amount equal to 90% of the fair market value per share of the Common Stock on either the first day or the last day of the Offering Period, whichever is lower. In no event may an employee purchase in any one Offering Period a number of shares which has an aggregate market value (determined on the last day of the Offering Period) in excess of $25,000. The Compensation Committee may, in its discretion, choose an Offering Period of 12 months or less for each of the Offerings and choose a different Offering Period for each Offering. 8. NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted net income (loss) per share:
Year Ended December 31, (In thousands) 1997 1996 1995 -------------------------- Numerator for basic and fully diluted earnings per share: Net income (loss) available to common shareholder: Continuing operations $(1,116) $ 599 $2,058 - ----------------------------------------------------------- ------- ------- ------ Net income $(1,116) $ 599 $1,893 - ----------------------------------------------------------- ------- ------- ------ Denominator: Denominator for basic earnings per share - weighted average shares 14,007 8,352 3,336 - ----------------------------------------------------------- ------- ------- ------ Effect of dilutive securities: Employee stock options 352 238 352 Conversion of preferred stock --- 2,294 5,004 ------- ------- ------ Dilutive potential common shares 352 2,532 5,356 - ----------------------------------------------------------- ------- ------- ------ Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversion 14,359 10,884 8,692 - ----------------------------------------------------------- ------- ------- ------ Basic net income (loss) available to common shareholder per common share: Continuing operations $ (0.08) $ 0.02 $ 0.62 - ----------------------------------------------------------- ------- ------- ------ Net income (loss) $ (0.08) $ 0.02 $ 0.57 - ----------------------------------------------------------- ------- ------- ------ Diluted net income (loss) available to common shareholder per common share: Continuing operations $ (0.08) 0.01 0.24 - ----------------------------------------------------------- ------- ------- ------ Net income (loss) (0.08) 0.01 0.22 - ----------------------------------------------------------- ------- ------- ------
-43- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Options to purchase 248,342 shares of common stock greater than $10.30 per share were outstanding during 1997 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price for the common shares and therefore the effect would be antidilutive. 9. COMMITMENTS The Company entered into a capital lease for $1.5 million in 1996 which was fully repaid in 1996 and entered into a capital lease for $3.2 million in 1997. The accumulated amortization of the assets under capital lease was $271,000 at December 31, 1997. The Company also has non-cancelable operating lease commitments for office space. Rent expense approximated $443,000 in 1995, $881,000 in 1996 and $1.2 million in 1997. Future minimum payments under non- cancelable capital leases and operating leases as of December 1997, are as follows (in thousands):
Capital Operating Year ending December 31, leases leases - ---------------------------------------------- 1998 $1,318 $1,246 1999 1,145 1,136 2000 562 778 2001 -- 198 2002 -- 38 - ---------------------------------------------- Total minimum lease payments $3,025 $3,396 ====== ====== Amounts representing interest 300 ------ Present value of net minimum payments 2,725 Current portion 1,127 ------ $1,598 ======
10. RELATED-PARTY TRANSACTIONS Pursuant to a management agreement, the Company paid annual fees in the amount of $1.0 million in 1995 and $252,000 in 1996 to a management company affiliated with certain shareholders of the Company. These amounts represent the payroll and certain benefit costs of six senior management personnel responsible for the operations of the Company. The management agreement was terminated in March, 1996 and the employees of the management company became employees of the Company. The management fees previously incurred by the Company under the management agreement closely approximate the actual payroll and related benefits currently being directly incurred by the Company, and the Company believes that these amounts are reasonable and comparable to those that would have been incurred with an unrelated third party. Additionally, the Company leased office space from another company affiliated with certain shareholders of the Company under a leasing arrangement which was terminated in August 1996. The Company recorded rent expense of $68,000 in 1995 and $40,000 in 1996 in connection with this lease. Another company, affiliated with certain shareholders of the Company, received $462,000 in connection with the repurchase of redeemable preferred stock of the affiliated company's investment and its accreted dividends. -44- Report of Ernst & Young LLP, Independent Auditors Board of Directors and Shareholders Boston Communications Group, Inc. We have audited the accompanying consolidated balance sheets of Boston Communications Group, Inc. and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of operations, redeemable preferred stock and shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statements schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Boston Communications Group, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Boston, Massachusetts February 6, 1998 -45- EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ------- ----------- *3.1 Restated Articles of Organization of the Company, as amended. *3.3 Amended and Restated By-Laws of the Company. *10.1 +1994 Stock Option Plan. *10.2 +1996 Stock Option Plan. *10.3 +1996 Employee Stock Purchase Plan. **10.3.1 +Amendment Number 1, dated August 30, 1996, to 1996 Employee Stock Purchase Plan *10.5 Billing and Related Services Agreement dated April 19, 1995 between the Company and OAN Services, Inc. ("OAN"). *10.7 Software license Agreement dated March 30, 1995 between the Company and Innovative Telecom Corporation ("ITC"). *10.8 Service Bureau Agreement dated April 7, 1995 between the Company and ITC. *10.9 BCG-ITC Strategic Partnership Agreement Addendum Dated March 31, 1996 between the Company and ITC. *10.10 License Agreement dated April 23, 1996 between the Company and MicroDimensions, Inc. *10.11 Gateway Service Agreement dated June 5, 1995 between the Company and SNET Diversified Group, Inc. -46- **10.12 Frontier Service Agreement dated June 6, 1996 between the Company and Frontier Communications of the West, Inc. *10.15 Commercial Lease dated January 24, 1996 between the Company and Cummings Properties Management, Inc. **10.15.1 Commercial Lease dated February 26, 1996 between the Company and Cummings Property Management, Inc. (Amendment No. 1). **10.15.2 Amendment No. 2, dated August 8, 1996, to the commercial lease between the Company and Cummings Property Management, Inc. **10.15.3 Amendment No. 3, dated February 5, 1997, to the commercial lease between the Company and Cummings Property Management, Inc. *10.16 Lease dated November 30, 1994, as amended, between the Company and Teachers Realty Corporation. *10.17 Commercial/Industrial Lease dated September 27, 1995 between the Voice Systems Technology Inc. ("VST") and Schleuter Properties. *10.22 Agreement dated April 22, 1996 between the Company and MDTelecom, Inc. ("MDT"). **10.23 Memorandum of Understanding dated January 1, 1997 between the Company and Milcon Communications (Hong Kong) Ltd. *10.24 Subscription and Sale Agreement dated April 23, 1996 between the Company and MDT. *10.25 Source Code Release Agreement dated April 23, 1996 between the Company and MDT. *10.26 End-User Purchase and License Agreement between the Company and Teloquent Communications Corporation. **10.27 Software License and Services Agreement dated October 30, 1996 between the Company and Oracle Corporation. **10.28 Software License and Services Agreement dated September 24, 1996 between the Company and Oracle Corporation. ***10.30 Registration Rights Agreement dated February 29, 1996 between the Company and Michael J. Buchel, Zuyus Investment Company, Peter T. Zuyus, Jr., Joseph Giegerich, Terrence G Hare III, J. Michael Looney and John M. Freese, Sr. ***10.31 Amendment, dated December 16, 1996, to the Registration Rights Agreement, dated February 29, 1996. ***10.32 Amendment, dated December 16, 1996, to the Registration Rights Agreement, dated February 29, 1996. -47- ****10.33 Commercial Lease dated April 1, 1997 between the Company and Cummings Properties Management, Inc. #10.34 Master Equipment Lease Agreement between Boston Communications Group, Inc. and Fleet Capital Corp. dated August 20, 1997 #10.35 Distribution Rights Agreement between Voice Systems Technology Inc. d/b/a Boston Communications Group and Motorola dated May 15, 1997 #10.36 Long Distance Service Agreement between Boston Communications Group, Inc. and AT&T Corp. dated July 10, 1997 10.38 Billing and Related Services Agreement between the Company and AT&T Corp. dated October 14, 1997 21 Subsidiaries of the Registrant. 23 Consent of Ernst & Young LLP, Independent Auditors. 27 Financial Data Schedules. * Incorporated by reference to the Company's Registration Statement on Form S-1 filed June 17, 1996 (File No. 333-4128) ** Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1996. *** Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 1997. **** Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1997. # Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1997. + Management contract or compensatory plan or arrangement filed as an exhibit pursuant to Item 14(c) of this Report. -48- SCHEDULE II BOSTON COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E ----------- ------- ---------------------- ------ ------ ADDITIONS ---------------------- CHARGED TO ---------- BALANCE AT CHARGED TO OTHER ---------- ---------- ----- BEGINNING OF COSTS AND ACCOUNTS DEDUCTIONS BALANCE AT ------------ --------- -------- ----------- ---------- DESCRIPTION PERIOD EXPENSES DESCRIBE (1) DESCRIBE (2) END OF PERIOD - ----------- ------------ --------- --------- --------- ------------- Year ended December 31, 1997: Reserves and allowances deducted from asset accounts: Allowance for billing adjustments and uncollectible accounts $1,242 -- $636 $574 $1,304 Year ended December 31, 1996: Reserves and allowances deducted from asset accounts: Allowance for billing adjustments and uncollectible accounts 884 30 896 564 1,242 Year ended December 31, 1995: Reserves and allowances deducted from asset accounts: Allowance for billing adjustments and uncollectible accounts 546 -- 642 304 884
(1) Billing adjustments recorded as a reduction of revenue. (2) Settlement of billing adjustments. -49- EX-10.38 2 BILLING AND RELATED SERVICES AGREEMENT AGREEMENT This agreement (the "Agreement") is effective as of the 14 day of October ---- 1997 (the "Effective Date,,) between the AT&T CORP., a corporation organized and existing under the laws of the State of New York, on behalf of itself and its affiliated companies (hereinafter "AT&T"), and BOSTON COMMUNICATIONS GROUP, INC., a corporation organized and existing under the laws of the State of Massachusetts on behalf of itself and its affiliated companies (collectively "BCG"). RECITALS WHEREAS BCG desires to purchase from AT&T and AT&T desires to provide to BCG billing and collection services for BCG customers; and WHEREAS AT&T desires to provide to holders of the AT&T Calling Card the ability to charge BCG wireless airtime calls to the AT&T Calling Card; NOW, THEREFORE, in consideration of the mutual benefits accruing to each party, the parties hereby covenant and agree as follows: Section 1. DEFINITIONS ----------- As used in this Agreement and unless otherwise expressly indicated herein, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "AT&T Calling Card" - Those calling cards issued by AT&T displaying ------------------- the AT&T name and logo, and an account number, which allow a customer to place telephone calls and have the charges for such call billed to the customers. This Agreement shall include calling cards issued by AT&T. 1 "C&D" - The systems used to transfer exchange message interface ----- ("EMI") formatted billing data between BCG and other AT&T billing systems. "Rated Message - A billing message which has been assembled and edited -------------- by BCG, which shall include applicable BCG rates and charges, together with all elements of an AT&T Calling Card billing number required for proper billing and distribution by AT&T. Section 2. USE OF AT&T NETWORK ------------------- BCG shall, where such facilities are available, utilize the AT&T Network in completing BCG Calls made with the AT&T Calling Card. This will include access to AT&T's card database to obtain appropriate validation responses. Section 3. BILLING AND COLLECTION SERVICE DESCRIPTION ------------------------------------------- AT&T shall provide or make available to BCG, and BCG shall purchase through AT&T, billing and collection services ("Services") for BCG calls which have been made using the AT&T Calling Card. Such Services shall consist of the preparation of bills to BCG Customers, the mailing of statements of the amount due for AT&T Calling Card calls, and the collection of monies due from BCG Customers for such calls. BCG shall submit billing data concerning calling made with the AT&T Calling Card exclusively to AT&T, and shall not bill BCG Customers, directly or otherwise, for BCG Calls made using the AT&T Calling Card. Section 4. RATED MESSAGE PROCESSING BY BCG ------------------------------- BCG shall deliver to AT&T Rated Message data concerning BCG Calls which have been charged to an AT&T Calling Card. BCG shall provide such data at least once per week (or more frequently, upon agreement of the parties) and in the format specified by AT&T. AT&T shall reformat the Rated Message data into an appropriate format and either bill such calls directly or transmit such data to the appropriate billing agent for billing to BCG Customers. 2 Section 5. PROCESSING AND BILLING ---------------------- Billing for BCG charges billed by AT&T will be rendered in accordance with the normal billing cycles for AT&T bills. The total BCG charges billed by AT&T shall be included in the customer's bill along with any other charges billed by AT&T whenever possible. Section 6. BILL FORMAT AND BILLING RESULTS INFORMATION -------------------------------------------- To the extent possible, the format of the billing to be rendered to BCG Customers pursuant to this Agreement shall include a designation for BCG as the provider of service, together with message detail and amount due. AT&T shall provide to BCG information concerning the results of billing performed on behalf of BCG. Section 7. CUSTOMER SERVICE ---------------- AT&T shall maintain a toll-free 800 telephone number to handle all inquiries concerning billing for BCG Calls. AT&T shall provide sufficient facilities and personnel, with respect to the customer service telephone numbers, to handle all inquiries and complaints regarding billing for BCG Calls in a reasonable and timely manner. All expenses associated with Customer service shall be the responsibility of AT&T. Section 8. SETTLEMENT AND PURCHASE OF RECEIVABLES -------------------------------------- See attached Service Agreement. Section 9. PAYMENT SCHEDULE TO BCG ----------------------- AT&T shall pay to BCG the Purchase Price, computed in accordance with Service Agreement, no later than 15 business days after the invoice date which will be no later than 30 days after any calendar month. Payment will be made via wire transfer to BCG's designated bank account. Payment to BCG will be based on a review of the BCG invoice and the C&D report of billing records received. Due to a continuous flow of a small percentage of billing records to a recycle file, complete reconciliation is not possible. Therefore, AT&T agrees to pay BCG the 3 invoiced amount up to 105 % of the C&D report of billing records received. AT&T and BCG agree to conduct a quarterly review of billing records for the purpose of reconciling monthly discrepancies. Section 10. SPONSORSHIP OF RATED MESSAGE ---------------------------- BCG represent and warrant to AT&T that the receivables for each and every Rated Message with respect to which BCG shall deliver billing data to AT&T under this Agreement is owned by BCG, free and clear of any and all liens or claims by any third party, and that at the time of delivery of such Rated Message data to AT&T the receivables for such Rated Message have not been assigned, pledged, transferred, sold, exchanged, or otherwise conveyed or encumbered. Section 11. TAXES ----- (A) Collection of Taxes. Except as set forth in Section 11 (D) and the ---------- attached Service Agreement, BCG is solely responsible for the determination of the appropriate federal, state and local taxes and tax-associated rate elements, including sales taxes and other taxes imposed on BCG Customers ("End-User Taxes"). BCG hereby releases AT&T with respect to any and all liability arising out of AT&T's compliance with BCG instructions and directions regarding the imposition, computation and collection of End-User Taxes. (B) Billing of Tax Returns. Except as set forth in Section 11 (D) and the ---------------------- attached Service Agreement, BCG shall file all required returns for all taxes imposed with respect to BCG services, and shall pay or remit to the respective taxing authorities all such taxes and any applicable interest or penalties. (C) Indemnity. Except as set forth in Section 11 (D) and the attached --------- Service Agreement, BCG agrees to indemnify and hold AT&T harmless from and against any liability or loss resulting from any federal, state or local taxes, including sales taxes, federal excise taxes and other taxes imposed on BCG Customers, and including penalty, interest, additions to tax, surcharges or other charges or expenses, including attorney's fees, payable or incurred as a result of: 4 (1) the delay or failure BCG to pay and federal state or local taxes, or file any return or other information as required by law or this Agreement; or (2) AT&T's compliance with this Agreement, or any determination by, or advice of BCG, or AT&T's use of information provided by BCG in performing any tax-related service hereunder; or (3) any audit investigation or assessment by any goverrunental unit or agency with respect to BCG calls billed by AT&T under this Agreement. (D) BCG represents that, as of the date of execution of this Agreement no state or local end-user taxes are due or collectable with respect to BCG calls. The parties recognize that, on an interim basis, AT&T's billing arrangements may result in the automatic computation, billing, collection, and remitting to various state and local authorities of end-user taxes with regard to such calls. AT&T wfll effect changes to its billing procedures as soon as practicable to eliminate such billing. Until such time as changes are implemented, AT&T will be solely responsible for the computation, imposition, collection and filing of such federal, state and local End-User taxes and filing of related returns and will indemnify and hold BCG harmless with regard to any liability resulting therefrom. Section 12. COLLECTION SERVICES ------------------- AT&T shall process bills TO BCG Customers, including any adjustments and allocations of aggregate amounts due, in a manner consistent with that utilized by AT&T on its own behalf and in accordance with appropriate regulatory requirements. AT&T shall utilize collection services pursuant to this Agreement in a manner consistent with the process applied by AT&T on its own behalf. BCG shall provide reasonable assistance to AT&T in connection with AT&T's collection efforts. Section 13. OTHER TERMS AND CONDITIONS -------------------------- (A) Dispute Resolution ------------------ (1) The parties will attempt to settle all disputes, controversies or claims, whether based 5 in contract, tort, statute, fraud, misrepresentation or any other legal theory, arising out of or relating to this Agreement and the Services provided under this Agreement (hereinafter collectively "Disputes"), through good faith negotiations. Except for Disputes that are subject to the jurisdiction of the FCC and Disputes that are described in Section 13 (A) (3). Disputes not thus resolved shall be settled by final and binding arbitration conducted in a mutually agreed location by 1 neutral arbitrator, in accordance with this Agreement and the current Commercial Arbitration Rules of the American Arbitration Association ("AAA"). The arbitrability of Disputes shall also be determined by the arbitrator. Each party shall bear its own expenses and the parties shall equally share the filing and other administrative fees of the AAA and the expenses of the arbitrator. Any award of the arbitrator shall be in writing and shall state the reasons for the award. Judgment upon an award may be entered in any Court having competent jurisdiction. The arbitrator shall not have the power to award any damages in excess of the dollar limits set forth in or excluded under the limitations of liability contained in this Agreement nor to award punitive damages and each party irrevocably waives any claim thereto. The arbitrator shall not have the power to order prehearing discovery of documents or the taking of depositions, but may compel attendance of witnesses and the production of documents at the hearing. The Federal Arbitration Act, 9 U.S.C., Sections 1 to 14, shall govern the interpretation and enforcement of this section 13(A). (2) The parties, their representatives and participants and the arbitrator shall hold the existence, content and the result of the arbitration in confidence, except to the limited extent necessary to enforce a final settlement agreement or to obtain or enforce a judgment on an arbitration an award. (3) Disputes relating to: (a) matters that are subject to the primary jurisdiction of the FCC, a state Public Utility Commission or other body, or (b) either parties compliance with the USE OF INFORMATION and PUBLICITY AND MARKS Articles of this Agreement, a violation of which would cause the INFORMATION 6 or MARKS owners irreparable harm for which damages would be inadequate, or ( c) billing disputes where the amount in controversy is less than $50,000, shall be exempt from binding arbitration described in section (1). As to Disputes described in subsections (a), (b) and (c ), the claimant reserves the right to seek relief from a regulatory body having primary jurisdiction or a court of competent jurisdiction, as appropriate. (4) Any initial demand for arbitration pursuant to Section (1) and any legal action pursuant to Section (3) must begin within two years after the case of action arises. (B) Limitation of Liability ----------------------- Each Party's liability to the other for any loss, cost, claim, injury, liability, or expense, including reasonable attorney's fees, relating to or arising out of any negligent act or omission in its performance of this Agreement (not involving knowing and willful misconduct) shall be limited to the amount of direct damage actually incurred. Absent such knowing and willful misconduct, neither Party shall be liable to the other for any indirect, special or consequential damage of any kind whatsoever. (C) Indemnification --------------- Except as provided in Section 11, each Party (the "Indemnifying Party") will indemnify and hold harmless the other Party (the "Indemnified Party") from and against any loss, cost, claim, liability damage and expense (including reasonable attorney's fees) to third parties, relating to or arising out of negligence or misconduct by the Indemnifying Party in the Performance of this Agreement. In addition, the Indemnified Party will, to the extent of its negligence or misconduct, defend any action or suit brought by a third party against the Indemnified Party for any loss, cost, claim, liability, damage or expense relating to or arising out of negligence or misconduct by the Indemnifying party in the Performance of this Agreement, The Indemnified Party will notify the Indemnifying Party promptly in writing of any written 7 claims, lawsuits or demands by third parties which the Indemnffied Party believes the Indemnified Party is responsible for under this Section, and will render the defense of such claim, lawsuit or demand. The Parties will cooperate in every reasonable manner with the defense or resolution of such claim, lawsuit or demand. The Indemnifying Party will not be liable under this Section for settlements by the indemnified Party of any claim, lawsuit or demand unless notice has been tendered to the Indemnifying Party in writing and the Indemnifying Party has failed promptly to undertake the defense. (D) Term and Termination -------------------- The term of this Agreement shall be one (1) year from the date hereof, and shall be renewed from year-to-year thereafter unless either Party gives ninety (90) days written notice prior to the end of the term or any renewal thereof that it wishes to terminate this Agreement. In the event of a material default under this Agreement, the non-defaulting Party shall have the right to terminate this Agreement if the default is not cured within thirty (30) days of the date that written notice of such default is given by the non-defaulting Party to the defaulting Party. (E) Proprietary Information ----------------------- Attached to this Agreement as the Service Agreement and incorporated hereto by reference is the Parties' Agreement with respect to proprietary information. The terms and conditions of this Agreement shall be considered proprietary information covered by the terms of the Parties' proprietary information agreement. (F) Access to Records ----------------- Each party shall provide the other party, or its designee, with reasonable access to all records relating to performance under this Agreement. (G) Amendments and Waiver --------------------- This Agreement may be amended only by written agreement of the Parties. No amendment 8 or waiver of any provisions of this Agreement, and no consent to any default under this Agreement, shall be effective unless the same shall be in writing and signed by a duly authorized representative on behalf of the Party against whom such amendment, waiver or consent is claimed. In addition, no course of dealing or failure of any Party to enforce strictly any term, right or condition of this Agreement shall be construed as a waiver of such term, right or condition. (H) Assignment ---------- Any assignment by either Party to any non-affiliated entity of any right, obligation or duty, in whole or in part, or of any other interest hereunder except to a purchaser of all or substantially all of the assets of that party, without the written consent of the other Party shall be void. All obligations and duties of any party under this Agreement shall be binding on all successors in interest and assigns of such Party. (1) Notice and Demand ----------------- Any notices, demands or requests made by either Party to the other Party shall be in writing and shall be deemed to have been duly given on the date delivered in person or deposited, postage prepaid, in the United States Mail via Certified Mail, Return Receipt Requested, and addressed as follows: To BCG: ------- General Counsel Boston Communications Group, Inc. 100 Sylvan Road, Suite 100 Woburn, MA 01801 To AT&T: -------- AT&T Card Product Manager American Telephone and Telegraph Company 295 North Maple Avenue Basking Ridge, NJ 07920 9 (J) Force Majeure ------------- Neither Party shall be held responsible for any delay or failure in performance of any partof this Agreement to the extent that such delay or failure is caused by fire, flood, explosion, war, strike, embargo, government requirement, civil or military authorities, Act of God or by the public enemy, acts or omissions of carriers, or other causes beyond the control of either Party. If any force Majeure condition occurs, the Party delayed or unable to perform shall give immediate notice to the other Party. During the pendency of the force Majeure condition, the duties of the Parties under this Agreement shall be abated and shall resume without liability thereafter. (K) EEO --- Each Party agrees and warrants that, in the performance of this agreement it will not discriminate or permit discrimination in employment against any person or group of persons on the grounds of sex, race, age, religion national origin or handicap in any manner prohibited by the laws of the United States of any state or local government having jurisdiction. (L) Governing Law ------------- This Agreement shall be governed by the internal laws of the State of New York. (M) Merger ------ This Agreement and all Exhibits and Attachments hereto constitute the entire understanding between the Parties and supersedes all prior understandings, oral or written representations, statements, negotiations proposals and undertakings with respect to the subject matter hereof. (N) Severability ------------ If any provision of this Agreement is held invalid, unenforceable or void, the remainder of this Agreement shall not be affected thereby and shall continue in full force and effect. 10 (0) Headings -------- The headings in this agreement are for convenience and shall not be construed to limit any of the terms herein or affect the meanings or interpretation of this Agreement. IN WITNESS WHEREOF, the Parties have executed this Agreement. AMERICAN TELEPHONE & TELEGRAPH COMPANY By: /s/ Lou Delery ------------------------------------ Lou Delery Director - Domestic Product Management Date:10-10-97 ------------- BOSTON COMMUNICATIONS GROUP, INC. By:/s/ Robert J. Sullivan --------------------------------------- Printed Name: Robert J. Sullivan ----------------------------- Title: Vice President ------------------------------------ Date: 10-14-97 ------------------------------------- By: --------------------------------------- Printed Name: ----------------------------- Title: ------------------------------------ Date: ------------------------------------- 11 SERVICE AGREEMENT ----------------- DEFINITIONS ----------- DEFINITIONS. - ------------ As used in this Agreement (including the Schedules attached to this Agreement), the terms set forth below will have the following respective meanings and will be equally applicable to both the singular and plural forms of the terms defined: "Accepted Billable Message Revenue" means revenue billed to End Users at BCG wireless roaming rates (exclusive of messages rejected in the initial C&D editing process). "Billable Messages" means those Messages that (a) consist of telephone calls to be billed to billing numbers issued by AT&T, and (b) have not been rejected by AT&T during the editing, balancing, and formatting process. "Billable Message Minutes" means the billed minutes associated with any Billable Message from which the Billing Services Charges will be calculated. Billed minutes will be based on whole minutes. Whole minutes represent the minutes portion of the billable time field that have been rounded upward to the next minute. "Billing Services Charges" means the agreed upon per minute fees due to AT&T from BCG (net of any uncollectible amounts or messages rejected in the initial C&D editing process) which rate shall include (a) billing, collection and related service fees (b) uncollectible amounts and (c) costs associated with electronic record transfer. "Business Day" means any day except a Saturday, Sunday, or other day on which national banking associations are authorized or required by law to close. "End User" means the ultimate customer of wireless airtime telephone calls provided by BCG using an AT&T calling card. "Message" means a call record for operator-assisted or automated voice response system calls using AT&T calling cards and such other legally permitted telephone calls and services as the parties may mutual agree upon, each of which was originated by an End User through BCG. "Purchase Price" means the amount that AT&T will remit to BCG to purchase receivables for Accepted Billable Message Revenue. 12 "Taxes" means all taxes, charges (including without limitation surcharges), fees, levies, or other assessments (including without limitation any income, gross receipts, excise, ad valorem, sales, occupation, use, service, service use, license, payroll, franchise, transfer and recording taxes, fees, surcharges and charges) imposed by any governmental authority, whether computed on a separate, consolidated, unitary, or combined basis or in any other manner, and includes any interest, penalties, assessments, deficiencies, and additions to any such tax. "Tax Returns" means returns, declarations, reports, claims for refund, and informational returns or statements relating to Taxes, including any schedules or attachments thereto. 13 BILLING SERVICES ---------------- 1. BILLING SERVICES. ----------------- (a) Preliminary Processing and Delivery of Messages. BCG will acquire ----------------------------------------------- Message data and will perform all of the preliminary processing of the Messages, which will include ensuring that the charge for each Message has been computed, arranging Message data in the Approved Message Format and providing the applicable batch control totals, including the total number of Messages per transmission, excluding any applicable Taxes, per submission. After such preliminary processing has been completed, BCG will electronically transmit the Message data, in a form or manner that is compatible with AT&T's Software. BCG acknowledges that AT&T will have no obligation to accept for processing any Message data that does not conform to the Approved Message Format. (b) Billable Messages. AT&T will purchase Billable Messages. AT&T ----------------- will provide the vendor providing the validation gateway service with a copy of the billable card types. AT&T may revise the billable card types from time to time and will provide the validation gateway with a copy of the revised billable file, either in written form or on electronic media, as soon as reasonably practicable. (c) Approved Message Format. Upon receipt of a Message transmission ----------------------- from BCG, AT&T will determine whether the Message data contained thereon is in the standard exchange message interface format or another format that has been chosen by AT&T (the "Approved Message Format"). BCG hereby acknowledges that AT&T has provided it with the current Approved Message Format. AT&T may from time to time revise the Approved Message Format based on reasonable business needs (as determined in good faith by AT&T), or the requirements of any governmental authority and will provide BCG with a copy of the revised Approved Message Format. BCG will comply with such new format within 90 days after receipt of a copy of the updated or revised Approved Message Format; provided, --------- however, that BCG will comply with such new format within 30 days after receipt - ------- of a copy of the updated or revised Approved Message Format if AT&T notifies BCG that such new format was revised to comply with industry-standard formats. (d) Editing, Balancing, and Formatting . If BCG's Message data is in ---------------------------------- the Approved Message Format, AT&T will edit, balance, and format such Messages in accordance with the requirements of AT&T. If any of BCG's Message data is not in the Approved Message Format or if such Message data is rejected by AT&T or AT&T discovers other errors as the result of editing, balancing, or reviewing the format (such Messages are referred to as "Rejected Messages"), AT&T will send such Rejected Messages (in standard machine readable form) to the BCG Representative within seven Business Days after the receipt of the Message type from BCG. Billing Transmissions. After editing, balancing, and formatting the --------------------- Messages in conjunction with the transmission of a Billing Transmission to the End User's AT&T bill, AT&T will record the amounts due to BCG with respect to such Billing Transmission. 14 (g) Returned Messages. If any of BCG's Billable Messages are returned ----------------- as unbillable by AT&T, AT&T will return such Message data to BCG within seven Business Days after AT&T's receipt of such Billable Messages, and BCG will use its best efforts (i) to determine the reason for the return, (ii) to correct the Billable Messages, and (iii) to resubmit them as appropriate to AT&T for resubmission. When available, AT&T will provide information to BCG regarding Returned Messages, including the reason for return, in machine readable form. (h) Inspection of Reports and Settlements. BCG will inspect and ------------------------------------- review all reports and Settlement information prepared by AT&T and will notify AT&T of its rejection of any incorrect reports and Settlement information within 60 days after receipt thereof. Failure to so reject any such report or information will constitute acceptance thereof. 2. Settlement and Purchase of Receivables -------------------------------------- (a) Disbursement by AT&T. BCG will invoice AT&T monthly based on --------------- total Accepted Billable Message Revenue, less the related Billing Service Charges. The net amount invoiced (referred to herein as the "Purchase Price") will be disbursed by AT&T to BCG by wire or electronic funds transfer to the bank or other depository designated in writing by BCG. The Purchase Price will be remitted to BCG each month within 15 business days of AT&T's billing cycle. (b) Calculation of Purchase Price. The Purchase Price will be ----------------------- calculated based on Billable Message Minutes of Approved Messages less Rejected Messages (or "Billable Messages") transmitted to AT&T to be billed to End User, less Billing Services Charges to be paid (retained) by AT&T. (c) Billing Services Charges Calculation. Billing Services Charges ------------------------------------ are calculated based on minutes included in Billable Messages at the rate of $____ per Billable Message Minute. (d) Uncollectible Messages. BCG is not responsible for any Billable ---------------------- Messages that may not be collected by AT&T from End User. However, BCG will use reasonable efforts to ensure that End Users understand charges and are authorized AT&T users. (e) Reports. AT&T will provide reports to BCG that reflect the ------- accepted amounts and the results of Rejected Messages, Returned Messages and other adjustments. AT&T will transmit the reports no later than one month after the receipt of Message data from BCG and will transmit Settlement reports at the time that AT&T remits the Purchase Price to BCG. 3. TAXES. ------ (a) Federal, State, and Local Taxes. AT&T will be responsible for ------------------------------- calculating all 15 Taxes applicable to each Message, will bill and collect all taxes from the End Users and will prepare and file all tax returns until AT&T notifies BCG that it will no longer be providing these services. AT&T will provide BCG at least 120 days prior notice in writing as to when AT&T will cease providing these services. AT&T will be liable for all tax rating and ren-dttances to governmental authorities for the time period in which AT&T is responsible for calculating, filing and remitting taxes. At which time BCG assumes responsibility for calculating and remitting taxes, taxes collected from End --------- Users by AT&T will be ren-dtted to BCG in the monthly Disbursement. 4. AT&T'S VGN NETWORK. ------------------- (a) AT&T's VGN Network. In connection with the provision of services ------------------ by AT&T pursuant to this Agreement, BCG has requested that AT&T provide BCG with access to AT&T 's proprietary VGN Network System (the 'System") for the purpose of electronically transmitting certain data to AT&T and otherwise communicating electronically with AT&T. AT&T will provide BCG with access to the System, and BCG will comply with the terms and conditions relating to such access, and in accordance with the other terms and provisions of this Agreement. (b) Confidential Information. BCG agrees and acknowledges that, as ------------------------ between BCG and AT&T, information available through use of the System, other than BCG Data, constitutes confidential and proprietary information of AT&T subject to the restrictions on disclosure thereof set forth in the Confidentiality Section of this Agreement. In addition to such obligations, BCG agrees to hold any user identification codes and/or passwords provided to BCG for the purpose of utilizing the System in strict confidence and BCG will not disclose such codes and/or passwords to any other Person except employees of BCG who have a need to know such codes and/or passwords. BCG hereby agrees to indemnify and hold harmless AT&T, its employees, agents, representatives, directors, and officers from any and all losses, liabilities, costs, and expenses (including, without limitation, reasonable attorneys' fees and expenses) arising from, or relating to, BCG's failure to comply with the provisions of this Section. 5. BILLING INQUIRY SERVICES. ------------------------- (a) AT&T Billing Inquiry Services During the Term, AT&T will (a) ----------------------------- establish, at its expense, toll-free '800" telephone numbers to be used by End Users for the purpose of making inquiries regarding charges for Billable Messages reflected on bills issued by AT&T to End User and (b) provide customer service representatives to assist End Users in connection with such inquiries (collectively, the "Billing Inquiry Services"). (b) BCG Billing Inquiry Assistance AT&T will be responsible for ------------------------------ handling all Billing Inquiry calls to assist in handling End User inquiries. However, in connection with Billing Inquiry Services, BCG will make BCG Billing Inquiry Specialists available for additional assistance as needed when an End User has specifically requested to speak to a BCG representative, to answer 16 non-standard End User questions or other reasonable instances. Assistance will be available during normal Billing Inquiry operating hours, as agreed to by AT&T and BCG. 6. VALIDATION OBLIGATIONS. ----------------------- (a) BCG Validation Obligations During the Term, BCG will at all times -------------------------- perform, or cause to be performed, call validation in a manner that meets at least the minimum standards described below. (b) AT&T Validation Services. AT&T shall provide the access to ------------------------ facilities from AT&T Databases to transmit BCG's Queries to such Databases. AT&T shall inform BCG of any significant outage or severe degradation of Service to the designated BCG contact. AT&T shall provide a report of any such outage or degradation to BCG within twelve (12) hours of the return of normal service. The Service shall be available for BCG's access except during scheduled maintenance or service downtime. BCG is not responsible for any losses associated with records in the Approved Message Format it attempted to query and validate through AT&T Databases but could not access. While AT&T does not warrant the accuracy, availability, frequency or updates or any other aspect of the Databases with which the Service is interconnected or the data stored in the Databases, AT&T shall use its best efforts to pass through to BCG: -the accuracy of such data, -the availability of access to such data, -the frequency of update to such data, -the fraud control processes for such data. 7. CAP ON UNCOLLECTIBLES (BAD DEBT) -------------------------------- (a) If the amount of uncollectibles during the Contract Year exceeds ___ percent (__%) of the gross receivables, then BCG shall pay to AT&T, within thirty (30) days after the receipt of appropriate notification and supporting documentation, an amount equal to all uncollectibles in excess of __% of the gross receivables. (b) Uncollectibles shall be defined as any billable message that was not ultimately collected by AT&T within 180 days of the date the call was placed. Uncollectibles include amounts not collected due to fraud, bankruptcy or failure to pay for any related reason. In order to minimize uncollectible amounts, AT&T will take reasonable and prudent steps to maintain an up-to-date current validation database. This includes updating the database for invalid card numbers on a timely basis. (c) The following items or amounts are not considered uncollectibles and are therefore not included in the uncollectibles calculation: -applicable taxes related to a call record 17 -amounts adjusted or credited by AT&T's billing inquiry centers including amounts credited for AT&T discount plans or customer courtesy credits -amounts rejected by AT&T in the initial C&D editing, balancing and formatting process, including recycled amounts -amounts not identified and reported to BCG as uncollectible until after 240 days (uncollectibles must be identified and reported between 180 and 240 days) (d) Other considerations AT&T and BCG will act in good faith and take reasonable steps to minimize uncollectibles. AT&T will monitor uncollectibles and provide BCG with data regarding uncollectibles on a regular basis (at least quarterly). Data provided to BCG will include but is not limited to: -call detail for rejected transactions from C&D including reason codes -call detail on adjusted amounts processed by AT&T's billing inquiry centers -call detail on uncollectible calls including reason codes -detailed reports supporting uncollectible percentages AT&T will provide BCG with access (24 hours a day, 7 days a week) to AT&T's Card Protection Center to provide a secondary validation point should BCG suspect fraudulent usage on an AT&T Calling Card. Additionally, AT&T and BCG agree to share any other information regarding circumstances that may impact uncouectibles. 18 PROPRIETARY RIGHTS, DATA AND AUDIT RIGHTS ----------------------------------------- SAFEGUARDING AND RETENTION OF BCG DATA. - --------------------------------------- AT&T will maintain reasonable safeguards against the destruction, loss, or alteration of the BCG Data in the possession of AT&T and will store information containing the BCG Data, in a secure area. BCG DATA. - --------- As between AT&T and BCG, the BCG Data will remain solely BCG's property. BCG hereby authorizes AT&T to have access to and to make use of such of the BCG Data as is appropriate for the performance by AT&T of its obligations under this Agreement. AT&T will not utilize the BCG Data for any purpose other than providing the Services; provided, that AT&T will have the right to retain copies of any BCG Data that AT&T deems necessary or appropriate for the purpose of performing any services under this Agreement including, without limitation, with respect to settlement processing services performed in accordance with the Agreement. BCG'S MAINTENANCE OF BCG DATA. - ------------------------------ BCG will establish at least 90 days' backup of the BCG Data submitted to AT&T for billing and will keep backup data and data files in its possession; provided, however, that AT&T will have such access to any such backup data and - -------- ------- data files as is reasonably required by AT&T in connection with the performance of the Services. OTHER ----- RELATIONSHIP OF PARTIES. - ------------------------ Neither party will be considered or be deemed to be an agent, employee, joint venture or partner of the other party, and no relationship other than independent contractor is intended or created by and between AT&T and BCG. CONFIDENTIALITY. - ---------------- Except as otherwise provided in this Agreement, each of the parties agrees that all confidential information and trade secrets communicated to it by the other party, whether before or after the Effective Date, will be, and will be deemed to have been, received in strict confidence and will be used only for the purposes of carrying out the obligations of, or as otherwise contemplated by, this Agreement. Without obtaining the prior written consent of the other party, neither party will disclose any such information received from the other party; provided, however, that this Section will not prevent a party from disclosing - ----------------- any such information that: (a) was already in the possession of such party without being subject to confidentiality obligations; (b) is or becomes generally available to the public other than as a result, directly or indirectly, of a disclosure of such information by such party or by other persons to whom such party disclosed such information; (c) 19 is or becomes available to such party on a nonconfidential basis from a source other than the other party or its representatives, provided that such source is not bound by a confidentiality agreement with the other party; (d) is independently developed by such party without the use of the other party's confidential information; (e) is required to be disclosed pursuant to an arbitration proceeding, provided that such disclosure is made in accordance with the approval and at the direction of an Arbitration Panel; (f) is required to be disclosed pursuant to a requirement of any governmental authority or any statute, rule, or regulation, provided that such party gives the other party notice of such requirement prior to any such disclosure; or (g) is reasonably necessary to be disclosed in connection with a billing inquiry by an End User. FEES AND EXPENSES. - ------------------ Except as otherwise provided in this Agreement, all fees and expenses (including without limitation legal and accounting fees and disbursements) incurred by either of the parties in connection with the negotiation and preparation of this Agreement or any other of the transactions contemplated hereby will be borne solely by the party incurring such fees and expenses. MEDIA RELEASES. - --------------- All press and media releases, public announcements and public disclosures by either of the parties relating to this Agreement or its subject matter, including without limitation promotional or marketing material (but not including any announcement intended solely for internal distribution by a party to its directors, officers and employees or any disclosures required by legal, accounting, regulatory or stock exchange requirements beyond the reasonable control of such party) will be coordinated with and approved by both parties to the release thereof. AMENDMENT. - ---------- This Agreement may not be modified or amended except by a written instrument executed by or on behalf of each of the parties to this Agreement. 20 Exhibit 10.38 BILLING AND RELATED SERVICES AGREEMENT between AT&T Corp. and BOSTON COMMUNICATIONS GROUP, INC. EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF REGISTRANT
NAMES UNDER WHICH PLACE OF INCORPORATION DOING BUSINESS ---------------------- --------------------------- 1. Voice Systems Technology Inc. Delaware Boston Communications Group 2. Cellular Express, Inc. Massachusetts Boston Communications Group 3. BCG Securities Corp. Massachusetts Boston Communications Group 4. BCG Foreign Sales Corp. U.S. Virgin Islands BCG Foreign Sales Corp. 5. BCG de Mexico, S.r.l. Mexico Boston Communications Group
EX-23.1 4 CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-11139) pertaining to the Boston Communications Group, Inc. 1996 Stock Option Plan, (Form S-8 No. 333-11191) pertaining to the Boston Communications Group, Inc. Non-Qualified Stock Options Pursuant to Written Option Agreements and (Form S-8 No. 333-11195) pertaining to the Boston Communications Group, Inc. 1996 Employee Stock Purchase Plan of our report dated February 6, 1998, with respect to the consolidated financial statements and schedule of Boston Communications Group, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1997. Ernst & Young LLP Boston, Massachusetts March 19, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 23,601 10,103 12,445 1,304 1,550 49,893 46,010 7,923 93,385 11,683 0 0 0 163 79,941 93,385 68,099 68,099 50,381 70,488 0 0 (1,085) (1,304) (188) (1,116) 0 0 0 (1,116) (0.08) (0.08)
EX-27.2 6 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS YEAR DEC-31-1996 DEC-31-1996 OCT-01-1996 JAN-01-1996 DEC-31-1996 DEC-31-1996 923 923 20,498 20,498 11,060 11,060 1,242 1,242 1,189 1,189 35,499 35,499 16,089 16,089 3,183 3,183 51,959 51,959 9,019 9,019 0 0 0 0 0 0 127 127 42,766 42,766 51,959 51,959 12,745 50,651 12,745 50,651 9,977 39,182 13,485 50,041 0 0 0 0 (329) (589) (411) 1,199 (106) 600 (305) 599 0 0 0 0 0 0 (305) 148 (0.02) 0.02 (0.02) 0.01
EX-27.3 7 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 3-MOS 9-MOS DEC-31-1996 DEC-31-1996 JUL-01-1996 JAN-01-1996 SEP-30-1996 SEP-30-1996 5,003 5,003 21,243 21,243 10,465 10,465 1,130 1,130 743 743 39,303 39,303 52,986 52,986 8,565 8,565 0 0 0 0 0 0 127 127 43,447 43,447 52,986 52,986 13,913 37,906 13,913 37,906 10,839 29,204 13,640 36,556 0 0 0 0 (341) (260) 614 1,610 283 706 331 904 0 0 0 0 0 0 331 453 0.03 0.06 0.03 0.04
EX-27.4 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR 3-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 MAR-31-1996 253 353 0 0 6,250 7,487 884 909 0 65 8,497 9,843 6,394 8,028 1,510 1,825 13,614 18,787 6,415 9,143 0 0 0 0 15,897 16,134 33 37 (8,732) (6,527) 13,614 18,787 0 92 34,220 11,153 0 37 26,195 8,372 5,895 2,046 642 177 151 6 1,979 729 (1,030) 300 3,009 429 (165) 0 0 0 0 0 1,,893 192 0.57 0.05 0.22 0.02
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