-----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, Kc9uYs43+9smKniRHaljLcwqk/lucpGt/Z5u9cVLMmHmMhfFZEU9t6tnZuEKGgBr 9xswr526PQpBofQVpGgpHw== 0000927016-99-001220.txt : 19990402 0000927016-99-001220.hdr.sgml : 19990402 ACCESSION NUMBER: 0000927016-99-001220 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99579705 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, 1998 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 1, 1999, was $193,316,499. The number of shares outstanding of the Registrant's common stock, $.01 par value per share, as of March 1, 1999 was 16,452,468. 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. -1- Item 1. BUSINESS BACKGROUND GENERAL Boston Communications Group, Inc. (BCGI) is the leading provider of prepaid services to wireless carriers in North and South America. Taken together with the Company's innovative roaming services and teleservices, this suite of offerings has made BCGI a leading provider of enhanced services to the wireless telecommunications industry. The Company's Prepaid Wireless Services Division provides U.S and Canadian carriers with prepaid wireless services through its C/2/C (R) network, which enables carrier's subscribers to use their wireless phone as if they were a post-pay subscriber, thereby expanding carriers' 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 international wireless and wireline carriers. The Systems Division also manufactures prepaid systems that are used to support the Company's C/2/C network. 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 ROAMERplus (TM) Division 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. The required disclosure information for the reportable operating segments is included in Note 5 of the Company's Consolidated Financial Statements. Wireless telephone service has been one of the fastest growing areas of the telecommunications industry over the last thirteen years. Currently, prepaid wireless is one of the fastest growing markets within the wireless industry. 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 61 million in June 1998. This represents an increase in market penetration from under 1% to over 22% of the United States population. The CTIA also estimates that aggregate annual service revenues from wireless subscribers grew from approximately $482.4 million in 1987 to approximately $29.6 billion in 1998. 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 digital wireless as the most recent form of wireless service. Industry sources forecast that the number of wireless subscribers will grow to 80 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. The Company was organized as a Massachusetts corporation in 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 Voice Systems Technology Inc, now the Systems Division. The Company's principal office is located at 100 Sylvan Road, Suite 100, Woburn, Massachusetts 01801 and its telephone number is (617) 692- 7000. Description of Business Prepaid Wireless Services Division The Company introduced its C2C network-based prepaid wireless service offering in early 1996 and was offering the service in over 150 U.S. Metropolitan Service Areas (MSA's) which cover more than 70% of the U.S. population and all major markets in Canada as of December 31, 1998. The Company has become the leading prepaid wireless service provider for wireless carriers in the United States and Canada and significantly expanded its subscriber base from 290,000 at December 31, 1997 to 890,000 at December 31, 1998. The average monthly minutes of use per subscriber were approximately 49 minutes during the fourth quarter of 1998. -2- The C/2/C network permits a wireless carrier to automatically switch a prepaid subscriber's call to the C/2/C 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 C/2/C 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 by credit card through C/2/C's automated replenishment feature or by paying cash at any of the carrier's affiliated retail outlets. The C/2/C network can complete a 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 roam into other markets. Prepaid roaming can be done automatically within C/2/C, via the Company's C/2/C service agreements, and through the Company's ROAMERplus service. The C/2/C 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 site 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 C/2/C network is in place. During 1998, BCGI expanded the features of its prepaid wireless services to offer additional functionality to its carriers and their prepaid subscribers. International dialing capabilities were added to the system to permit prepaid subscribers to make calls from within the United States and Canada to countries around the world. The Passport feature was also introduced into the C/2/C product line. This feature allows subscribers to use prepaid wireless services from any prepaid or traditional postpaid mobile phone and select prepaid service on a per-call basis. Other features were added including outbound roaming, automated replenishment options and credit card address verification. The Company works closely with the carriers on an ongoing basis to develop additional features and functionality to expand the capabilities and value of prepaid wireless services. During 1998, the Company upgraded its nodes and migrated the prepaid system to an Oracle database platform. These improvements and others dramatically enhanced the overall system reliability. The Company signed an agreement in 1998 with AG Communication Systems (AGCS) to jointly develop a Wireless Intelligent Network (WIN) based solution for prepaid wireless service, including prepaid roaming. This new WIN system will take advantage of the call processing efficiency and enhanced feature capabilities of WIN, while building on BCGI's existing strengths in all areas of prepaid service delivery. The WIN system will allow BCGI to enhance the current features enjoyed by its carrier customers in the areas of rating, reporting, distribution support, customer care and replenishment. This will enable BCGI to provide a state-of-the-art, full-featured platform to new customers while allowing a smooth migration for current customers, including roaming capability between WIN and non-WIN systems. The WIN service logic that BCGI and AGCS are developing is intended to operate on many Service Control Point (SCP) platforms, providing carriers the flexibility to run WIN service logic on their own SCP platform if they choose. Carriers compensate BCGI 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 C/2/C network voice node. The terms of the Company's existing contracts to provide prepaid wireless services through the C2C network are generally two or three years. The Company currently provides C/2/C to several U.S. carriers, including AirTouch Communications, Southwestern Bell Mobile Systems, Bell Atlantic Mobile, Bell South Cellular Corp., LA Cellular, AT&T Wireless (AWS), Frontier Cellular, Bay Area Cellular, Western Wireless' PCS Division, Aliant Cellular, Dobson Cellular Systems, -3- Inc., and Southern New England Telephone Corp., in addition to more than 15 wireless resellers. The Company also provides prepaid wireless services in Canada to Rogers Cantel. As of February 28, 1999 the Company was supporting over one million prepaid subscribers on behalf of carriers who have deployed a BCGI prepaid system in the United States and Canada. Teleservices Division The Company 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 wireless 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 teleservice representatives also assist carriers in billing and collections. Most carriers using BCGI'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 thirty-three wireless customers. Certain wireless carriers that have contracted for the Company's prepaid wireless services have also engaged the Company to provide teleservices for their prepaid subscribers. The Company provides its teleservices from four telecommunications call centers located in the United States and Canada. The largest call center is located at the Company headquarters in Woburn, Massachusetts and has been in operation since 1996. In March 1998, the Company, in collaboration with the University of Massachusetts Lowell, opened its second service center in Lowell, Massachusetts. This service center is located on the campus of the university and provides students the opportunity to learn about call center operations while earning money and scholarships to pay for their education. More than 50% of the current teleservices representatives at this service center are student employees of the university. The third telecommunications call center was opened in Deland, Florida in August 1998 and employed over 300 personnel as of December 31, 1998. In December 1998, the Company began to provide services in a fourth call center in New Brunswick, Canada. The ICT Group, Inc. handles the management and operational functions of this call center, in accordance with company specifications. BCGI is responsible for call routing, initial training and ongoing quality assurance and mentoring to ensure compliance with the Company's standards. Each of the Company's facilities is designed 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. BCGI 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, BCGI provides teleservices support to carriers who are currently supporting prepaid subscribers on the C/2/C network. BCGI's wireless-trained representatives are available to effectively answer subscriber questions that are not handled by C2C's automated customer service application. BCGI also provides special support services to carriers including dealer support, 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 customer service skills, 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. BCGI intends to continue to market and invest in its teleservices technology in order to provide additional service offerings. -4- Roaming Services Division BCGI's ROAMERplus roaming service enables wireless carriers to cost-effectively generate revenues from subscribers roaming in a carrier's service area who are not covered under traditional roaming agreements. These unregistered roamers attempting to place calls in the serving carrier's territory are automatically switched to BCGI, which arranges payment for the calls, completes the calls and pays the serving carrier based on the length of the call. 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, a prepaid account or as a collect call. 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. The Company's roaming service is being used by approximately 95 wireless carriers that collectively hold licenses for over 1,100 markets in the United States, Canada and Mexico. BCGI services 8 of the 10 largest wireless carriers, by number of subscribers, in the United States. In order to implement the Company's ROAMERplus service, a carrier need only make a minor software change in its switches. BCGI 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, BCGI 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 BCGI (typically, under the trade name "Wireless Roaming") as the vendor. ROAMERplus eliminates collection and fraud risk for the carrier because BCGI takes responsibility for collection from the customer. The Company manages this collection and fraud risk by utilizing its own proprietary and external fraud control systems as well as validating the caller's credit before completing the call. Over the past few years there has been a decrease in the suspension of inter-carrier roaming agreements due to improved fraud controls implemented by the carriers. Systems Division The Systems Division delivers prepaid wireless solutions to carriers which, when coupled with the Prepaid Wireless Services Division's carrier customers, makes BCGI the leading provider of prepaid wireless services to carriers in North and South America. The Systems Division sells systems that enable prepaid wireless calling on a turnkey basis primarily to international customers. The Division also markets and sells 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. Prepaid systems have been sold to several customers whose efforts are focused on international prepaid wireless, including Cable & Wireless, Bell South Wireless International and Cellstar, Ltd. These customers have operations throughout the world and have enabled the Company to make significant prepaid system sales in Mexico, Brazil, Venezuela and several other South American countries. The Company expects to continue to market and sell its systems through these and other companies to expand prepaid wireless services beyond North and South America. 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, that employs technicians and other support staff throughout Mexico. Engineering, Research and Development BCGI 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 -5- 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 C/2/C network. In addition, BCGI's agreement with AGCS to jointly develop the WIN system is expected to improve call processing efficiency and provide BCGI the ability to enhance the features available to carriers. These enhanced services are intended to be designed to enable carriers to generate additional sources of revenue from subscribers, to provide carriers with more extensive internal reporting capabilities and help to reduce carriers' telecommunications costs. The Company spent approximately $3.2 million, $5.4 million and $5.5 million on engineering, research and development in 1996, 1997, and 1998, respectively. During 1998, the responsibilities of a number of prepaid wireless service personnel were shifted from development and engineering of the prepaid architecture to the duties of maintaining and upgrading the C2C network to provide high quality performance. This trend is expected to continue in 1999. The Company expects to continue to devote significant resources to its engineering, research and development activities in future years. 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. BCGI 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, Prepaid Wireless Services and Systems Divisions. The Company's sales force consists of sales representatives who 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 strategic 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 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, advertising and public relations. Because the Company's customers are a group of large-scale wireless carriers, 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 Services, Teleservices and Systems Divisions. Each group focuses on supporting carriers' operational issues, 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, the product and account management groups focus on identification of new features and functionality that drive incremental prepaid business. Distribution of prepaid wireless is an integral piece of the service 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 wireless carriers by seeking arrangements with national distributors, retailers, resellers and alternative channels to increase market penetration and exposure. The Company intends to focus more efforts on its marketing program in 1999 to expand awareness of its prepaid product offering, specifically to provide more assistance to its carrier customers in strategically marketing and promoting prepaid services through their sales and distribution channels. -6- Customers The Company provides its services to wireless carriers and resellers of varying size, expertise and capabilities. The Company currently provides one or more of its services to approximately 95 wireless carriers in the United States, Canada and Mexico, including 8 of the 10 largest wireless carriers in the United States. Historically, a significant portion of the Company's revenues in any particular period has been attributed to a limited number of customers. Net revenues attributable to the Company's ten largest customers accounted for approximately 82%, 75% and 79% of the Company's total revenues in 1996, 1997, and 1998, respectively. Ameritech Cellular Services, Bell Atlantic Mobile, Southwestern Bell Mobile Systems, Bell South Cellular and Airtouch Communications accounted for approximately 12%, 12%, 11%, 5% and 9%, respectively, of total revenues in 1997 and for 15%, 11%, 10%, 13% and 13%, respectively, of total revenues in 1998. For the year ended December 31, 1998, the Company's Systems Division generated $13.6 million in prepaid and voice system revenues. Of this revenue, a significant portion represented sales to support prepaid wireless service in several South American countries on behalf of Bell South International Wireless, Inc. 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. BCGI's principal competitor in the unregistered roaming market is National Telemanagement Corporation and in the prepaid network market, Brite Voice Systems, Inc., National Telemanagement Corporation, and GTE Telecommunications Services, Inc. In the teleservices market, BCGI competes with a variety of companies that have inbound and outbound service centers. The Systems Division's principal competitors in the turnkey prepaid and voice processing systems markets include Comverse Technology, Inc., Brite Voice Systems, Inc. and Centigram Communications Corp. 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. BCGI 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 -7- 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, 1998, the Company had a total of 1,135 full-time and part- time employees. Of these employees, 830 serve in teleservices and roaming call center and related functions, 174 serve in technical support and technology and software development, 51 serve in sales, marketing, product and account management and 80 serve in administration and management. In addition, 146 students of the University of Massachusetts - Lowell serve as representatives for the Teleservices Division. None of the Company's employees are represented by a labor union. The Company believes that its employee relations are good. Backlog As of December 31, 1998, there was no backlog of firm orders of the Systems Division. 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 five of its six principal locations: Burlington, Woburn and Lowell, Massachusetts, Deland, Florida and Mexico City, Mexico. In March 1999 the Company purchased the property at its Tulsa, Oklahoma location which was previously under lease. The Woburn location serves as one of the call centers for teleservices and also has separate facilities that house the Company's network operations center as well as the Company's executive headquarters, engineering, sales, human resources and finance personnel. The Burlington site is currently utilized for service center operations for ROAMERplus and houses training facilities and certain engineering personnel. Its operations are expected to be fully consolidated into the Woburn facility during 1999 upon the expiration of the lease in October 1999. The Tulsa facility is used for the manufacturing and assembly of systems and houses other Systems Division support functions such as engineering, product management, sales support and finance. The Mexico City office serves as the headquarters of the technical service operation in Mexico. The Company has 33 other leased facilities throughout the United States that are used to house the Company's voice nodes and certain equipment for the C/2/C network. The following is a listing of the Company's significant leased facilities: Location Square Footage Expiration Date - -------- -------------- --------------- Woburn, Ma 58,415 February 2001-October 2003 Burlington, Ma 19,975 October 1999 Lowell, Ma 9,000 February 2002 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. -8- 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. 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, 1998. 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 55 Chairman of the Board Brian E. Boyle 50 Vice Chairman E.Y. Snowden 44 President & Chief Executive Officer, Director Frederick E. von Mering 45 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 Corporation (now MicroFinancial Corporation (MFC)), 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, and MFC, 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. -9- 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. 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. 1997 1998 --------------------------- -------------------------- High Low High Low ------------- ------------ ------------ ------------ First Quarter $ 7 1/8 $ 3 7/8 $11 11/16 $ 6 1/8 Second Quarter 15 1/16 4 1/8 11 1/4 6 1/2 Third Quarter 17 1/4 12 1/4 9 1/8 3 7/8 Fourth Quarter 19 8 1/2 13 6 3/4 Holders At February 23, 1999, there were approximately 5,000 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. -10- 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, -------------------------------------------------------------------------- 1994 1995 1996 (1) 1997 1998 ------------- ------------- -------------- ------------- ------------- Consolidated Statements of Operations Data: (in thousands, except per share data) Total revenues $ 18,334 $ 34,220 $ 50,651 $ 68,099 $ 86,482 Operating income (loss) 405 2,129 610 (2,389) (3,149) Income (loss) from continuing operations(2) 288 3,008 599 (1,116) (1,800) Income (loss) from discontinued operations 1,507 (165) -- -- -- Net income (loss) 1,795 2,843 599 (1,116) (1,800) Net income (loss) available to common shareholders 779 1,893 148 (1,116) (1,800) Basic net income (loss) per common share(3): 0.24 0.57 0.02 (0.08) (0.11) Diluted net income (loss) per common share(3): 0.22 0.22 0.01 (0.08) (0.11) Consolidated Balance Sheet Data: Cash and short-term investments 204 253 21,421 33,704 25,609 Working capital 1,098 2,082 26,433 38,210 37,397 Property and equipment, net 2,699 4,884 12,906 38,087 38,055 Total assets 8,867 13,614 51,959 93,385 91,760 Redeemable preferred stock 14,947 15,896 -- -- -- Shareholders' equity (deficit) $ (10,591) $ (8,698) $ 42,893 $ 80,104 $ 78,658 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. (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. (3) See Note 8 of Notes to Consolidated Financial Statements. -11- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Results of Operations - ---------------------------------- The Company's total revenues increased 27% from $68.1 million in 1997 to $86.5 million in 1998. The growth was primarily attributable to a 147% increase in the Company's principal business, prepaid wireless, and to a 53% increase in teleservices revenues, primarily arising from increased customer service for carriers' C2C customers. A 13% decline in roaming service revenues slightly offset the growth in prepaid wireless and teleservices. In 1997, total revenues increased 34% compared to 1996 primarily due to increases in prepaid wireless and systems revenues. The Company incurred operating losses for the years ended December 31, 1998 and 1997 totaling $3.1 million and $2.4 million, respectively, compared to operating income of $610,000 in 1996. Excluding the effects of the loss on impairment of long-lived assets, the operating losses for the years ended December 31, 1998 and 1997 would have been $2.5 million and $1.8 million, respectively. The increase in operating losses reflects the increased depreciation, telecommunication and personnel costs associated with the deployment and operation of the C/2/C network. The specifics of each division's revenues and net operating income (loss) are discussed in greater detail below. The Company's reportable operating segments consist of Prepaid Wireless Services, Teleservices, Roaming Services and Systems Divisions. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in Note 2 of the Company's Consolidated Financial Statements, except that the financial results for the Company's operating segments have been prepared using a management approach. This approach is consistent with the basis and manner in which the Company's management internally analyzes financial information for the purposes of assisting in making internal operating decisions. The Company evaluates performance based on stand-alone divisions operating income (loss) before interest and taxes and allocates corporate level operating expenses to the operating divisions. Segment disclosure information is included in Note 5 of the Company's Consolidated Financial Statements. The Company's chief operating decision-maker is its President. The Company's Divisions, or operating segments, are managed separately because each represents a strategic business unit that offers different products and serves unique markets within the wireless industry. However, the divisions do complement each other in order to provide the Company with a strong suite of products and services to meet the needs of wireless carriers. The Company's customers include eight of the ten largest domestic wireless carriers, six of whom use two or more of the Company's products. -12- Divisional Data - --------------- (in thousands except for percentages)
Prepaid Wireless Roaming Services Teleservices Services Systems Total - ------------------------------------------------------------------------------------------------------------------------------ 1998 - ---- Revenues $18,624 $26,001 $28,235 $13,622 $86,482 ======= ======= ======= ======= ======= Gross margin 8,659 5,918 6,364 5,174 26,115 ======= ======= ======= ======= ======= Gross margin percentage 46% 23% 23% 38% 30% ======= ======= ======= ======= ======= Operating income (loss) (7,236) 393 2,962 732 (3,149) ======= ======= ======= ======= ======= Percentage of revenues (39%) 2% 10% 5% (4%) ======= ======= ======= ======= ======= 1997 - ---- Revenues 7,539 17,009 32,461 11,090 68,099 ======= ======= ======= ======= ======= Gross margin 1,260 4,815 6,754 4,889 17,718 ======= ======= ======= ======= ======= Gross margin percentage 17% 28% 21% 44% 26% ======= ======= ======= ======= ======= Operating income (loss) (7,976) 562 4,547 478 (2,389) ======= ======= ======= ======= ======= Percentage of revenues (106%) 3% 14% 4% (4%) ======= ======= ======= ======= ======= 1996 - ---- Revenues 312 13,413 32,234 4,692 50,651 ======= ======= ======= ======= ======= Gross margin (537) 3,331 6,559 2,116 11,469 ======= ======= ======= ======= ======= Gross margin percentage (172%) 25% 20% 45% 23% ======= ======= ======= ======= ======= Operating income (loss) (5,792) 674 4,757 971 610 ======= ======= ======= ======= ======= Percentage of revenues (1856%) 5% 15% 21% 1% ======= ======= ======= ======= =======
Prepaid Wireless Services Division - ---------------------------------- Prepaid Wireless Services Division revenues increased from $312,000 in 1996 to $7.5 million in 1997 and increased 148% to $18.6 million in 1998. Both increases were the result of new carrier contracts secured in 1997 and 1998, as well as existing carrier customers adding new markets to the C2C network during both periods. At the end of 1998 there were approximately 890,000 paid subscribers on the C/2/C network, as compared to 290,000 subscribers at the end of 1997, an increase of over 200%. Gross margins for the Prepaid Wireless Services Division improved from a negative margin in 1996 to 17% of revenues in 1997 and 46% of prepaid wireless services revenues in 1998. The improvement in both years resulted from the significant increase in prepaid wireless services revenues in each of 1997 and 1998. This increase in gross margins was partially offset by increased personnel and related costs incurred to support the growth of the C/2/C network. Operating losses for the Prepaid Wireless Services Division increased 38% from $5.8 million in 1996 to $8.0 million in 1997, and decreased 10% to $7.2 million in 1998. These operating losses have been due to costs associated with the C/2/C network, including costs for personnel and for telecommunications equipment and software. While the Company expects to continue to incur significant capital and personnel costs to support the expansion and development of the C/2/C network, the Company also anticipates that increases in prepaid wireless services revenues will improve the gross margins and operating results of the Prepaid Wireless Services Division in 1999. Teleservices Division - --------------------- Teleservices Division revenues increased 27% from $13.4 million in 1996 to $17.0 million in 1997 and increased 53% to $26.0 million in 1998. The increases in teleservices revenues were primarily due to new and additional services provided to existing customers and the addition of new carrier customers in 1997 and 1998. A significant component of these increases was the increase in teleservices revenues from billing inquiry services provided to the Prepaid Division's carriers. Teleservices revenues from those services were negligible in 1996, increased 11% to $1.9 million in 1997 and increased 31% to $8.2 million in 1998. -13- Gross margins for the Teleservices Division increased from 25% of teleservices revenues in 1996 to 28% of teleservices revenues in 1997, but declined to 23% of teleservices revenues in 1998. The increase from 1996 to 1997 resulted primarily from labor efficiencies and other economies of scale as higher teleservices revenues absorbed more fixed operating costs. The decrease in gross margins in 1998 was primarily due to incremental costs in connection with opening three additional call centers in 1998, including training and travel costs. Although the Company anticipates teleservices revenues to increase in 1999, it expects the gross margin from that division to decline compared to the levels achieved in 1998. A significant reason for the gross margin decline is increased costs resulting from the Company's plan to support new business in the Teleservices Division by leasing call center facilities, equipment and personnel from third parties that will be classified entirely in cost of services. In 1998 and prior years, a portion of these costs were classified in depreciation or general and administrative expenses. Operating income for the Teleservices Division decreased slightly from $674,000 in 1996 to $562,000 in 1997 and $393,000 in 1998. Operating income for the Teleservices Division represented 5% of teleservices revenues in 1996, 3% in 1997 and 2% in 1998. The decreases in each of 1997 and 1998 were primarily due to the Company's significant investment in call center technology during 1997 designed to enhance service offerings as well as improve operational efficiency. Roaming Services Division - ------------------------- Roaming services revenues remained relatively flat at $32.2 million in 1996 and $32.5 million in 1997 and decreased 13% to $28.2 million in 1998. Roaming services revenues remained relatively constant from 1996 to 1997, even though there were fewer suspensions of inter-carrier automatic roaming agreements by the carriers in 1997 as compared to 1996, because the Company expanded the billing options that it offered to carriers and maintained its market presence. The decrease in roaming services revenues in 1998 was primarily attributable to greater suspensions of inter-carrier automatic roaming agreements and some cannibalization of unregistered roaming use by prepaid wireless growth. In addition, a consumer' decision to use the Company's premium priced roaming service has been adversely affected by an increase in one-rate registered roaming plans offered by some national carriers. The Company anticipates that these trends will continue and, therefore, roaming services revenues will continue to decrease over time. Gross margins for the Roaming Services Division improved from 20% of revenues in 1996 to 21% in 1997 and 23% in 1998. The improvement in both years resulted primarily from enhancement and expansion of automated features of the service that reduced labor costs. Operating income for the Roaming Services Division was relatively flat at $4.8 million in 1996 and $4.5 million in 1997 and decreased 33% to $3.0 million in 1998. The decrease in 1998 was primarily a result of lower absorption of fixed costs as roaming services revenues declined. The decrease was offset to some extent by reduced labor costs. The Company anticipates that operating income for the Roaming Services Division will continue to decline slightly due to the anticipated decrease in roaming services revenues. Systems Division - ---------------- Systems revenues increased 136% from $4.7 million in 1996 to $11.1 million in 1997 and increased 23% to $13.6 million in 1998. The increase in 1997 systems revenues was attributable to the sale of prepaid systems to an existing customer in Mexico and to new customers in South America. The increase in 1998 was due to further system sales to new and existing customers in South America. Gross margins for the Systems Division decreased slightly from 45% of systems revenues in 1996 to 44% in 1997 and further decreased to 38% in 1998. The reduction in the gross margin from 1996 to 1997 was primarily due to a change in the mix of the types of systems sold to more sales of prepaid systems in proportion to total sales. Prepaid systems have a lower margin than voice systems. The decrease in 1998 was primarily a result of increased competition in the market for such systems that resulted in reduced prices for the systems, as well as higher costs -14- associated with installing systems abroad. The trend of selling more prepaid systems in proportion to total systems sales also continued and, therefore, was an additional factor in the decrease in gross margin. Operating income for the Systems Division decreased 51% from $971,000 in 1996 to $478,000 in 1997 and increased 53% to $732,000 in 1998. Operating income for the Systems Division represented 21% of systems revenues in 1996, 4% of systems revenues in 1997 and 5% of systems revenues in 1998. The decrease in operating income in 1997 resulted primarily from costs incurred to expand into Mexico and South America, including costs for sales, development and administrative personnel, international travel expenses, additional development and test equipment and increased amortization costs related to goodwill acquired in connection with the purchase of a subsidiary. Operating income remained consistent as a percentage of systems revenues from 1997 to 1998, notwithstanding the decrease in gross margin, because sales and marketing expenses of the Systems Division were reduced with the consolidation of one of the division's satellite sales offices into its Tulsa headquarters. The Company currently prices and sells all of its systems to international customers in U.S. dollars. In addition, many Systems Division customers are multinational corporations that are publicly traded in the U.S. All payments are received in U.S. dollars which helps to protect the Company from the need to hedge against foreign currency risk. Operating Data - -------------- ($ in thousands)
1998 1997 1996 Total % of Revenue Total % of Revenue Total % of Revenue - ----------------------------------------------------------------------------------------------------------------- Total revenues $86,482 100% $68,099 100% $50,651 100% Engineering, research and development 5,523 6% 5,433 8% 3,221 6% Sales and marketing 5,590 6% 5,089 7% 2,949 6% General and administrative 6,208 7% 3,470 5% 2,580 5% Depreciation and amortization 11,245 13% 5,546 8% 2,109 4% Impairment of long-lived assets 698 1% 569 1% - -
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 decreased as a percentage of total revenues from 8% to 6% for the years ended December 31, 1997 and 1998, respectively. This decrease primarily resulted from engineers devoting less time to developing and building out the C/2/C network infrastructure than they had in the prior year and, to a lesser extent, to the changes associated with organizing the Company into its four operating divisions. As a result of the divisional structure, certain senior management personnel changed their functional responsibilities from engineering to general management and oversight of the divisions. 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 . Engineering, research and development expenses increased as a percentage of total revenues from 6% to 8% 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 C/2/C network, and to a lesser extent, additional personnel and related costs to support the expansion of teleservices and system sales. -15- 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. As a percentage of total revenues, sales and marketing expenses decreased from 7% in 1997 to 6% in 1998. This decrease resulted primarily from revenues absorbing fixed sales and marketing costs that did not increase as rapidly as revenue growth. In addition, the decrease resulted from the consolidation of the Systems Division satellite sales offices to the Tulsa headquarters in 1997 and, to a lesser extent, to the changes associated with organizing the Company into its four operating divisions. As a result of the divisional structure, certain senior management personnel changed their functional responsibilities from sales and marketing to general management and oversight of the divisions. Sales and marketing expenses increased as a percentage of total revenues from 6% to 7% in 1996 and 1997, respectively. The increase in sales and marketing expenses was principally due to additional expenditures to support the concentrated efforts of the Systems Division to expand internationally and the overall growth in system sales. Additional personnel, recruiting, commissions and other costs were also incurred in 1997 to support sales and marketing efforts in the Prepaid Wireless Services and Teleservices Divisions. The Company expects to increase expenditures for sales, marketing and product management in the future to assist carriers with more prepaid marketing and distribution efforts as well as expanding systems sales into new geographical markets. Such expenditures are expected to vary as a percentage of total revenues. General and administrative expenses - ----------------------------------- General and administrative expenses include salaries and benefits of employees and other expenses that provide administrative support to the Company. General and administrative expenses increased as a percentage of total revenues from 5% in 1997 to 7% in 1998. The increase resulted principally from the addition of staff to support the Company's growth and changes associated with organizing of the Company into its four operating divisions. As a result of the divisional structure, certain senior management personnel changed their functional responsibilities from marketing and engineering to general management and oversight of the divisions. Total general and administrative expenses were consistent as a percentage of total revenues for 1996 and 1997, respectively, but increased in absolute dollars from $2.6 million in 1996 to $3.5 million in 1997. The increase in in the dollar amount of general and administrative expenses in 1997 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. 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 amortized over eight years. Depreciation and amortization expense increased more than 100% in 1998 compared to 1997 and 163% from 1996 to 1997. The increase in 1998 was due primarily to the depreciation of additional technical equipment and software to support the rapid expansion and enhancement of the Company's prepaid wireless network. These same factors contributed to greater depreciation and amortization in 1997 compared to 1996. In addition, the increase in 1997 was attributable to the amortization of goodwill from the Company's acquisitions and depreciation of technical equipment and software purchased for the teleservices business. Depreciation and amortization expense are expected to increase in 1999 due to increased capital expenditures for telecommunications systems, primarily related to new features and functionality and the continued expansion of the C/2/C network. -16- Impairment of long-lived assets - ------------------------------- The Company recognized a pre-tax charge of $698,000 and $569,000 in the years ended December 31, 1998 and 1997, respectively, for a write-down of assets that are no longer being used to support the Company's operations. Interest income - --------------- Interest income increased from $589,000 in the year ended December 31, 1996 to $1.1 million in 1997 and $1.3 million in 1998. 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 benefit of $188,000 for the year ended December 31, 1997 yielded a 14% income tax benefit. The income tax expense of $600,000 for the year ended December 31, 1996 yielded a 50% income tax rate, as compared to the statutory rate of 40%. The lack of an income tax benefit in 1998, the lower benefit in 1997 and the higher rate in 1996 resulted primarily from the non-deductibility of goodwill from the Company's acquisitions. In addition, the Company did not provide any additional benefit for net operating losses generated in 1998. The Company's effective income tax rate may be greater than 40% in future years due to the continued impact of non-deductible goodwill. The Company has recorded a net deferred tax asset for net operating loss carryforwards and other temporary differences based on management's assessment that it is more likely than not that future results of operations will be sufficient to realize this asset. 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, 1998, 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 when read in conjunction with the audited Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. -17-
Three months ended - -------------------------------------------------------------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, (In thousands) 1997 1997 1997 1997 1998 1998 1998(1) 1998 - -------------------------------------------------------------------------------------------------------------------------------- Revenues: Prepaid wireless services $ 790 $ 1,513 $ 2,571 $ 2,665 $ 2,934 $ 4,043 $ 5,010 $ 6,637 Teleservices 3,789 4,375 4,369 4,476 4,589 6,226 7,514 7,672 Roaming services 7,012 8,048 9,241 8,160 7,796 7,059 7,097 6,283 System sales 4,028 2,417 1,852 2,793 5,064 3,932 1,547 3,079 - -------------------------------------------------------------------------------------------------------------------------------- Total revenues 15,619 16,353 18,033 18,094 20,383 21,260 21,168 23,671 Expenses: Cost of service revenues 9,419 10,882 11,954 11,925 12,041 12,899 13,684 13,295 Cost of system revenues 2,640 1,095 814 1,652 2,673 2,180 1,363 2,232 Engineering, research and 1,029 1,168 1,593 1,643 1,403 1,176 1,426 1,518 development Sales and marketing 1,063 1,230 1,358 1,438 1,333 1,308 1,387 1,562 General and administration 649 824 833 1,164 1,414 1,469 1,572 1,753 Depreciation and amortization 890 1,203 1,534 1,919 2,452 2,695 2,908 3,190 Impairment of long-lived assets -- -- -- 569 -- 698 -- -- - -------------------------------------------------------------------------------------------------------------------------------- Total expenses 15,690 16,402 18,086 20,310 21,316 22,425 22,340 23,550 - -------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) (71) (49) (53) (2,216) (933) (1,165) (1,172) 121 Interest income 262 135 254 434 386 326 331 306 - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 191 86 201 (1,782) (547) (839) (841) 427 Provision (benefit) for income taxes 98 43 100 (429) (208) -- 208 -- - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) 93 43 101 (1,353) (339) (839) (1,049) 427 ================================================================================================================================ Basic and diluted earnings per share $ 0.01 $ 0.00 $ 0.01 $ (0.08) $ (0.02) $ (0.05) $ (0.06) $ 0.03 ================================================================================================================================
(1) In January 1999, the Company restated its results of operations for the quarter ended September 30, 1998 for a system sale that should not have been included in the 1998 results. Total revenues and net loss, as previously reported, for the quarter ended September 30, 1998 were $22.8 million and $141,000, respectively. -18-
As a Percentage of Total Revenues ----------------------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, (In thousands) 1997 1997 1997 1997 1998 1998 1998 1998 - -------------------------------------------------------------------------------------------------------------------------------- Revenues: Prepaid wireless services 5% 9% 14% 15% 14% 19% 24% 28% Teleservices 24 27 24 25 23 29 36 32 Roaming services 45 49 52 45 38 33 33 27 System sales 26 15 10 15 25 19 7 13 - -------------------------------------------------------------------------------------------------------------------------------- Total revenues 100 100 100 100 100 100 100 100 Expenses: Cost of service revenues 60 67 66 66 59 61 64 56 Cost of system revenues 17 7 5 9 13 10 6 9 Engineering, research and 7 7 9 9 7 6 7 6 development Sales and marketing 7 7 7 8 7 6 7 7 General and administration 4 5 5 6 7 7 7 7 Depreciation and amortization 6 7 8 11 12 13 14 14 Impairment of long-lived assets -- -- -- 3 -- 3 -- -- - -------------------------------------------------------------------------------------------------------------------------------- Total expenses 101 100 100 112 105 106 105 99 Operating income (loss) (1) 0 0 (12) (5) (6) (5) 1 Interest income 2 1 1 2 2 2 1 1 - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 1 1 1 (10) (3) (4) (4) 2 Provision (benefit) for income taxes 0 0 0 (2) (1) -- 1 0 - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) 1% 1% 1% (8)% (2)% (4)% (5)% 2% - --------------------------------------------------------------------------------------------------------------------------------
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 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 of more of the Company's significant teleservices customers, including engagement of the Company to implement or assist in implementing special projects of limited duration. The timing of orders and the number of large prepaid systems shipped during a particular quarter may fluctuate based upon the needs of prepaid systems customers and can have a significant impact on the level of Systems Division revenues. 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 1998, the Company made significant investments in personnel and infrastructure to support the ongoing development, expansion and upgrading of the C/2/C network. These strategic investments have impacted earnings and the Company expects that these strategic investments will continue to impact earnings in the short- term. -19- Liquidity and Capital Resources - ------------------------------- Cash, cash equivalents and short-term investments decreased from $33.7 million in 1997 to $25.6 million in 1998. The decrease was due primarily to additional capital expenditures to support expanded features and growth of the Company's C/2/C network. Net cash provided by operations of $3.2 million in 1998 was primarily generated from $11.2 million in depreciation and amortization expense, which resulted from the significant investment in telecommunications systems and equipment in 1998. Depreciation and amortization was offset mostly by increased accounts receivable and inventory balances due to the increased sales volume in 1998. The Company's investing activities utilized $7.5 million of net cash in 1998. The Company expended $10.5 million in 1998, including almost $7 million for telecommunications systems equipment and software for expansion of the Company's C/2/C network. These expenditures were offset by $3.0 million in net sales of short-term investments. The Company anticipates that over the next 12 months it will continue to make significant capital investments for additional equipment and enhanced feature capabilities to strengthen prepaid wireless services. The Company's financing activities utilized $773,000 in 1998, mainly due to payments of capital lease obligations, offset by proceeds from exercise of stock options. In addition, the Company repurchased 55,000 shares for $301,000 in accordance with a plan approved by the Board of Directors. These shares are being held by the Company as treasury shares. The Company believes that its short-term investments and the funds anticipated to be generated from operations would be sufficient to finance the Company's operations for at least the next 18 months. Year 2000 - --------- The Company is currently implementing enterprise-wide project and test plans to ensure that all products, services and support systems can fully process date/time data before, during, and after midnight, December 31, 1999, recognize the year 2000 as a Leap Year and maintain existing interoperability and interfaces with other devices already in use without any modifications or changes in operations. The Company is assessing its readiness by: 1) Conducting comprehensive inventories of all hardware, software, telecommunications providers, and material third party relationships. This stage is nearly complete and the process will continue to be updated during 1999. 2) Seeking compliance certification from each vendor through direct communication. The Company is conducting unit, regression, interoperability, and call flow tests wherever possible. Dedicated resources, including senior level management and paid consultants, manage this comprehensive effort. 3) Implementing test plans that are supported by doctorate level technical consultants and dedicated QA equipment and personnel that are examining multiple static and rollover date scenarios. Testing is projected to be completed by June 30, 1999. The assessment process follows a method to focus on vendors/products that are most significant to the Company's operations with the intent to maximize the lead time should any issues arise. For any systems that may need replacement, the Company will take the necessary steps to obtain, test and install qualified systems to ensure timely Year 2000 compliance. In June 1998, the Company completed the re-write, redesign and implementation of its C/2/C prepaid system. The Company's development team devoted nearly one year to produce the necessary changes and included Year 2000 readiness as part of this process. Additionally, desktop hardware and software, call distribution systems and customer service handling software are 90% Year 2000 ready today. To ensure Year 2000 readiness, the Company intends to upgrade these systems through vendor provided Year 2000 patches or purchases of new systems in the normal course of business during 1999. Core business teams for all divisions expect to examine all internal and external support systems including facilities, finance and human resource components. The Company has completed a comprehensive on-site physical inventory and upgrade of all of its C/2/C nodes, of which Year 2000 readiness was a component. The remedial action required as a result of this inventory is minimal and expected to be implemented by September 30, 1999. In addition, BCGI has identified 40 UNIX servers that require upgrades to be ready for Year 2000. All necessary software has been obtained and the project is expected to be completed by June 30, 1999. -20- The Company licenses some of the software used to support the Company's services from only one source and these sources are small corporations. The Company is testing the software of such sources and expects to receive updates from these sources to achieve Year 2000 readiness. In the event that any of these sources are not ready by June 30, 1999, the Company will establish contingency plans to ensure there will be no adverse impact on operations. The Company has licensed the source code from one such vendor to aid the Company in Year 2000 readiness testing efforts for the ROAMERplus service. In March 1999 the Company's Systems Division completed testing of its prepaid platform in use in several international markets and found that it was Year 2000 ready with no failures. The Company is fully dependent on the services of multiple telecommunications providers. If these providers fail to deliver these services, the Company would be vulnerable to serious service failures and be exposed to liability to customers and third parties, including the potential for significant lost revenue. The Company is communicating with all providers in order to assess this risk. Additionally, the Company will evaluate contingency options in the event of a failure by such providers. The Company has not currently developed any contingency plans for the services of these providers. In the event that tests reveal failures that cannot be remedied within the Company's timetable for readiness, contingency plans will be established. The Company has spent significant amounts in research and development of its C/2/C prepaid service system to ensure it is Year 2000 ready. In addition, through December 31, 1998 the Company has incurred and expensed approximately $230,000 in payroll, benefit and consulting costs for dedicated resources related to Year 2000 issues. The Company currently estimates additional costs of approximately $660,000 will be incurred in 1999 to resolve Year 2000 issues. The Company anticipates that the amounts and resources utilized to achieve Year 2000 readiness will not delay or reduce the resources available to complete other projects. The costs to complete Year 2000 analysis and remediation are based on management's best estimates, which have been determined through numerous assumptions about future events including the availability of resources and other factors. However, there can be no assurances that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that could generate significant negative consequences include undetected errors or defects of third party hardware and software utilized in the Company's operations, noncompliance of other providers (phone service, electricity, other utilities, etc.) and other uncertainties. Although management does not expect Year 2000 issues to have a material impact on its business or results of operations, there can be no assurance that there will not be interruptions or other limitations of system functionality. Certain Factors That May Affect Future Results - ---------------------------------------------- This Annual Report contains forward-looking statements that involve risks and uncertainties, including without limitation, statements regarding improvement of Prepaid Division gross margin and operating results, Teleservices revenue and gross margin, trend of decreased suspensions of inter-carrier automatic roaming agreements, prepaid cannibalization of unregistered roaming and carrier marketing of one-rate registered roaming plans to reduce roaming service revenues, Roaming Division profitability declining due to decreasing revenue, increased expenditures for engineering, research and development, increased expenditures for sales, marketing and product management, greater costs of depreciation and amortization and an effective income tax rate greater than 40%. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. A number of important factors exist that could affect the Company's future operating results, including, without limitation, technological changes in the Company's industry, the ability of the Company to continue to successfully support its C/2/C network, the ability of the Company's carrier customers to successfully continue to market and sell C/2/C prepaid wireless services, the Company's ability to retain existing customers and attract new customers, increased competition and general economic factors. -21- 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. A number of the Company's Prepaid, Teleservices and Systems Division contracts have been extended beyond their expiration dates or will expire in 1999 and beyond. There can be no assurances that the Company will be successful in renewing any of these contracts. If these contracts are not renewed the Company's business, financial condition and results of operations could be materially adversely affected. The Company has experienced fluctuations in its quarterly operating results and anticipates that such fluctuations will continue and could intensify. The Company experienced an operating loss in 1997 and the first three quarters of 1998, primarily due to expenses associated with the development and expansion of its C2C network. The Company's quarterly operating results may vary significantly depending on a number of factors including, the timing of the introduction or acceptance of new services offered by the Company or its competitors, changes in the mix of services provided by the Company, variations in the level of system sales, changes in regulations affecting the wireless industry, changes in the Company's operating expenses, the ability to identify, hire and retain qualified personnel and general economic conditions. Due to all of the foregoing factors, it is possible that in some future quarter the Company's results of operations will be below prior results or the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected. The Company historically has provided its services almost exclusively to wireless carriers. Although the wireless telecommunications market has experienced significant growth in recent years, there can be no assurance that such growth will continue at similar rates, or at all, or that wireless carriers will continue to use the Company's services. The Company expects that demand for its roaming services will continue to decline as fewer inter-carrier roaming agreements are suspended, prepaid cannibalization of unregistered roaming use increases and carriers more frequently offer one-rate roaming plans. 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 support and enhancement of its prepaid wireless services and systems to maintain system reliability and expand the C/2/C network. Several of the Company's carrier customer contracts contain penalty clauses that provide for reductions in revenue for certain network outages. There can be no assurance that the Company will successfully support and enhance the C/2/C network effectively to avoid system outages and any associated loss in revenue, that the market for the Company's prepaid service will continue to develop, or that the Company's C/2/C network will successfully support current and future growth. Furthermore, the Company has expended 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 carrier 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. -22- The Company has expanded its operations rapidly, creating significant demands on the Company's administrative, operational, development and financial personnel and other resources. In addition, the growth of the Company's Teleservices Division is dependent on recruiting, training and retaining employees to perform customer services responsibilities. Teleservices has also recently outsourced a small portion of its call center operations to a third party vendor who is responsible for certain operational functions, including hiring, training and retaining employees. There can be no assurance that the vendor will continue to be able to meet the Company's existing and future needs effectively. Additional expansion by the Company may further strain the Company's management, financial and other resources. There can be no assurance that the Company's systems, procedures, controls and existing space will be adequate to support expansion of the Company's operations. If the Company's management is unable to manage growth effectively, the quality of the Company's services, its ability to retain key personnel and its business, financial condition and results of operations could be materially and adversely affected. The Company currently prices and sells all of its systems to international customers in U.S. dollars. In addition, many Systems Division customers are multinational corporations that are publicly traded in the U.S. All payments are received in U.S. dollars which helps to protect the Company from the need to hedge against foreign currency risk. While these provisions serve to protect the Company from accounts receivable losses, there can be no assurances that systems sales to foreign countries will not result in losses due to devaluation of foreign currencies or other international business conditions outside of the Company's control. The market for services to wireless carriers is highly competitive and subject to rapid change. A number of companies currently offer one or more of the services offered by the Company. In addition, many wireless carriers are providing or can provide, in-house, the services that the Company offers. In addition, the Company anticipates continued growth and competition in the wireless carrier services industry and consequently, the entrance of new competitors in the future. An increase in competition could result in price reductions and loss of market share and could have a material adverse effect on the Company's business, financial condition or results of operations. The Company's success and ability to compete is dependent in part upon its proprietary technology. If unauthorized copying or misuse of the Company's technology were to occur to any substantial degree, the Company's business, financial condition and results of operations could be materially adversely affected. In addition, some of the software used to support the Company's services is licensed by the Company from single vendors, which are small corporations. There can be no assurance that these suppliers will continue to license this software to the Company or, if any supplier terminates its agreement with the Company, that the Company will be able to develop or otherwise procure software from another supplier on a timely basis and at commercially acceptable prices. The Company's operations are dependent on its ability to maintain its computer, switching and other telecommunications equipment and systems in effective working order and to protect its systems against damage from fire, natural disaster, power loss, telecommunications failure or similar events. Any damage, failure or delay that causes interruptions in the Company's operations could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is actively addressing the concerns of its operations with respect to Year 2000 issues. Company management, with the assistance of consultants, is implementing an enterprise-wide project to identify systems, equipment, vendors and customers that may be affected by the Year 2000 issues and to develop a comprehensive plan to be in compliance with the Year 2000 issues prior December 31, 1999. The Company expects to make the necessary changes to be Year 2000 compliant, but there can be no assurances that the Company will adequately identify all Year 2000 issues and the associated costs and expenses in a timely manner. Also, there can be no assurance that such costs and expenses will not have a material adverse effect on the Company's business, financial condition and results of operations. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company currently prices and sells all of its systems to international customers in U.S. dollars. In addition, many Systems Division customers are multinational corporations that are publicly traded in the U.S. All payments -23- are received in U.S. dollars which helps to protect the Company from the need to hedge against foreign currency risk. While these provisions serve to protect the Company from accounts receivable losses, there can be no assurances that systems sales to foreign countries will not result in losses due to devaluation of foreign currencies or other international business conditions outside of the Company's control. The Company does not believe that there is any material market risk exposure with respect to derivative or other financial instruments which would require disclosure under this item. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements and supplementary data are included as part of this Annual Report on Form 10-K: Report of Independent Auditors............................................... 40 Consolidated Balance Sheets at December 31, 1998 and 1997.................... 25 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996................................................................ 26 Consolidated Statements of Redeemable Preferred Stock & Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996......................... 27 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................................................................ 28 Notes to Consolidated Financial Statements................................... 29 -24- Consolidated Balance Sheets (In thousands, except share and per share amounts)
December 31, --------------------- 1998 1997 ======================================================================================================== ASSETS Current assets: Cash and cash equivalents $ 18,523 $ 23,601 Short-term investments 7,086 10,103 Accounts receivable, net of allowance for billing adjustments and 18,432 12,445 doubtful accounts of $1,508 in 1998 and $1,304 in 1997 Inventory 3,525 1,550 Deferred income taxes 1,564 1,564 Prepaid expenses 823 630 - -------------------------------------------------------------------------------------------------------- Total current assets 49,953 49,893 Property and equipment: Telecommunications systems & software 47,801 36,346 Furniture and fixtures 2,264 1,984 Leasehold improvements 2,127 1,725 Systems in development 4,305 5,955 - -------------------------------------------------------------------------------------------------------- 56,497 46,010 Less allowance for depreciation and amortization 18,442 7,923 - -------------------------------------------------------------------------------------------------------- 38,055 38,087 Goodwill, net 3,460 4,067 Other assets 292 1,338 - -------------------------------------------------------------------------------------------------------- Total assets $ 91,760 $ 93,385 ======================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 884 $ 2,786 Accrued expenses 10,124 7,304 Income taxes payable 496 466 Current maturities of capital lease obligations 1,052 1,127 - -------------------------------------------------------------------------------------------------------- Total current liabilities 12,556 11,683 Capital lease obligations, net of current maturities 546 1,598 Commitments and contingencies Shareholders' equity: Preferred Stock, $.01 par value, 2,000,000 shares authorized, none issued and outstanding -- -- Common Stock, voting, par value $.01 per share, 35,000,000 shares 164 163 authorized, 16,436,028 shares in 1998 and 16,273,947 shares in 1997 issued Additional paid-in capital 91,683 91,029 Treasury Stock (101,420 shares in 1998 and 46,420 shares in 1997 at cost) (673) (372) Accumulated deficit (12,516) (10,716) - -------------------------------------------------------------------------------------------------------- Total shareholders' equity 78,658 80,104 - -------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 91,760 $ 93,385 ========================================================================================================
See accompanying notes. -25- Consolidated Statements of Operations (In thousands, except share and per share amounts)
Year Ended December 31, ----------------------------- 1998 1997 1996 ============================================================================================== REVENUES: Prepaid wireless services $18,624 $ 7,539 $ 312 Teleservices 26,001 17,009 13,413 Roaming services 28,235 32,461 32,234 System sales 13,622 11,090 4,692 - --------------------------------------------------------------------------------------------- 86,482 68,099 50,651 EXPENSES: Cost of services revenues 51,919 44,180 36,606 Cost of system revenues 8,448 6,201 2,576 Engineering, research and development 5,523 5,433 3,221 Sales and marketing 5,590 5,089 2,949 General and administrative 6,208 3,470 2,580 Depreciation and amortization 11,245 5,546 2,109 Impairment of long-lived assets 698 569 -- - --------------------------------------------------------------------------------------------- 89,631 70,488 50,041 - --------------------------------------------------------------------------------------------- Operating income (loss) (3,149) (2,389) 610 Interest income 1,349 1,085 589 - --------------------------------------------------------------------------------------------- Income (loss) before income taxes (1,800) (1,304) 1,199 Provision (benefit) for income taxes - (188) 600 - --------------------------------------------------------------------------------------------- Net income (loss) (1,800) (1,116) 599 Accretion of dividends on redeemable preferred stock -- -- (451) - --------------------------------------------------------------------------------------------- Net income (loss) available to common shareholders $(1,800) $(1,116) $ 148 ============================================================================================= Basic net income (loss) available to common shareholders: Net income (loss) $(0.11) $(0.08) $0.02 ============================================================================================= Shares used in computing basic net income (loss) per share 16,274 14,007 8,352 ============================================================================================= Diluted net income (loss) available to common shareholders: Net income (loss) $(0.11) $(0.08) $0.01 ============================================================================================= Shares used in computing diluted net income (loss) per 16,274 14,007 10,884 share =============================================================================================
See accompanying notes. -26- Consolidated Statements of Redeemable Preferred Stock and Shareholders' Equity (In thousands, except share amounts)
Shareholders' Equity --------------------------------------------------------------------------------------- Accretion of Redeemable Convertible Dividends Preferred Stock Treasury Stock Preferred Stock Common Stock Additional Redeemable ----------------------------------------------------------------------------- Paid In Preferred Shares Dollars Shares Dollars Shares Dollars Shares Dollars Capital Stock - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1996 11,871 $ 15,896 -- -- 850 $ 1 3,335,985 $ 33 $ 1,016 $(4,025) Conversion of Convertible Preferred Stock -- -- -- -- (850) (1) 5,004,608 50 (49) -- Accretion of dividends on Redeemable Preferred Stock -- 451 -- -- -- -- -- -- -- (451) Redemption of Redeemable Preferred Stock and Accreted Dividends (11,871) (16,347) -- -- -- -- -- -- -- 4,476 Issuance of Common Stock -- -- -- -- -- -- 4,183,928 42 51,745 -- Exercise of Common Stock Options -- -- -- -- -- -- 201,228 2 26 -- Treasury Stock Purchase -- -- 46,420 (372) -- -- -- -- -- -- Net income -- -- -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 -- -- 46,420 (372) -- -- 12,725,749 127 52,738 -- Issuance of Common Stock -- -- -- -- -- -- 3,000,000 30 35,769 -- Exercise of Common Stock Options -- -- -- -- -- -- 538,630 6 2,482 -- Issuance of Common Stock Under Employee Stock Purchase Plan -- -- -- -- -- -- 9,568 -- 40 -- Net loss -- -- -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 -- -- 46,420 (372) -- -- 16,273,947 163 91,029 -- Exercise of Common Stock Options -- -- -- -- -- -- 143,488 1 572 -- Issuance of Common Stock Under Employee Stock Purchase Plan -- -- -- -- -- -- 18,593 -- 82 -- Treasury Stock Purchase -- -- 55,000 (301) -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1998 -- $ -- 101,420 $(673) -- $-- 16,436,028 $164 $91,683 $ -- =================================================================================================================================== Shareholders' Equity -------------------------------------- Total Shareholders' Accumulated Equity Deficit (Deficit) -------------------------------------- Balance at January 1, 1996 $ (5,723) $ (8,698) Conversion of Convertible Preferred Stock -- -- Accretion of dividends on Redeemable Preferred Stock -- (451) Redemption of Redeemable Preferred Stock and Accreted Dividends (4,476) -- Issuance of Common Stock -- 51,787 Exercise of Common Stock Options -- 28 Treasury Stock Purchase -- (372) Net income 599 599 - -------------------------------------------------------------- Balance at December 31, 1996 (9,600) 42,893 Issuance of Common Stock -- 35,799 Exercise of Common Stock Options -- 2,488 Issuance of Common Stock Under Employee Stock Purchase Plan -- 40 Net loss (1,116) (1,116) - -------------------------------------------------------------- Balance at December 31, 1997 (10,716) 80,104 Exercise of Common Stock Options -- 573 Issuance of Common Stock Under Employee Stock Purchase Plan -- 82 Treasury Stock Purchase -- (301) Net loss (1,800) (1,800) - -------------------------------------------------------------- Balance at December 31, 1998 $ (12,516) $ 78,658 ==============================================================
See accompanying notes -27- Consolidated Statements of Cash Flows (In thousands)
Year Ended December 31, -------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ (1,800) $ (1,116) $ 599 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 11,245 5,546 2,109 Deferred income taxes -- (230) 466 Impairment of long-lived assets 698 569 -- Changes in operating assets and liabilities, excluding effects of business acquisitions: Accounts receivable (5,987) (1,385) (3,208) Inventory (1,975) (361) (1,128) Prepaid expenses and other assets 65 (151) (547) Accounts payable and accrued expenses 918 1,514 524 Income taxes payable 30 (24) (297) - -------------------------------------------------------------------------------------------- Net cash provided by (used in) operations 3,194 4,362 (1,482) INVESTING ACTIVITIES Acquisition of businesses, net of cash acquired -- (1,398) (846) Purchase of short-term investments (14,095) (12,976) (26,937) Sale of short-term investments 17,112 23,371 6,439 Purchase of property and equipment (10,516) (28,552) (8,093) - -------------------------------------------------------------------------------------------- Net cash used in investing activities (7,499) (19,555) (29,437) FINANCING ACTIVITIES Proceeds from exercise of stock options 573 2,488 28 Proceeds from issuance of stock 82 35,839 49,787 Repurchase of redeemable preferred stock -- -- (16,347) Purchase of treasury stock (301) -- (372) Repayment of capital lease obligations (1,127) (456) (1,507) - -------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (773) 37,871 31,589 ============================================================================================ Increase (decrease) in cash and cash equivalents (5,078) 22,678 670 ============================================================================================ Cash and cash equivalents at beginning of year 23,601 923 253 ============================================================================================ Cash and cash equivalents at end of year $ 18,523 $ 23,601 $ 923 ============================================================================================
See accompanying notes. -28- Notes to Consolidated Financial Statements 1. BASIS OF PRESENTATION The Company Boston Communications Group, Inc. (the Company) develops, markets and provides specialized prepaid wireless services, teleservices, and roaming 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 customer care support, processing prepaid wireless calls and processing wireless calls for unregistered wireless subscribers who have roamed outside of their service area. Revenue is recognized when the service is provided and is recorded net of estimated 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. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Investments The Company accounts for its marketable securities under the Statement of Financial Accounting Standards 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. Investments with maturities between three and twelve months are considered short-term investments. The Company's short-term investments are invested in corporate notes. 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 prepaid wireless services allows carriers, throughout the United States and Canada, to access the Company's prepaid C/2/C platform, enabling the carriers to offer prepaid wireless calling to their subscribers. Accounts are not activated until payment is received by the carrier. Teleservices are provided to wireless carriers located throughout the United States and Canada. 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. The Company sells its voice systems in North America and its prepaid systems in North and South America. -29- The Company has roaming, teleservice and prepaid wireless service agreements with, and sells its systems to numerous carriers. During the years ended December 31, 1998, 1997 and 1996, the Company's top 10 customers accounted for 79%, 75% and 82% of the Company's total revenues, respectively. The following table summarizes sales in excess of 10% of total revenues only, as a percentage of total revenues, to major customers:
December 31, ------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Ameritech Cellular (T,R) 15% 12% 15% BellSouth Cellular Corp. (P,T,R,S) 13 -- 11 AirTouch (P,T,R) 13 -- -- Bell Atlantic Mobile (P,T,R) 11 12 12 Southwestern Bell Mobile Systems (P,T,R) -- 11 -- - -------------------------------------------------------------------------------
Revenue from these customers was generated from the following divisions: P - Prepaid wireless services T - Teleservices R - Roaming services S - Systems 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 (in thousands):
December 31, --------------------------- 1998 1997 ========================================================================== Raw materials $2,690 $1,114 Work in process 835 127 Finished goods -- 309 - -------------------------------------------------------------------------- $3,525 $1,550 ==========================================================================
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. In accordance with Financial Accounting Standards Board Statement 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 1998 and 1997, the Company recorded impairment losses of $698,000 and $569,000, respectively, for the writedown of equipment which could no longer be used in its business to its fair market value. These assets were sold during 1998 at their impaired carrying value of $265,000. 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 approximately $1.4 million and $786,000 as of December 31, 1998 and 1997, respectively. -30- Engineering, Research and Development Costs associated with engineering, research and development are expensed as incurred. Reclassifications Certain items on the financial statements have been reclassified from the prior year to be comparable with the current year presentation. 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 (SFAS) 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. Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes standards for the recognition, measurement, and reporting of derivatives and hedging activities and is effective for the Company's year ended December 31, 2000. The Company anticipates that the adoption of this new accounting standard will not have a material impact on the Company's consolidated financial statements. 3. ACQUISITIONS In February 1996, the Company acquired the net assets of Voice Systems Technology Inc. (VST), now the Systems Division, 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 allocation of the purchase price was based on the fair market value of assets and liabilities acquired and the excess over those amounts is accounted for as goodwill. On January 31, 1996, the Company acquired 17.5% of the stock in Wireless America Corp. (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. 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. The acquisitions have 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 following unaudited pro forma information has been prepared assuming that these acquisitions had taken place at the beginning of 1996. 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 acquired companies and income taxes. The unaudited pro forma financial information is not necessarily indicative of the results of operations as if the transactions had been effected on December 31, 1996 (unaudited and in thousands, except per share data): Net revenues $51,873 ============================================================ Net income available to common stockholders $ 1 Net income per basic and diluted common share $ 0.00 ============================================================
-31- 4. ACCRUED EXPENSES Accrued expenses consist of the following:
December 31, -------------------------- (In thousands) 1998 1997 - -------------------------------------------------------------------------- Billing adjustments $ 1,177 $1,216 Cellular airtime 1,178 1,544 Payroll 2,052 1,183 Telecommunication costs 1,596 779 Deferred revenue 700 426 Other 3,421 2,156 - -------------------------------------------------------------------------- $10,124 $7,304 ==========================================================================
5. SEGMENT REPORTING The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" in 1998. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision- maker is the Chief Executive Officer. The operating segments are managed separately because each operating segment represents a strategic business unit that offers different products and serves different niches in the wireless industry. The Company's reportable operating segments consist of the Prepaid Wireless Services, Teleservices, Roaming Services and Systems Divisions. The Company's Prepaid Wireless Services Division offers prepaid wireless service that allows carriers to access the Company's prepaid C/2/C platform, enabling the carriers to offer prepaid wireless calling to their subscribers. The Company's Teleservices Division provides customer support teleservices to wireless carrier's customers, which allows carriers to outsource all or a portion of their customer service activities. The Company's Roaming Services Division provides carriers with ROAMERplus call processing services which provides carriers the ability to generate revenues from subscribers who are not covered under traditional roaming agreements by arranging payment for roaming calls. The Company's Systems Division manufactures and markets voice processing platforms to wireless and wireline carriers throughout North and South America with enhanced features including prepaid wireless, voice messaging and fax mail services. The Systems Division also sells prepaid systems to international carriers and manufactures the voice nodes used to support the Company's C/2/C network. The other segment assets include cash equivalents and short-term investments and other assets not allocated to the reportable operating segments. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except that the financial results for the Company's operating segments have been prepared using a management approach. This is consistent with the basis and manner in which the Company's management internally analyzes financial information for the purposes of assisting in making internal operating decisions. The Company evaluates performance based on stand-alone operating segment income (loss) before interest and taxes and allocates corporate level operating expenses to the operating segments. All revenues are generated from external customers and there are no intersegment revenues. Revenues are attributed to geographic areas based on the location of the customers to whom the services were provided or the location where the systems were shipped. Capital expenditures include equipment purchased directly from vendors or acquired through a capital lease. The summary of operating segment information is as follows at December 31, (in thousands): -32-
Prepaid Wireless Roaming Services Teleservices Services Systems Other Total ======================================================================================================================= 1998 Net revenues $ 18,624 $ 26,001 $ 28,235 $ 13,622 $ -- $ 86,482 Depreciation and amortization 6,782 2,473 808 1,182 -- 11,245 Operating income (loss) (7,236) 393 2,962 732 -- (3,149) Assets, net 31,501 10,493 5,518 12,855 31,393 91,760 Capital expenditures 6,603 1,311 199 1,184 1,219 10,516 ======================================================================================================================= 1997 - ----------------------------------------------------------------------------------------------------------------------- Net revenues 7,539 17,009 32,461 11,090 -- 68,099 Depreciation and amortization 2,359 1,745 600 842 -- 5,546 Operating income (loss) (7,976) 562 4,547 478 -- (2,389) Assets, net 29,314 8,126 7,110 9,701 39,134 93,385 Capital expenditures 24,742 4,154 798 1,006 1,034 31,734 ======================================================================================================================= 1996 - ----------------------------------------------------------------------------------------------------------------------- Net revenues 312 13,413 32,234 4,692 -- 50,651 Depreciation and amortization 789 701 263 356 -- 2,109 Operating income (loss) (5,792) 674 4,757 971 -- 610 Assets, net 5,630 5,435 6,966 7,934 25,994 51,959 Capital expenditures 5,165 1,305 611 945 1,567 9,593 =======================================================================================================================
Information concerning principal geographic areas is as follows (in thousands):
Year ended December 31, --------------------------------------------------- Net Revenues 1998 1997 1996 ============================================================================== North America - ------------------------------------------------------------------------------ United States $78,044 $59,760 $47,786 Other 3,565 5,296 2,865 - ------------------------------------------------------------------------------ Total North America 81,609 65,056 50,651 ============================================================================== South America - ------------------------------------------------------------------------------ Total South America 4,873 3,043 - ============================================================================== Total $86,482 $68,099 $50,651 ==============================================================================
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, ---------------------------------- 1998 1997 - ------------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 1,724 $ 884 Allowance for doubtful accounts and billing 521 adjustments 747 Minimum tax credit carryforwards 111 128 Accrued expenses and other 1,222 665 Asset impairment 478 200 - ------------------------------------------------------------------------------------------- Total deferred tax assets 4,056 2,624 Deferred tax liabilities: Tax over book depreciation and amortization expense (2,492) (1,060) - ------------------------------------------------------------------------------------------- Total deferred tax liabilities (2,492) (1,060) - ------------------------------------------------------------------------------------------- Net deferred tax assets $ 1,564 $ 1,564 - -------------------------------------------------------------------------------------------
-33- The provision (benefit) for income taxes consists of the following (in thousands):
Year Ended December 31, ---------------------------------------- 1998 1997 1996 ========================================================================================= Current: Federal $-- $ -- $ 51 State -- 42 83 - ----------------------------------------------------------------------------------------- -- 42 134 Deferred: Federal -- (209) 423 State -- (21) 43 - ----------------------------------------------------------------------------------------- -- (230) 466 - ----------------------------------------------------------------------------------------- Income tax provision (benefit) $-- $(188) $600 =========================================================================================
The Company utilized $2.0 million in 1996 of federal net operating loss carryforwards to offset taxable income. The valuation allowance decreased $162,000 during 1996 due primarily to the utilization of net operating loss carryforwards. At December 31, 1998, the Company has approximately $4.7 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, ---------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Federal provision (benefit) at statutory rate (34%) (34%) 34% State income provision (benefit), net of federal (6) (6) 6 Permanent differences 16 26 12 Net operating losses not recognized 24 - - Benefit of net operating loss - - (2) - ------------------------------------------------------------------------------------------------- 0 % (14)% 50% - -------------------------------------------------------------------------------------------------
Income taxes paid were $352,000 in 1996, $83,000 in 1997 and $61,000 in 1998. 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 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 to the Company 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. -34- In 1997, the Company sold in a public offering 3,000,000 shares of its common stock yielding net proceeds to the Company of $35.8 million. The proceeds are being used for capital and other expenditures in connection with the expansion of the C/2/C network. 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 Plans The Company's 1996 and 1998 Stock Option Plans (the Plans) were adopted by the Board of Directors and approved by the stockholders of the Company in 1996 and 1998, respectively. The Plans provide for the grant of stock options to employees, officers and directors, consultants and advisors to, the Company and its subsidiaries. Under the Plans, 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 and 600,000 shares of Common Stock may be issued upon the exercise of options granted under the 1996 and 1998 Stock Option Plans, respectively. The maximum number of shares with respect to which options may be granted to any employee under the 1996 and 1998 Stock Option Plans shall not exceed 200,000 and 60,000 shares of Common Stock, respectively, during any calendar year. All options granted have 10 year terms and generally vest and become exercisable over five years. In 1996, the Company granted non-qualified options to purchase 653,278 and 93,551 shares of common stock at exercise prices of $5.75 and $10.00, respectively. In 1998, the Company granted 400,000 non-qualified options to purchase shares of common stock at an exercise price of $7.06. The exercise prices of all non-qualified options were equal to the fair market value as determined by the Company on the date of grant. 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 1997 and 1998: risk-free interest rates of 6.4% and 5.4% 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 4 to 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): -35-
December 31, ------------------------------------------------------ 1998 1997 1996 =========================================================================================== Pro forma net loss $(4,034) $(3,474) $(1,086) =========================================================================================== Pro forma basic net loss per share $ (0.25) $ (0.25) $ (0.13) =========================================================================================== Pro forma diluted net loss per share $ (0.25) $ (0.25) $ (0.10) ===========================================================================================
Stock option information is as follows:
1998 1997 1996 ================================================================================================================= Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ================================================================================================================= Outstanding -- beginning of year 1,417,654 $6.74 1,666,359 $ 8.86 355,758 $ 0.14 Granted 966,500 7.33 1,124,342 5.87 1,548,329 9.76 Exercised (143,888) 4.00 (538,630) 4.62 (201,228) 0.14 Canceled (304,290) 9.00 (834,417) 11.18 (36,500) 13.61 Outstanding--end of year 1,935,976 $6.90 1,417,654 $ 6.74 1,666,359 $ 8.86 =================================================================================================================
The following table summarizes the stock options outstanding and exercisable as of December 31, 1998:
Options Options Exercise Exercisable Outstanding Price ========================================================= -- 5,555 $ 0.14 190,476 621,410 4.75 4.88 316,928 752,278 5.00 7.06 121,033 556,733 $7.25- 14.00 - --------------------------------------------------------- 628,437 1,935,976 =========================================================
There are 439,649 options available for grant at December 31, 1998. There were 417,915 options exercisable at December 31, 1997 at a weighted-average exercise price of $6.44. The weighted-average fair value of options granted during 1997 and 1998 was $3.44 and $3.24, respectively. The weighted-average contractual life of options outstanding at December 31, 1997 and 1998 was 9.2 and 8.6 years, respectively. 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. All full-time 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. -36- 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) 1998 1997 1996 ================================================================================================== Numerator for basic and fully diluted earnings per share: Net income (loss) available to common shareholder $ (1,800) $ (1,116) $ 148 ================================================================================================== Denominator: Denominator for basic earnings per share weighted average shares 16,274 14,007 8,352 - -------------------------------------------------------------------------------------------------- Effect of dilutive securities: Employee stock options -- -- 238 Conversion of preferred stock -- -- 2,294 - -------------------------------------------------------------------------------------------------- Dilutive potential common shares -- -- 2,532 - -------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share adjusted weighted average shares and assumed Conversion 16,274 14,007 10,884 ================================================================================================== Basic net income (loss) available to common shareholder per common share $ (0.11) $ (0.08) $ 0.02 ================================================================================================== Diluted net income (loss) available to common shareholder per common share $ (0.11) (0.08) 0.01 ==================================================================================================
Options to purchase 1,935,976 shares of common stock were outstanding as of December 31, 1998 and were not included in the computation of diluted earnings per share because of the Company's net losses for those years. 9. COMMITMENTS Leases 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 and $886,000 at December 31, 1997 and 1998, respectively. The Company also has non- cancelable operating lease commitments for office space, call center facilities, equipment and personnel. Rent and call center facility and equipment expense approximated $881,000 in 1996, $1.2 million in 1997, and $2.2 million in 1998. -37- Future minimum payments under non-cancelable capital leases and operating leases are as follows (in thousands):
Capital Operating Year ending December 31, Leases leases ======================================================================== 1999 $1,145 $ 5,165 2000 562 3,446 2001 -- 2,814 2002 -- 2,641 2003 -- 1,543 - ------------------------------------------------------------------------ Total minimum lease payments 1,707 $15,609 ============ Amounts representing interest 109 - ------------------------------------------------------- Present value of net minimum payments 1,598 Current portion 1,052 - ------------------------------------------------------- $ 546 =======================================================
The operating leases include $2.4 million per year payable through May 2003 for a call center facility and equipment. The Company has the option to buyout the lease for the call center facility and equipment beginning in May 1999 for $5.9 million. Significant Contracts In 1998, the Company entered into an agreement with a vendor to jointly develop two products for the Company. The Company will pay this vendor $1.7 million for the development effort and the exclusive license of the first product. In addition, the Company is required to pay $9 million for the second product during the next three years. 10. RELATED-PARTY TRANSACTIONS Pursuant to a management agreement, the Company paid annual fees of $252,000 in 1996 to a management company affiliated with certain shareholders of the Company. This amount represents 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 $40,000 in 1996 in connection with this lease. Another company, affiliated with certain shareholders of the Company, received $462,000 in 1996 in connection with the repurchase of redeemable preferred stock of the affiliated company's investment and its accreted dividends. -38- 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, 1998 and 1997 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, 1998. 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, 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. /s/ Ernst & Young LLP Boston, Massachusetts January 29, 1999 -39- Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 20, 1999, set 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 20, 1999, 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 20, 1999, sets 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 20, 1999, 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. -40- 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 Item 8: Consolidated Balance Sheets at December 31, 1998 and 1997.................................................................. 25 Consolidated Statements of Operations - Years ended December 31, 1998, 1997 and 1996................................................... 26 Consolidated Statements of Redeemable Preferred Stock & Shareholders' Equity - Years ended December 31, 1998, 1997 and 1996................. 27 Consolidated Statements of Cash Flows -- Years ended December 31, 1998, 1997 and 1996................................................... 28 Notes to Consolidated Financial Statements............................ 29 (2) Financial Statement Schedules Index to Consolidated Financial Statement Schedules For the years ended December 31, 1998, 1997 and 1996: 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 -41- 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 29th day of March 1999. 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 29, 1999 - -------------------------- Executive Officer E. Y. Snowden and Director /s/ Fritz E. von Mering Vice President, March 29, 1999 - -------------------------- Executive Officer Fritz E. von Mering and Director /s/ Paul J. Tobin Chairman of the March 29, 1999 - ---------------------- Board of Directors Paul J. Tobin -42- Signature Title Date --------- ----- ---- /s/ Brian E. Boyle Vice Chairman of March 29, 1999 - -------------------------- Board of Directors Brian E. Boyle /s/ Jerrold D. Adams Director March 29, 1999 - -------------------------- Jerrold D. Adams /s/ Craig L. Burr Director March 29, 1999 - -------------------------- Craig L. Burr /s/ Paul R. Gudonis Director March 29, 1999 - -------------------------- Paul R. Gudonis /s/ Gerald Segal Director March 29, 1999 - -------------------------- Gerald Segal /s/ Mark J. Kington Director March 29, 1999 - -------------------------- Mark J. Kington -43- EXHIBIT INDEX Exhibit No. Description - -------- ----------- 3.1 Restated Articles of Organization of the Company, as amended/1/ 3.3 Amended and Restated By-Laws of the Company./1/ 10.2 +1996 Stock Option Plan./1/ 10.3 +1996 Employee Stock Purchase Plan./1/ 10.3.1 +Amendment Number 1, dated August 30, 1996, to 1996 Employee Stock Purchase Plan/2/ 10.5 Billing and Related Services Agreement dated April 19, 1995 between the Company and OAN Services, Inc. ("OAN")./1/ 10.10 License Agreement dated April 23, 1996 between the Company and MicroDimensions, Inc. /1/ 10.11 Gateway Service Agreement dated June 5, 1995 between the Company and SNET Diversified Group, Inc./1/ 10.12** Frontier Service Agreement dated June 6, 1996 between the Company and Frontier Communications of the West, Inc./2/ 10.15 Commercial Lease dated January 24, 1996 between the Company and Cummings Properties Management, Inc./1/ 10.15.1 Commercial Lease dated February 26, 1996 between the Company and Cummings Property Management, Inc. (Amendment No. 1)./2/ 10.15.2 Amendment No. 2, dated August 8, 1996, to the commercial lease between the Company and Cummings Property Management, Inc./2/ 10.15.3 Amendment No. 3, dated February 5, 1997, to the commercial lease between the Company and Cummings Property Management, Inc./2/ 10.16 Lease dated November 30, 1994, as amended, between the Company and Teachers Realty Corporation./1/ 10.17 Commercial/Industrial Lease dated September 27, 1995 between the Voice Systems Technology Inc. ("VST") and Schleuter Properties./1/ 10.26 End-User Purchase and License Agreement between the Company and Teloquent Communications Corporation./1/ 10.27 Software License and Services Agreement dated October 30, 1996 between the Company and Oracle Corporation./2/ 10.28 Software License and Services Agreement dated September 24, 1996 between the Company and Oracle Corporation./2/ 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./3/ 10.31 Amendment, dated December 16, 1996, to the Registration Rights Agreement, dated February 29, 1996./3/ 10.32 Amendment, dated December 16, 1996, to the Registration Rights Agreement, dated February 29, 1996./3/ 10.33 Commercial Lease dated April 1, 1997 between the Company and Cummings Properties Management, Inc./4/ 10.34 Master Equipment Lease Agreement between Boston Communications Group, Inc. and Fleet Capital Corp. dated August 20, 1997./5/ 10.36 Long Distance Service Agreement between Boston Communications Group, Inc. and AT&T Corp. dated July 10, 1997./5/ 10.38 Billing and Related Services Agreement between the Company and AT&T Corp. dated October 14, 1997./6/ 10.39 Agreement dated March 21, 1997 between the Company and Aspect Telecommunications Corporation./7/ 10.40** Amendment No. 1, dated January 7, 1998 to the service agreement between the Company and Frontier Communications of the West, Inc./7/ 10.41 Agreement dated February 9, 1998 between the Company and the University of Massachusetts at Lowell./7/ 10.42 Employment Letter Agreement dated February 10, 1998 between the Company and E.Y. Snowden./7/ 10.43** Agreement dated May 15, 1998 between the Company and ICT Group, Inc./8/ 10.44** Agreement dated May 4, 1998 between the Company and Smartalk Teleservices, Inc./8/ 10.45 +1998 Stock Incentive Plan 10.46* Agreement dated October 6, 1998 between the Company and ICT Group, Inc. 10.47* Agreement between the Company and AG Communication Systems dated Nov. 16, 1998. 10.48* Agreement dated December 17, 1998 between MD Telecom, Inc. and the Company. 10.49 Amendment No. 4, dated December 4, 1998, to the commercial lease between the Company and Cummings Property Management, Inc. 21 Subsidiaries of the Registrant. 23 Consent of Ernst & Young LLP, Independent Auditors. 27 Financial Data Schedules. - -------------------- /1/ Incorporated by reference to the Company's Registration Statement on Form S-1 filed June 17, 1996 (File No. 333-4128) /2/ Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1996. /3/ Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 1997. /4/ Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1997. /5/ Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1997. /6/ Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1997. /7/ Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 1998. /8/ Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1998. /+/ Management contract or compensatory plan or arrangement filed as an exhibit pursuant to Item 14(c) of this Report. /*/ Confidential treatment requested as to certain portions, which portions have been deleted and filed separately with the Securities and Exchange Commission. /**/Confidential treatment granted as to certain portions, which portions have been deleted and filed separately with the Securities and Exchange Commission. EX-10.45 2 1998 STOCK INCENTIVE PLAN EXHIBIT 10.45 BOSTON COMMUNICATIONS GROUP, INC. 1998 STOCK INCENTIVE PLAN ------------------------- 1. Purpose ------- The purpose of this 1998 Stock Incentive Plan (the "Plan") of Boston Communications Group, Inc., a Massachusetts corporation (the "Company"), is to advance the interests of the Company's stockholders by enhancing the Company's ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company's stockholders. Except where the context otherwise requires, the term "Company" shall include any present or future subsidiary corporations of Boston Communications Group, Inc. as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code"). 2. Eligibility ----------- All of the Company's employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock, or other stock- based awards (each, an "Award") under the Plan. Any person who has been granted an Award under the Plan shall be deemed a "Participant". 3. Administration, Delegation -------------------------- (a) Administration by Board of Directors. The Plan will be administered by ------------------------------------ the Board of Directors of the Company (the "Board"). The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board's sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith. (b) Delegation to Executive Officers. To the extent permitted by -------------------------------- applicable law, the Board may delegate to one or more executive officers of the Company the power to make Awards and exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the maximum number of shares subject to Awards and the maximum number of shares for any one Participant to be made by such executive officers. (c) Appointment of Committees. To the extent permitted by applicable law, ------------------------- the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "Committee"), consisting of not less than two members, each member of which shall be an "outside director" within the meaning of Section 162(m) of the Code and a "non-employee director" as defined in Rule 16b-3 promulgated under the Exchange Act." All references in the Plan to the "Board" shall mean the Board or a Committee of the Board or the executive officer referred to in Section 3(b) to the extent that the Board's powers or authority under the Plan have been delegated to such Committee or executive officer. 4. Stock Available for Awards -------------------------- (a) Number of Shares. Subject to adjustment under Section 4(c), ---------------- Awards may be made under the Plan for up to 600,000 shares of the common stock, $.01 par value per share, of the Company (the "Common Stock"). If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall, again be available for the grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options (as hereinafter defined), to any limitation required under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. (b) Per-Participant Limit. Subject to adjustment under Section 4(c), --------------------- the maximum number of shares with respect to which an Award may be granted to any Participant under the Plan shall be 60,000 per calendar year. The per-participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m) of the Code. (c) Adjustment to Common Stock. In the event of any stock split, stock -------------------------- dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the number and class of security and exercise price per share subject to each outstanding Option, (iii) the repurchase price per security subject to each outstanding Restricted Stock Award, and (iv) the terms of each other outstanding stock-based Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is necessary and appropriate. If this Section 4(c) applies and Section 8(e)(1) also applies to any event, Section 8(e)(1) shall be applicable to such event, and this Section 4(c) shall not be applicable. 5. Stock Options ------------- (a) General. The Board may grant options to purchase Common Stock (each, ------- an "Option") and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock Option". (b) Incentive Stock Options. An Option that the Board intends to be an ----------------------- "incentive stock option" as defined in Section 422 of the Code (an "Incentive Stock Option") shall only be granted to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) which is intended to be an Incentive Stock Option is not an Incentive Stock Option. (c) Exercise Price. The Board shall establish the exercise price at the -------------- time each Option is granted and specify it in the applicable option agreement; provided, however, that no Option shall be granted at an exercise price below fair market value at the time of grant. (d) Duration of Options. Each Option shall be exercisable at such times ------------------- and subject to such terms and conditions as the Board may specify in the applicable option agreement. No Option will be granted for a term in excess of ten (10) years. (e) Exercise of Option. Options may be exercised only by delivery to the ------------------ Company of a written notice of exercise signed by the proper person together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised. (f) Payment Upon Exercise. Common Stock purchased upon the exercise of --------------------- an Option granted under the Plan shall be paid for as follows: (1) in cash or by check, payable to the order of the Company; (2) except as the Board may otherwise provide in an Option Agreement, delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to 2 deliver promptly to the Company cash or a check sufficient to pay the exercise price, or delivery of shares of Common Stock owned by the Participant valued at their fair market value as determined by the Board in good faith ("Fair Market Value"), which Common Stock was owned by the Participant at least six months prior to such delivery; (3) to the extent permitted by the Board and explicitly provided in an Option Agreement (i) by delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (ii) by payment of such other lawful consideration as the Board may determine; or (4) any combination of the above permitted forms of payment. 6. Restricted Stock ---------------- (a) Grants. The Board may grant Awards entitling recipients to acquire ------ shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each a "Restricted Stock Award"). (b) Terms and Conditions. The Board shall determine the terms and -------------------- conditions of any such Restricted Stock Award, including the conditions for repurchase (or forfeiture) and the issue price, if any. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant's death (the "Designated Beneficiary"). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 7. Other Stock-Based Awards ------------------------ The Board shall have the right to grant other Awards based upon the Common Stock having such terms and conditions as the Board may determine, including the grant of shares based upon certain conditions, the grant of securities convertible into Common Stock and the grant of stock appreciation rights. 8. General Provisions Applicable to Awards --------------------------------------- (a) Transferability of Awards. Except as the Board may otherwise determine ------------------------- or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. (b) Documentation. Each Award under the Plan shall be evidenced by a ------------- written instrument in such form as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan. (c) Board Discretion. Except as otherwise provided by the Plan, each type ---------------- of Award may be made alone or in addition or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Board need not treat Participants uniformly. (d) Termination of Status. The Board shall determine the effect on an --------------------- Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant's legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award. 3 (e) Acquisition Events ------------------ (1) Consequences of Acquisition Events. Upon the occurrence of an ---------------------------------- Acquisition Event (as defined below), or the execution by the Company of any agreement with respect to an Acquisition Event, the Board shall take any one or more of the following actions with respect to then outstanding Awards: (i) provide that outstanding Options shall be assumed, or equivalent Options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), provided that any such Options substituted for Incentive Stock Options shall satisfy, in the determination of the Board, the requirements of Section 424(a) of the Code; (ii) upon written notice to the Participants, provide that all then unexercised Options will become exercisable in full as of a specified time (the "Acceleration Time") prior to the Acquisition Event and will terminate immediately prior to the consummation of such Acquisition Event, except to the extent exercised by the Participants between the Acceleration Time and the consummation of such Acquisition Event; (iii) in the event of an Acquisition Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Acquisition Event (the "Acquisition Price"), provide that all outstanding Options shall terminate upon consummation of such Acquisition Event and each Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (whether or not then exercisable), exceeds (B) the aggregate exercise price of such Options; (iv) provide that all Restricted Stock Awards then outstanding shall become free of all restrictions prior to the consummation of the Acquisition Event; and (v) provide that any other stock-based Awards outstanding (A) shall become exercisable, realizable or vested in full, or shall be free of all conditions or restrictions, as applicable to each such Award prior to the consummation of the Acquisition Event, or (B), if applicable, shall be assumed, or equivalent Awards shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof). An "Acquisition Event" shall mean: (a) any merger or consolidation which results in the voting securities of the Company outstanding immediately prior thereto representing immediately thereafter (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) less than 50% of the combined voting power of the voting securities of the Company or such surviving or acquiring entity outstanding immediately after such merger or consolidation; (b) any sale of all or substantially all of the assets of the Company; or (c) the complete liquidation of the Company. (2) Assumption of Options Upon Certain Events. The Board may grant Awards ----------------------------------------- under the Plan in substitution for stock and stock-based awards held by employees of another corporation who become employees of the Company as a result of a merger or consolidation of the employing corporation with the Company or the acquisition by the Company of property or stock of the employing corporation. The substitute Awards shall be granted on such terms and conditions as the Board considers appropriate in the circumstances. (f) Withholding. Each Participant shall pay to the Company, or make ----------- provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. The Board may allow Participants to satisfy such tax obligations in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant. (g) Amendment of Award. The Board may amend, modify or terminate any ------------------ outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant. 4 (h) Conditions on Delivery of Stock. The Company will not be obligated to ------------------------------- deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations. (i) Acceleration. The Board may at any time provide that any Options shall ------------ become immediately exercisable in full or in part, that any Restricted StockAwards shall be free of all restrictions or that any other stock-based Awards may become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be. 9. Miscellaneous ------------- (a) No Right To Employment or Other Status. No person shall have any claim -------------------------------------- or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. (b) No Rights As Stockholder. Subject to the provisions of the applicable ------------------------ Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares. (c) Effective Date and Term of Plan. The Plan shall become effective on ------------------------------- the date on which it is adopted by the Board but no Award granted to a Participant designated as subject to Section 162(m) by the Board shall become exercisable, vested or realizable, as applicable to such Award, unless and until the Plan has been approved by the Company's stockholders. No Awards shall be granted under the Plan after the completion of ten years from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company's stockholders, but Awards previously granted may extend beyond that date. (d) Amendment of Plan. The Board may amend, suspend or terminate the Plan ----------------- or any portion thereof at any time, provided that no Award granted to a Participant designated as subject to Section 162(m) by the Board after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award (to the extent that such amendment to the Plan was required to grant such Award to a particular Participant), unless and until such amendment shall have been approved by the Company's stockholders. (e) Stockholder Approval. For purposes of this Plan, stockholder approval -------------------- shall mean approval by a vote of the stockholders in accordance with the requirements of Section 162(m) of the Code. (f) Governing Law. The provisions of the Plan and all Awards made ------------- hereunder shall be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts, without regard to any applicable conflicts of law. 5 EX-10.46 3 AGREEMENT DATED 10-6-98 BETWEEN COMPANY & ICT GROU EXHIBIT 10.46 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. MANAGEMENT SERVICES AGREEMENT - -------------------------------------------------------------------------------- INTRODUCTION AGREEMENT is entered into on October 6, 1998 between ICT Group Inc. ("ICT"), 800 Town Center Drive, Langhorne, PA, 19047-1748 and Cellular Express, Inc., d/b/a Boston Communications Group ("Client"), 100 Sylvan Road, Suite 100, Woburn, MA 01801. BACKGROUND ICT is in the business of providing call center services to the business community. ICT and Client desire to enter into this Agreement pursuant to which, ICT will plan, manage and operate call center in accordance with the terms and conditions of the Agreement. TERMS AND CONDITIONS SECTION 1. SERVICE 1.1. Included Services. In consideration of the payment by Client to ICT of the amounts due under this Agreement, ICT agrees that it will furnish the Client with the specific Scope of Services described in Exhibit A and the specific Service Levels described in Exhibit B. --------- --------- 1.2. Supplemental Services. ICT may provide Supplemental Services, subject to the availability and expertise of ICT personnel, at such additional cost for such Supplemental Services as agreed by both parties. Any Supplemental Services shall be provided in accordance with the terms and conditions of this Agreement and shall be pursuant to an approved Service Enhancement Request (see Section 10). SECTION 2. CERTAIN CLIENT OBLIGATIONS 2.1. In order for ICT to perform its obligations hereunder, Client shall keep its Information current and its Telecommunications Equipment operational at all times. Equipment failure will negatively impact performance and Service Levels. 2.2. Upon ICT's reasonable request, Client agrees to make its personnel, including appropriate professional personnel, administrative personnel and other employees, reasonably available for consultation at mutually convenient times in order to assist ICT to perform its own obligations under this Agreement. SECTION 3. TERM Page 1 3.1. Subject to Section 14 "Termination," the initial term of this Agreement shall commence on November 1, 1998 (effective date) and continue until December 31, 2004. If Cantel cancels its Agreement with Client, the Client can terminate Agreement on the following December 31st with no less than 4 months written notice to ICT. 3.2. This Agreement shall automatically renew for a period of one (1) year unless prior written notification is provided to either party 180 days prior to expiration of this Agreement or any renewal thereof. SECTION 4. QUALITY ASSURANCE 4.1. ICT agrees to use its best efforts at all times to provide prompt and efficient service. 4.2. A comprehensive system of observation and monitoring of all activities will be employed. ICT will provide the Client with silent monitoring of phone presentations from the Client's location or on ICT's premises as requested by Client. All people to be monitored shall be advised by ICT that they are subject to silent and other monitoring during work. SECTION 5. CONFIDENTIALITY 5.1 Confidential Information Defined As used in this Agreement, "Confidential Information" means all information of the Client that is not generally known to the public, whether of a technical, business or other nature (including, without limitation, trade secrets, know how and information relating to the technology, customers, business plans, promotional and marketing activities, finances and other business affairs ), that is disclosed by the Client to ICT and that has been identified as being proprietary and/or confidential. Without limitation, all references in any form or medium whatsoever to Subscriber's (i) name, address, phone number (ii) account balances, (iii) call records, (iv) transaction records, or (v) other information is and shall remain BCG Confidential Information. 5.2 Prohibition on Disclosure and Use ICT, except as expressly provided in this Agreement, shall not disclose the Confidential Information to anyone without BCG's prior written consent. ICT shall not use, or permit others to use, Confidential Information for any purpose other than the performance of this Agreement. ICT shall take all reasonable measures to avoid unauthorized disclosures, dissemination, or use of Confidential Information, including, at a minimum, those measures it takes to protect its own confidential information of a similar nature. 5.3 Restrictions on Personnel ICT shall restrict the possession, knowledge, development, and use of Confidential Information to its employees, agents, subcontractors, and entities controlled by it (collectively, "Personnel") who have a need to know Confidential Information in connection with the performance of this Agreement. ICT's Personnel shall have access only to the Confidential Information they need for such purpose. ICT shall ensure that its Personnel comply with this Agreement. 5.4 Disclosure to Governmental Authority If the ICT becomes legally obligated to disclose Confidential Information to any governmental entity with jurisdiction over it, it shall give Client prompt written notice sufficient to allow Client to seek a protective order or other appropriate remedy. ICT shall disclose only such information as is legally required and shall use its reasonable best efforts to obtain confidential treatment for any Confidential Information that is so disclosed. Page 2 5.5 Exceptions The provisions of this Section 5 shall not apply to any information that can be shown by documented evidence: (i) to be publicly available without breach of this Agreement; (ii) to have been known to ICT at the time of its receipt from Client; (iii) to have been rightfully received from a third party who did not acquire or disclose such information by a wrongful or tortious act; (iv) to have been independently developed by ICT without access to any Confidential Information; or (v) to have been approved for release by Client in writing. 5.6 Ownership of Confidential Information All Confidential Information shall remain the exclusive property of the Client, and ICT shall have no rights, by license or otherwise, to use the Confidential Information except as expressly provided herein. 5.7 Return of Confidential Information ICT shall promptly return all tangible material embodying Client Confidential Information (in any form and including, without limitation, all summaries, copies, and excerpts of Confidential Information) upon any expiration or termination of this Agreement or upon the Client's written request. 5.8 Injunctive Relief The parties agree that a breach by either party (or its owners, affiliates, officers, directors, employees, agents, contractors, subcontractors, or the successors or assigns of each of them) of any of the covenants contained in Sections 5 of this Agreement will cause irreparable damage to the non-breaching party, the monetary amount of which may be impossible to determine. As a result, the parties agree that the non-breaching party shall be entitled, in addition to other remedies at law or in equity, to an injunction from any court of competent jurisdiction, enjoining and restraining any violation of any or all of such covenants. In order to obtain injunctive relief, the non-breaching party shall not be required to post a bond or, if a bond is required by law or by the court, the parties agree to a bond in the lowest possible amount permitted by law. This right to injunction shall be cumulative and shall not preclude the non- breaching party from seeking or being awarded any other damages or legal or equitable remedies. 5.8 The terms of this Section shall survive the termination of this Agreement for any reason. SECTION 6. WARRANTIES 6.1. ICT represents and warrants to Client that ICT has and will continue to maintain all necessary licenses, permits or approvals required under this Agreement in each and every jurisdiction having authority over the services ICT performs under this Agreement. 6.2. ICT represents and warrants that it shall (a) comply with all international, federal, provincial, state, and local laws, ordinances, regulations, and orders (including, without limitation, all laws, ordinances, regulations, and orders related to telephone communications with consumers and businesses) with respect to its performance of the Services, (b) file all reports relating to the Services (including, without limitation, tax returns), (c) pay all filing fees and federal, provincial, state, and local taxes applicable to ICT's business as the same shall become due, and (d) pay all amounts required under local, state, provincial and federal workers' compensation acts, disability benefit acts, unemployment insurance acts, and other employee benefit acts when due. SECTION 7. INDEMNIFICATION Page 3 7.1. The undersigned Client does hereby indemnify, defend, and save harmless ICT and its subsidiaries, affiliates, shareholders, officers, directors and employees from any and all loss or liability arising from any and all complaints, claims or legal actions, in any way resulting from any Client products, and Client shall assume full responsibility for, and handling of, any such complaint, claim or legal action as well as for payment of all expenses, costs, counsel fees, judgment and/or settlements thereby incurred, except to the extent that such complaint, claim or legal action, costs, counsel fees, judgment or settlements result from or arise out of an act of commission or omission by ICT, its agents and/or its employees. ICT shall notify Client promptly of any complaint, claim or legal actions and shall cooperate in any defense. ICT agrees that Client shall have sole control over such defense, including but not limited to retaining counsel and all offers of settlement. 7.2. ICT does hereby indemnify, defend, and save harmless Client and its subsidiaries, affiliates, shareholders, officers, directors and employees from any and all loss or liability arising from any and all complaints, claims or legal actions, which may result or arise out of ICT's performance under this Agreement, and ICT shall assume full responsibility for, and handling of, any such complaint, claim or legal action as well as for payment of all expenses, costs, counsel fees, judgment and/or settlements thereby incurred, except to the extent that such complaint, claim or legal action, costs, counsel fees, judgment or settlements result from or arise out of an act of commission or omission by Client, its agents and/or its employees. Client shall notify ICT promptly of any complaint, claim or legal actions and shall cooperate in any defense. Client agrees that ICT shall have sole control over such defense, including but not limited to retaining counsel and all offers of settlement. SECTION 8. LIMITATION OF LIABILITY 8.1. NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY HEREUNDER FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES (INCLUDING WITHOUT LIMITATION, LOST PROFITS, LOST FUTURE EARNINGS, LOST ECONOMIC ADVANTAGE) ARISING FROM OR RELATING TO ANY DELAY, PERFORMANCE OR FAILURE TO PERFORM UNDER THIS AGREEMENT, EVEN IF A PARTY HAS BEEN ADVISED OF THE POSSIBILITY, AND EACH PARTY HEREBY WAIVES AND RELEASES ANY SUCH CLAIMS FOR SUCH DAMAGES AGAINST THE OTHER PARTY. SECTION 9. FINANCIAL TERMS Pricing is based on the complexity, duration, type and volume of services required. Specific prices for the program are included in Exhibit C attached --------- hereto. 9.1. For the Included Services and related expenses, ICT will invoice Client thirty (30) days prior to the due date, and Client will pay ICT on the first business day of each month during the term of this Agreement, the amounts set forth in the Pricing Schedule contained in Exhibit C. --------- 9.2. Supplemental Services shall be invoiced monthly as such Supplemental Services are provided. 9.3. All amounts under this Agreement shall be due thirty (30) days from the date of invoice. Without waiving any other right, balances of any kind past due in excess of thirty (30) days shall bear interest at the lesser of Prime Rate plus three (3%) percent or the highest rate permitted by law. The term "Prime Rate" means interest at a fluctuating rate per annum which at all times shall be the lowest rate of interest generally charged from time to time (determined as of the first Page 4 business day of each week, which rate shall remain in effect until the first business day of the immediately succeeding week) by Summit Bancorp, Princeton, New Jersey, and publicly announced as its so- called "prime rate" 9.4. If in November, 1999 and in each or any July thereafter during the term of this Agreement, the simple average of the U.S. Consumer Price Index and the Canadian Consumer Price Index exceeds the simple average of the U.S. Consumer Price Index and the Canadian Consumer Price Index for the month of July immediately prior thereto (for this purpose, the index for the latest month of July shall be called the "Current Index" and the index for the immediately preceding month of July shall be called the "Base Index"), then on each November 1, during the term of this Agreement, the amounts set forth in Exhibit C --------- for the year beginning on that November 1 shall be deemed automatically adjusted, without any further act by either party, to reflect the amount by which the then Current Index exceeds the Base Index, and such increase shall be compounded in each year by the amount of the cost of living adjustment percentage applied for each previous year that this Agreement was in place. ICT shall calculate this adjustment and, no later than thirty (30) days after the Current Index becomes available, inform Client in writing of the results of the calculation. Notwithstanding the above, in no event shall the cost of living adjustment in any one Client fiscal year be less than three percent (3%) nor more than eight percent (8%). 9.5. The obligation of Client to pay for services rendered in accordance with the terms and conditions of this Agreement shall survive the termination of this Agreement for any reason. SECTION 10. SERVICE ENHANCEMENT REQUEST 10.1. Client may request changes to, modifications of, and work in addition to that identified pursuant to Exhibit A by submitting a written --------- Service Enhancement Request to ICT from time to time during the term of this Agreement. ICT shall have the right to accept or reject the Client's Service Enhancement Request, in its sole discretion. Upon the approval of a Service Enhancement Request by ICT, the amount to be paid ICT under this Agreement and the time of performance shall be adjusted as specified in the Service Enhancement Request. All such work shall be executed under the terms and conditions specified in this Agreement and all approved Service Enhancement Requests will be appended to this Agreement in Exhibit D. --------- SECTION 11. COOPERATION 11.1. The parties acknowledge and agree that performance under this Agreement will require the continued definition and setting of priorities, the balancing of competing tasks and schedules, and the adjustment of priorities over different tasks and different schedules. The parties will periodically define in writing, and mutually agree the activities, schedules, and deliverables and relative priorities with respect thereto, during the term of this Agreement. 11.2. ICT shall be excused from meeting Performance Objectives if and to the extent that any such failure is properly attributable to the delay or failure of Client to perform its obligations hereunder to provide equipment, services or information to ICT. This includes, but is not limited to, forecasting anticipated call volumes under attached Scope of Services. SECTION 12. RIGHT USE CLIENT'S NAME 12.1 Each party grants to the other party the right to use the other party's name in government filings without the necessity of obtaining the other party's approval for such use. Neither party will use the other party's name in a press release or other public announcement without Page 5 the other party's prior written consent, such consent not to be unreasonably withheld or delayed. SECTION 13. ASSIGNMENT 13.1. This Agreement shall not be assigned by either the Client or ICT without the express prior written consent of the other party, and this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. SECTION 14 TERMINATION 14.1. This Agreement may be terminated in the following instances, such termination shall be a termination for cause: a) By either party, to the extent permitted under applicable law, if the other ceases to function as a going concern, becomes insolvent, makes an assignment for the benefit of creditors, files a petition on bankruptcy, permits a petition in the bankruptcy to be filed against it and such petition is not dismissed within sixty (60) days of filing, or admits in writing its inability to pay its debts as they mature, or if a receiver is appointed over a substantial part of its assets; b) By either party by reason of any other material breach of this Agreement by other party which breach has not been remedied or cured after at least (90) days written notice delivered by the aggrieved party to the other party; c) By ICT for Client's failure to pay any amounts or other charges within sixty (60) days from the payment due date, it being understood by ICT that Client may elect to make payment to ICT with an express reservation of rights to assure continued performance by ICT under this Agreement pending resolution of any disputes. d) By CLIENT for ICT's failure to meet the performance standards for three consecutive months as outlined in Exhibit B. 14.2. If Client terminates this Agreement for any reason, Client shall pay to ICT the following: . a) All amounts due (subject to monthly minimums, if applicable) for properly completed services received by Client in accordance with the Scope of Services in Exhibit A; plus, b) All costs and expenses incurred by ICT on behalf of Client up to the date of termination including, but not limited to, telemarketing representative training, applicable data processing costs, program development time, and third party services; plus, 14.3 If CLIENT terminates this Agreement without cause, CLIENT shall pay ICT the above plus the following: . a) Any other expense incurred by ICT as a result of termination; plus . b) In the event of early termination of services, 20% of average monthly charges (the average is calculated for the period commencing 30 days after effective date to 30 days prior to the early termination date notice) times the number of months remaining through the end of the Page 6 term. .SECTION 15. INFORMAL DISPUTE RESOLUTION 15.1. Prior to the initiation of arbitration pursuant to Section 16, the parties shall first attempt to resolve their dispute informally as follows: . a) Upon the written request of a Party, each Party shall appoint a designated representative who does not devote substantially all of his or her time to performance under this Agreement, whose task it will be to meet for the purpose of endeavoring to resolve such dispute. b) The designated representatives shall meet as often as they reasonably deem necessary for each Party to gather and furnish to the other all information with respect to the matter in issue which Parties believe to be appropriate and germane in connection with its resolution. The representatives shall discuss the problem and attempt to resolve the dispute without necessity of any formal proceeding. . c) During the course of discussion, all reasonable requests made by one Party to another for non-privileged information, reasonably related to this Agreement, shall be honored in ordered each of the Parties may be fully advised of the other's position. . d) The specific format for the discussions shall be left to the discretion of the designated representatives, but may include the preparation of agreed-upon statements of fact or written statements of position. e) Arbitration for the resolution of a dispute shall not be commenced until the earlier of: i) the designated representatives concluding in good faith that amicable resolution through continued negotiation of the matter does not appear likely; or ii) thirty (30) days after the initial written request to appoint a designated representative pursuant to Paragraph (i) above (this period shall be deemed to run notwithstanding any claim that the process described in this Section X1.(a) was not followed). 15.2. This Section 15 shall not be construed to prevent a Party from instituting, and a Party is authorized to institute, litigation earlier than prescribed in Subparagraph 15.1 to (i) avoid the application of any applicable limitations period, (ii) preserve a superior position with respect to other creditors, or (iii) seek immediate injunctive relief. SECTION 16. ARBITRATION Page 7 16.1. Differences between the Client and ICT on which an Agreement cannot be reached will be decided by arbitration. The arbitrators will determine the interpretation of the Agreement in accordance with usual business and insurance practices rather than strict technicalities. 16.2. Any arbitration shall be conducted in accordance with the rules of the American Arbitration Association. 16.3. Either party may serve upon the other party by certified mail a written demand that the claim, dispute or controversy, be arbitrated, specifying in reasonable detail the nature of the dispute or claim to be submitted to arbitration. The demand, which shall be effective upon receipt, shall be made within a reasonable time after the claim, dispute or controversy has arisen. In no event shall the demand for arbitration be made more than one year after the claim or cause of action arises. 16.4. Within thirty (30) days after service of a demand for arbitration, the parties shall agree upon three (3) arbitrators. These arbitrators must have no past or present relationship with the parties to this Agreement. One of the arbitrators is to be appointed by Client and one by ICT and these two arbitrators will select a third. If the two are unable to agree on a third within thirty (30) days, the choice will be left to the American Arbitration Society (Philadelphia Office). The rules governing the procedure of any arbitration hereunder shall be in accordance with the rules provided by the American Arbitration Society. 16.5. All arbitration hearings shall be held in Philadelphia, Pennsylvania. Judgment upon the award rendered by the arbitration may be entered in any court having jurisdiction thereof. 16.6. The arbitrators are not bound by rules of law. Their decision will be by majority vote and no appeal will be taken from it. 16.7. The cost of the arbitration will be borne evenly by each party unless the arbitrators decide otherwise. SECTION 17. RELATIONSHIP 17.1. Nothing contained herein shall be construed to create the relationship of employer and employee between ICT and Client or between Client and any of ICT's employees or agents. It is the express intent of the parties hereto that ICT is not an employee of Client for any purpose, but is an independent contractor for all purposes and in all situations. ICT and ICT's employees shall not represent that they are employees of Client, nor shall they in any manner hold themselves out to be employees of Client. 17.2. Neither party shall have the right to enter into any Agreement or commitment in the name of or on the behalf of the other, or to bind the other in any respect whatsoever, unless specifically authorized in writing by the other. SECTION 18. INSURANCE 18.1. ICT, at its expense, shall secure and maintain at all times during the period of performance of this Agreement, insurance as set forth in Section 18.3 below. Page 8 18.2. Upon receipt of Client's written request for Certification of Insurance, ICT shall provide Client with Certificates of Insurance with respect to the insurance maintained by ICT as provided in Section 18.3 below. 18.3. ICT agrees to maintain comprehensive general liability insurance in the following minimum amounts: Bodily Injury and Loss of Life -- $1,000,000-$1,000,000 per occurrence and aggregate; Workers Compensation-Statutory Limits as required by Labor Code of the State of Pennsylvania; and Crime Coverage Insuring Employee Theft. SECTION 19. GOVERNING LAW 19.1. This Agreement shall be construed in all respects under the laws of the Commonwealth of Pennsylvania. If any part of this Agreement shall be held to be void or unenforceable, such part will be treated as severable, leaving valid the remainder of this Agreement notwithstanding the part or parts found to be void or unenforceable. SECTION 20. GENERAL 20.1. Audit. Upon five (5) business days prior written notice to ICT, and during regular business hours, BCG shall have the right to audit, examine, and copy any record of ICT that is related in any way to ICT's service level and billing performance of this Agreement. 20.2 Modifications. This Agreement can only be modified by a written Agreement duly signed by the persons authorized to sign agreements on behalf of ICT and of Client. 20.3. Severability of Provisions. If any provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or be impaired thereby. 20.4. Limitations. No action, other than an action for non-payment, regardless of form arising out of this Agreement may be brought by either party hereto more than two (2) years after the cause of action has arisen. 20.5. Waivers. A waiver of a breach or default under this Agreement shall not be a waiver of any other or subsequent breach or default. The failure or delay by either party in enforcing compliance with any term or condition of this Agreement shall not constitute a waiver of such term or condition unless such term or condition is expressly waived in writing. 20.6. Force Majeure. Either party's failure to perform any of its obligations hereunder, except for the obligation to pay monies when due hereunder, shall be excused and shall not give rise to any claims for damages to the extent it is caused by an event or occurrence beyond the reasonable control of such party including, but not limited to, war, embargoes, government restrictions, riots, severe weather or storms, floods, earthquakes, natural disasters, or other Acts of God, strikes, power failures, power interruptions, nuclear or other civil or military emergencies, or telecommunications or equipment failures or interruptions caused by suppliers. 20.7. Captions. Captions contained in this Agreement are for reference purposes only and do not constitute part of this Agreement. Page 9 20.8. Notices. All notices which are required to be given or submitted pursuant to this Agreement shall be in writing and shall be sent by registered or certified mail, return receipt requested, to the address set forth below or to such other address as ICT or Client may from time to time designate by written notice delivered in accordance with this Section. ADDRESS FOR NOTICES TO CLIENT: ADDRESS FOR NOTICES TO ICT: ----------------------------- -------------------------- Boston Communications Group, Inc. ICT, Inc. 100 Sylvan Road, Suite 100 800 Town Center Drive Woburn, MA, 01801 Langhorne, PA 19047 Attention: General Counsel Attention: Chief Financial Officer 20.9. Authority: Each party represents that it has full power and authority to enter into and perform this Agreement, and the person signing this Agreement on behalf of it has been properly authorized and empowered to enter into this Agreement. SECTION 21. ENTIRE AGREEMENT The parties acknowledge that this Agreement is the complete and exclusive statement between the parties and no change or modification shall be made except in writing. CELLULAR EXPRESS, INC., D/B/A BOSTON COMMUNICATIONS GROUP, INC. ICT, INC. - --------------------------------- --------- ACCEPTED BY: E. Y. Snowden___________ ACCEPTED BY: John D. Campbell______ TITLE: President and C.E.O.____ TITLE: President--ICT Group Sales SIGNATURE: /s/ E. Y. SNOWDEN_______ SIGNATURE: /s/ John D. Campbell ___ DATE: October 7, 1998_________ DATE: OCTOBER 12, 1998____ Page 10 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT "A" SCOPE OF SERVICES GENERAL OVERVIEW: ICT will recruit, screen, hire and train a dedicated team of - ---------------- Customer Service Representatives (CSR's) for CLIENT's inbound Customer Service calls. Initially the calls will be related to prepaid cellular service including balance inquiry, recharging, billing inquiry and general information. The work will be performed at ICT's call center located in Riverview, New Brunswick, Canada. First live calls will arrive on Monday, November 9 "or" Monday, November 16, 1998. RECRUITING: ICT will use the CLIENT's CSR profile to screen and select CSR's. - ---------- ICT will recruit English, French and bilingual (FRE-ENG) CSRs. The CLIENT will specify the number of each type at least [**] days in advance so that ICT will have sufficient time to screen and select the required CSRs. The CLIENT may review the selected CSRs in advance of training. The CLIENT may remove CSRs that do not meet their qualifications for initial hiring. The CLIENT or their representative may test the selected CSRs for their French language skills. The CLIENT may remove CSRs that do not meet their qualifications for French language skills. ICT and CLIENT will agree on a standard evaluation form, which CLIENT will complete for each CSR removed, documenting why that CSR did not meet CLIENT qualifications. ICT will require a brief criminal background check on all selected CSRs to inspect for a history of fraud or credit card misuse. The Client may provide to ICT testing tools to use during the interview. ICT will use those tools to conform the CLIENT's standard. TRAINING: The Client will train ICT Trainers and at least one (1) ICT - -------- Supervisor who will, in turn, train the CSR staff. This Client training period will continue for two complete training sessions. The CLIENT will provide the CSR training on-site in Riverview, until ICT trainers have completed two training sessions with the CLIENT. The Client will be billed for initial CSR program training of 2 - 3 weeks duration and for any training that might be required by a CLIENT initiated program change. The Client will not be billed for training required as a result of CSR attrition after an initial 90 day ramp period beginning on the inception date of this service agreement. If training must be conducted off-site from Riverview, the CLIENT will pay travel and living expenses for the ICT staff during the training. CONTINUOUS TRAINING: ICT will provide one (1) hour of billable refresher - ------------------- training per CSR per month. ICT will institute by May 1, 1999 a Supervisor Development Program for the supervisors assigned to CLIENT or ICT will adopt CLIENT's Supervisor Development Program. It is expected that this Page 11 development program will be an on-going activity and will consume less than 3.5% of the supervisor's work activity on an annual basis. LD CARRIER: CLIENT will select and directly contract with [pay access and - ---------- usage charges] the IXC of their choice who will provide inbound call transport services. QUALITY ASSURANCE: ICT supervisors or QA department will monitor at least two - ----------------- inbound calls per agent per week. These calls will be rated and scored using a format and criteria provided by the CLIENT. The CLIENT will have remote access to ICT's ACD in order to monitor calls. ICT and CLIENT agree to comply with all legal requirements regarding the monitoring and taping of calls. SOFTWARE: ICT will provide for each station the following software: - -------- . Windows NT Workstation 4.0, Service Pack 3 . Oracle Client for Windows NT. The CLIENT will supply and configure all other software required to support the workstation using the CLIENT's application. HOURS OF COVERAGE: ICT will operate the CLIENT's program as follows: - ----------------- Monday - Friday 8 AM to 11 PM Eastern Standard Time Saturday 8 AM to 11 PM Eastern Standard Time Sunday 8 AM to 11 PM Eastern Standard Time ASPECT: Equipped with Producer / Director capabilities and Report Writer. - ------ CLIENT will have access to Director terminal screens related to CLIENTS programs. REPORTS: ICT will e-mail reports according to a client defined schedule - ------- The CLIENT will supply Aspect ACD custom report templates. ICT will run such CLIENT reports and deliver to such to the CLIENT on schedule to be defined. ICT will also run standard aspect reports when requested or as scheduled by the CLIENT. ICT will supply a monthly breakdown of Payroll Hours by CSR which, at minimum, will include Aspect Log-on hours and training hours. SYSTEMS SUPPORT: Supplied upon request at the hourly rate shown in Schedule "C" - --------------- SPECIAL REQUIREMENTS: ICT will supply a dedicated LAN in Riverview to support - -------------------- CLIENT's program. ICT will purchase and install Routers and LAN ports to CLIENT specifications which are similar to those required to support the Deland, Florida facility. The CLIENT will pay for all Voice and Data communication facilities. ICT will assist the CLIENT, though a Letter of Agency, to facilitate the delivery of such services to the Riverview facility. Page 12 The CLIENT will be permitted to have their representative in the call center during buildout. ICT will make floor space available to support the CLIENT's TIN Voice Response Unit. The CLIENT will pay for any additions and modifications such as equipment racks, electrical outlets, etc. that may be required to support this equipment including, but not limited to, facilities to connect the TIN to the Aspect, LAN, Wan and voice networks. All ICT expenditures required by the TIN VRU will be pre-approved by the CLIENT. CLIENT will pay for any additional expense required to connect to the ICT Aspect. The CLIENT will have limited, read only, access to their program data on the Aspect ACD for reporting purposes. WORKSTATIONS: ICT will provide 60% - 75% as many workstations [each equipped - ------------ for voice and data] as there are Full Time Equivalent (FTE) CSRs. After January 1999, ICT will install and use Aspect Winsets if CLIENT data applications require them. SECURITY PLAN: ICT to provide a plan within first thirty days after start-up. - ------------- The intent of the security plan is to reasonably accommodate the CLIENT's concern that access to the PC workstation be restricted to CSRs assigned to the CLIENT's program. Page 13 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT "B" SERVICE LEVELS SERVICE OBJECTIVE: [**] - ----------------- QUALITY ASSURANCE STANDARDS: ICT will adhere to Client's standards of - --------------------------- monitoring at least 2 Inbound calls per agent per week. DEDICATED CSRs: Based on signing this service agreement no later than - -------------- Wednesday, October -7, 1998 "and" CLIENT providing trainers when necessary to support scheduled training sessions, ICT will provide dedicated CSR's, who only work on CLIENT's program, according to the following schedule:
FTE CSR's taking calls French Speaking CSRs Delivery Date ------------------------ --------------------- -------------------- 30 10 (35% of 30) 11/09/98 to 11/16/98 70 17 (24% of 70) 12/01/98 to 12/14/98
Each week the CLIENT will supply a rolling [**] day forecast of the required staffing levels. ICT and Client will then agree to a staffing level in writing. ICT agrees to meet staff increases within [**] days after receipt of the forecast provided the increase is not more than 30 additional CSRs. ICT will apply best efforts to meet CLIENT requirements if the increase is more than 30 CSRs within a [**] day time frame. Beyond 120 seats in the Riverview Call Center, fulfillment of CSRs is conditional upon space availability and workstation build-out. The CLIENT commits to use at least [**] of the staffing levels requested for at least 14 months after the date of request to increase staff, subject to the termination provisions of this agreement. Page 14 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT "C" PRICING FOR RIVERVIEW, NEW BRUNSWICK -- CANADA BILLABLE HOURS: ICT will bill the CLIENT for "Aspect Log-on Hours" for the - -------------- assigned CSRs. This time will include two 15 minute breaks per 7.5 hour workday. Lunch break will not be billed to the CLIENT. If the CLIENT requires activity other than handling inbound calls or if the CLIENT's processes and procedures require the CSR to engage in substantial non- phone activity, those hours will be billed to the CLIENT at the standard rate specified below for Inbound Customer Service. DEDICATED CUSTOMER SERVICE REPRESENTATIVES: - ------------------------------------------ - -------------------------------------------------------------------------------- MONTHLY VOLUME $/REP/HOUR - -------------------------------------------------------------------------------- [**] + Hours [**] - -------------------------------------------------------------------------------- TRAINING: [**] - -------- SYSTEMS SUPPORT / PROGRAMMING: [note 6] [**] - ----------------------------- CRIMINAL BACKGROUND CHECK: At Cost - ------------------------- CUSTOMER SPECIFIED EQUIPMENT: [**] - ---------------------------- ICT TRAINER [OPTIONAL]: - ---------------------- Annual retainer charge of [**] which includes [**] hours of training service. Additional hours billed at [**] per hour CLIENT pays T&E outside trainers home area STAFFING PENALTY PROVISION: The Client shall receive a credit for any ICT -------------------------- failure to deliver at least [**] of the "FTE CSR" staff (on the scheduled "Delivery Dates" as detailed in Exhibit "B" - Dedicated CSRs and as mutually agreed in the rolling [**] day forecast). Client may take a credit against the ICT monthly invoice of [**] for each FTE CSR below the [**] level not available during a calendar month, with a maximum penalty of [**] in any given calendar month. An FTE CSR is defined as [**] hours of production time. NOTES: ----- 1.) All rates are in U.S. Dollars, with a minimum monthly billing equal to [**] hours, "or" [**] hours times the number of FTE CSR's contracted for times [**], whichever is greater. 2.) CLIENT contracts with and pays IXC for all inbound access and usage charges. Page 15 3.) Same workstation configuration as Deland, Florida call center. 4.) Specialized data/system equipment supplied by BCG or priced separately. 5.) Data Communication links provided by BCG. 6.) When requested by CLIENT. Page 16 EXHIBIT "D" APPROVED SERVICE ENHANCEMENT REQUESTS [TO BE PROVIDED] Page 17 EX-10.47 4 AGREEMENT BETWEEN COMPANY AND AG COMMUNICATIONS EXHIBIT 10.47 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. AGREEMENT --------- AGREEMENT made this 16th day of November, 1998, by and between Cellular Express, Inc., a Massachusetts corporation d/b/a Boston Communications Group (the "Company"), having offices at 100 Sylvan Road, Woburn, MA 01801 and AG Communications Systems, a corporation having offices at 2500 W. Utopia Road, Phoenix, AZ 85072 ("AGCS"). 1. Engagement. The Company hereby engages AGCS as an independent ---------- contractor to perform the services described in Attachment 1 to this Agreement, and AGCS hereby agrees to such engagement. 2. Performance. AGCS agrees to perform at all times faithfully, ----------- industriously, and to the best of AGCS's ability, experience, and talents, the duties that may be required of AGCS pursuant to the terms hereof. 3. Compensation. The Company shall pay AGCS, and AGCS shall accept from ------------ the Company, in full payment for AGCS's services hereunder, compensation as provided in Attachment 1 to this Agreement. 4. Confidentiality. AGCS shall not at any time whatsoever, or in any --------------- manner, either directly or indirectly, divulge, disclose or communicate to any person, firm or corporation in any manner whatsoever any confidential information of the Company, including specifications, technical and business plans, drawings, system design, software, data, documentation, methods of operation, processes, customer information or any other information which is identified by the Company as confidential at the time of its disclosure to AGCS, without the prior written consent of the Company, the parties hereto stipulating that as between them, the same are important, material, and confidential and gravely affect the effective and successful conduct of the business of the Company and its good will. 5. Rights in Roaming Solution. AGCS hereby agrees that the software -------------------------- developed by AGCS in accordance with Company's proprietary specifications for Company's Roaming Solution, and the software developed by AGCS in accordance with Company's proprietary specifications for [**] WPS functionality not covered by the [**], WIN,[**] and [**] industry standards, are works for hire and all rights in and to such developments shall belong to the Company in perpetuity, and that AGCS shall not disclose any of such developments to any third party without the prior written consent of the Company. AGCS agrees to cooperate with the Company and to execute such documents as the Company may reasonably require to effect or enforce its rights in such developments. It is understood that those portions of the [**] WPS solution that are covered by the [**], WIN,[**] and [**] standards are not "works for hire" and are not subject to the provisions of this Section 5. 6. Indemnification. Each party shall indemnify, defend and hold the other --------------- party harmless from any losses, damages, liabilities, claims, costs and expenses (including reasonable attorneys' fees) on account of any damage to property and personal injuries, including death, occurring during the performance of this Agreement, to any person or persons, arising from any act or omission of the indemnifying party related to the performance of this Agreement or the services provided hereunder. 7. Independent Covenants. The covenants on the part of AGCS in Sections 5, --------------------- 6 and 7 shall survive the termination of this Agreement for a period of two years and shall be construed as agreements independent of any other provision contained in this Agreement and the effect of any claim or action by AGCS against the Company whether predicated on this Agreement or otherwise shall not constitute a defense to the enforcement by the Company of these covenants. 8. Warranties. ---------- (a) AGCS represents and warrants that AGCS's execution and performance of this Agreement does not and will not conflict with any other Agreement to which AGCS is a party or by which AGCS is bound. (b) AGCS warrants that each product provided to the Company by AGCS pursuant to this Agreement will perform in accordance with the functional specifications for such product for a period of twelve (12) months following acceptance of such product by the Company. (c) AGCS represents and warrants that all deliverables provided by AGCS to the Company will not infringe any United States patent or copyright of any third party. AGCS will defend all actions, claims, and suits against the Company alleging that any of the software or other deliverables furnished hereunder infringes any United States patent or copyright, and will pay all damages and costs which by final judgment may be assessed against the Company on account of such infringement, provided that AGCS (i) shall have received written notice of any claim of such infringement or suit and full opportunity and authority to assume the sole defense of and to settle such suit, and (ii) shall be furnished, upon AGCS's request and at AGCS's expense, such information and assistance as AGCS may reasonably request from the Company relating to such defense. If the use of such software or other deliverable in any such suit is held to constitute infringement and the use of said software or deliverable is enjoined, AGCS will either procure for the Company the right to continue using said software or deliverable or replace it with a non-infringing product or modify it so that it becomes non-infringing. No undertaking of AGCS under this Section shall extend to any such alleged infringement or violation to the extent it is caused by adherence to design specifications, modifications, drawings or other written instructions which AGCS is directed by Company to follow, provided that, in adhering to such specifications or instructions, AGCS does not knowingly infringe on the patent or copyright of a third party. (d) AGCS represents, warrants and covenants that: (i) all products and services delivered under this contract, including embedded third party software or hardware, shall be able to accurately process date data including, but not limited to, calculating, comparing, and sequencing from, into, and between the twentieth and twenty-first centuries, including leap year calculations, provided that all products and services used in combination with such products and services properly exchange date data with it; (ii) AGCS's products and services are and will be fully capable of operating as required to accommodate the year 2000 and beyond; (iii) any modifications to AGCS's products and services made to accommodate year 2000 processing will not adversely affect any existing function, feature, architectural design or current working processes with regard to AGCS's product and AGCS's knowledge of BCG's use; and (iv) AGCS will provide the support and maintenance, at no cost to BCG, to ensure that any new releases of the products or services delivered hereunder have year 2000 capability. (e) The provisions of this Section 9 shall survive the termination of this Agreement. 9. Enforcement. The parties acknowledge the uniqueness of AGCS's services ----------- to the Company, and agree that any violation or breach by AGCS of the covenants contained in Sections 5 or 6 above shall entitle the Company to injunctive relief or other equitable relief in any court of competent jurisdiction. 10. Notice. Any notice required under this Agreement shall be in writing ------ and personally delivered or sent by registered or certified mail to the addresses of the parties set forth on page 1 of this Agreement, or to such other address as the parties hereto may designate in writing to each other. 11. Authority. Notwithstanding anything herein contained to the contrary, --------- AGCS shall not have the right to make any contracts or commitments for or on behalf of the Company without obtaining the prior written consent of the Company. 12. Entire Agreement. This contract contains the complete agreement ---------------- between the parties and shall, as of the effective date hereof, supersede all other agreements written or oral between the parties concerning the subject matter hereof. The parties stipulate that neither of them has made any representation with respect to the subject matter of this agreement or any representations including the execution and delivery hereof except such representations as are specifically set forth herein and each of the parties hereto acknowledges that such party has relied on his, her or its own judgment in entering into this agreement. 13. Modifications. No waiver or modification of this agreement or of any ------------- covenant, condition, or limitation herein contained shall be valid unless in writing and duly executed by the party to be charged therewith and no evidence of any waiver or modification shall be offered or received in evidence of any proceeding, arbitration, or litigation between the parties hereto arising out of or affecting this agreement, or the rights or obligations of the parties hereunder, unless such waiver or modification is in writing, duly executed as aforesaid, and the parties further agree that the provisions of this paragraph may not be waived except as herein set forth. 14. Termination. This agreement may be terminated by the Company, at its ----------- sole discretion, at any time prior to the delivery of the completed product by AGCS to the Company, on fifteen (15) days prior written notice to AGCS. Upon termination by the Company for any reason except default by AGCS, AGCS shall not have any further rights against the Company under this agreement except that AGCS shall be paid AGCS's compensation on a pro-rata basis through the date of termination. If AGCS shall fail to deliver a product which conforms to the functional specifications for such product by the agreed upon delivery date, or if at any time during the term of this Agreement AGCS shall neglect or fail to perform or observe any material provision of this Agreement and shall fail to remedy the same within thirty (30) days after notice from the Company, then the Company may, at any time thereafter, terminate this Agreement by notice to AGCS, and in addition to any other remedies which the Company may have, at law or in equity, the Company may return such product to AGCS and shall be entitled to a full refund of all amounts previously paid by the Company for such product. If at any time during the term of this Agreement a party shall make an assignment for the benefit of creditors; or a party shall file a voluntary petition in bankruptcy or shall be adjudicated bankrupt or insolvent, or shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief for itself under any present or future Federal, State or other statute, law or regulation for the relief of debtors, or shall seek or consent to acquiesce in the appointment of any trustee, receiver or liquidator of such party or of all or any substantial part of its properties, or shall admit in writing its inability to pay its debts generally as they become due; or a petition shall be filed against a party in bankruptcy or under any other law seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any present or future Federal, State, or other statute, law or regulation of similar import and shall remain undismissed or unstayed for an aggregate of ninety (90) days (whether or not consecutive), or if any debtor in possession, trustee, receiver or liquidator of a party or of all or any substantial part of its properties shall be appointed without the consent or acquiescence of said party and such appointment shall remain unvacated or unstayed for an aggregate of ninety (90) days (whether or not consecutive); then, in any such case, the other party may, at any time thereafter, terminate this Agreement by notice to the defaulting party, specifying a date not less than fifteen (15) days after the giving of such notice on which this Agreement shall terminate; and in such event each party shall remain liable for amounts due to the other party prior to the date of such termination. 15. Return of Materials. Upon termination of work as an independent ------------------- contractor to the Company, AGCS shall immediately return to the Company any and all documents, materials, equipment and other property of the Company in AGCS's possession or control, including without limitation any and all data and work product prepared pursuant to this Agreement, summaries, abstracts, descriptions and notes made by or for AGCS. 16. Governing Law. It is the intention of the parties hereto that this ------------- agreement and the performance hereunder and all suits and special proceedings hereunder be construed in accordance with and under and pursuant to the laws of the Commonwealth of Massachusetts, and that in any action, special proceeding or other proceeding that may be brought arising out of, in connection with, or by reason of this agreement, the laws of the Commonwealth of Massachusetts shall be applicable and shall govern to the exclusion of the law of any other forum, without regard to the jurisdiction in which any action or special proceeding may be instituted. 17. Construction. Nothing in this agreement shall be deemed to create any ------------ relationship of principal and agent or any relationship between the parties other than that of an independent contractor to the Company. 18. Assignment; Binding Effect. This Agreement shall inure to the benefit -------------------------- of the Company and its successors and shall not be assigned by AGCS. 19. Force Majeure. Neither party shall be liable to the other for any ------------- delay or failure of any part of this Agreement from any cause beyond its control and without its fault, including, without limitation, changes in government regulations, embargoes, epidemic, war, terrorist acts, riots, insurrections, fires, explosions, earthquakes, nuclear accidents, floods, strikes, power blackouts, severe weather conditions, failure by the Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. other party to fulfill any of its obligations under this Agreement, or acts or omissions of common carriers (collectively referred to as "Force Majeure Conditions"); provided, however, that this shall not be deemed to apply to a failure of AGCS to comply with the provisions of Section 8 hereof, nor to a failure of the Company to make any payment due pursuant to the terms of Attachment 1. 20. Acceptance ---------- 20.1 Prior to delivery of the commercial Roaming WPS Software solution and [**] WIN WPS Software solution to Company, AGCS shall perform the internal testing that is appropriate to provide reasonable assurance that each software solution will perform in conformance with their specifications. The Company acceptance test period shall commence on the date each software solution is received by Company. For the purposes of this Agreement, receipt shall be deemed to have occurred: (i) as evidenced by documentation signed by the Company, or (ii) the date a software solution is physically delivered to the Company by a representative of AGCS. The Company acceptance test period shall end forty-five (45) days after the start of the acceptance trial period. During the acceptance trial, Company may operate and test each software solution as it deems appropriate, including use of a software solution for commercial purposes. Company's use of a software solution for commercial purposes during the trial shall not constitute acceptance of a software solution. 20.2 Company shall, prior to the end of an acceptance test period, notify AGCS whether a software solution performed in conformance with its specifications. Notification under this provision shall consist of: (i) a signed Certification of Acceptance attached hereto as Attachment 2 for the software solution, or (ii) a written description of the material nonconformance items. Should Company fail to submit written notification within the time frame specified in this paragraph, the software solution shall be deemed accepted. 20.3 If the Roaming WPS Software solution fails to perform in conformance with its specifications during the acceptance test period, AGCS shall extend the acceptance test period, as mutually agreed by both parties, and shall correct the material deficiencies. If AGCS is unable to correct material deficiencies by the date agreed to by both parties, Company shall be refunded the amount paid for the Roaming WPS Software solution. 20.4 If the [**] WIN WPS Software solution fails to perform in conformance with its specifications during the acceptance test period, AGCS shall extend the acceptance test period, as mutually agreed by both parties, and shall correct the material deficiencies. If AGCS is unable to correct material deficiencies by the date agreed to by both parties, Company shall be refunded the amount paid for the [**] WIN WPS Software solution. Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 20.5 If the [**] WIN WPS Software solution fails to perform in conformance with its specifications during the acceptance test period, AGCS shall extend the acceptance test period, as mutually agreed by both parties, and shall correct the material deficiencies. If AGCS is unable to correct material deficiencies by the date agreed to by both parties, Company shall be refunded the amount paid for the [**] WIN WPS Software solution. 21. Audit ----- 21. Not more than twice a year AGCS may audit, or designate an independent certified auditor to audit the directly relevant records of Company during Company's regular business hours to determine whether the amount paid to AGCS by the Company is accurate. Any expenses of such audit shall be born by AGCS, unless the audit determines that the amount paid to AGCS by the Company is inaccurate by more than ten (10%) percent, in which case all reasonable expenses of the audit will be born by Company. The Company will be required to pay AGCS any amount owed. In the event that the audit determines that the Company has made an overpayment, AGCS shall pay the amount of such overpayment to the Company. 21.2 Company agrees to report to AGCS within five (5) business days following the end of each quarter [**]. This report must be generated in accordance with the instructions as described in the User's Manual and forwarded to AGCS either electronically or via facsimile. 21.3 It may be necessary to establish a data connection agreement between the parties to regulate the method and extent of the connection between the parties' computer networks. If such data connection is required, it shall be governed by a Data Connection Agreement, in the form attached as Attachment 3 hereto. 21.4 Any reports shall be conclusively presumed as accurate after eighteen (18) months from date of delivery to AGCS by Company and shall be excluded from auditing. 21.5 Any information derived from Company's reports or records shall be maintained in confidence by AGCS as Confidential Information of Company pursuant to Section 4 hereof. 22. Billing Terms AGCS shall issue invoices using net thirty (30) day ------------- payment terms and shall bear interest at the rate of one percent (1.0%) per month, or at the highest rate allowed by law, whichever is less, from the date due until paid. 23. Maintenance Regarding maintenance, as defined in Attachment 1, AGCS ----------- assumes TAC support will be provided and that maintenance will correct errors or deficiencies in the operation and functioning of the application as required by the specifications. Maintenance does not include additional or enhanced functionality or additional or enhanced features to the software, except that provided for in Attachment 1. Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 24. WIN Industry Standard Support The Company and AGCS agree to support ----------------------------- one another in the [**] and WIN industry standards groups on matters affecting the applications covered by this Agreement. 25. Specifications The parties assume that the final specifications for -------------- [**] will be available to AGCS no later than [**]. If such final specifications are not available by such date, AGCS will deliver the [**] WPS application [**] from the availability to AGCS of such specifications. IN WITNESS WHEREOF, the parties hereunto set their hands and seals the day and year first above written. CELLULAR EXPRESS, INC. By: /s/ Kevin M. Thigpen ----------------------------------- Vice President & General Manager AG COMMUNICATIONS SYSTEMS /s/ Charles Schulz -------------------------------------- Vice President & General Manager Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. ATTACHMENT 1 ------------ Scope of Services and Compensation Between AG Communication Systems and Boston Communications Group 1. GENERAL AG Communication Systems (AGCS) will develop and port the following Wireless Prepaid Services (WPS) solutions for Boston Communications Group (BCGI): a Roaming WPS solution based on BCGI's submitted technical specification [**] and BCGI roaming functional specifications to be provided by BCGI; a Wireless Intelligent Network (WIN) based [**] WPS solution based on [**], service specifications with modifications/additions per BCGI functional specifications and, a [**] WPS solution based on [**] WIN,[**], which is expected to be standardized sometime in [**]. AGCS will develop a WIN based [**] WPS solution for delivery in [**] This solution will interface with BCGI's rating engine and BCGI's IP as detailed in the following BCGI documents: BCGI's WIN prepaid business requirements [**]; and a WIN prepaid functional specification to be provided by BCGI. This solution will initially be developed to run on [**] platforms identified by BCGI with a [**] optional platform to be developed subsequently (see Platforms section below). As part of this agreement, AGCS will migrate this solution to a [**] WIN [**] solution when this standard becomes available. AGCS will develop and port the roaming solution to BCGI specifications for $1,730,000. This price includes BCGI exclusive license of the roaming solution. Maintenance for this is included throughout [**]. The [**] WPS solution will be paid as a business arrangement as follows: [**] of use on the AGCS [**] WPS BCGI service bureau application (either on a BCGI owned SCP or carrier owned SCP) from inception of service through [**]; and a WIN Development Cost Share Rate [**] (described below) from [**] through [**]. If BCGI requests a [**] platform for this solution from AGCS, this business arrangement will extend through [**]. BCGI and AGCS may renegotiate in good faith the continuation of this business agreement at any time to continue after [**]. WIN Development Cost Share Rate will be [**] of use on the AGCS [**] WPS service bureau application (either on a BCGI owned SCP or carrier owned SCP) until the total AGCS proceeds for the [**] WPS solution, including the proceeds from this WIN Development Cost Share Rate, the [**] of use fee through [**] described above and any Advanced Payments (as described below) total [**] or more. For payments beyond [**] and less than [**], the WIN Development Cost Share Rate will be [**]. For payments beyond [**] and less than [**], the WIN Development Cost Share Rate will be [**]. For payments beyond [**], the WIN Development Cost Share Rate will be [**]. WIN Development Cost Share rate is subject to the lower of the specified rate [**] of the cost BCGI charges its carriers. However, the rate will not fall below [**] through [**] and will not fall below [**] through [**]. The rate through [**], if this agreement is extended with the addition of a [**] platform, will not fall below [**]. Maintenance fees for [**] WPS will be [**] cost BCGI pays to AGCS if BCGI provides first level support and AGCS provides second level support, or [**] cost if AGCS provides first level Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. support. Pricing for system sales without service bureau component will be described in a separate agreement. The [**] WPS solution will utilize the standard [**], WIN,[**] and [**] developed prepaid messages. Any BCGI specifications not covered by these standards, including interfaces to BCGI's IP and rating engine, are the exclusive properties of BCGI and cannot be disclosed or reused by AGCS or any partner of AGCS, for any purpose, without prior written consent of BCGI. AGCS must provide a reasonable demonstration of the controls that AGCS will put in place to enforce this clause. Neither [**] nor other [**] applications are included in this agreement. This agreement does not preclude BCGI from developing [**] for prepaid or any other [**] applications. BCGI guarantees that an average of [**] subscribers will be on the [**] solution each month from commercial deployment until the end of this agreement. This guarantee equates to approximately $9.0 million in WIN Development Cost Share payments cumulatively to AGCS. At the end of the agreement [**] if the total of these payments does not equal or exceed $9.0 million, BCGI will compensate AGCS the difference. Any payment made to compensate for unrealized revenues will apply towards the [**] WIN Development Cost Share, should BCGI elect to port to a [**] platform. After paying a total of at least $9.0 million, BCGI will have an unlimited, fully-paid and perpetual license (excluding source code and maintenance) to the [**] software. AGCS agrees to place the source code in escrow within 30 days following acceptance of the software by BCGI, upon mutually agreed terms which shall include the provision that the source code shall be released to BCGI in the event that AGCS ceases operations or is otherwise unable or refuses in writing to maintain the software. BCGI may also elect to pay AGCS the cost paid by AGCS for any platforms jointly purchased for development and testing of [**]. BCGI will take ownership of these platforms at that time, but not later than [**]. AGCS and BCGI will respond to [**] based on mutually agreed upon terms. Formal contract will be signed by November 14, 1998.
PAYMENT TERMS: Schedule % Amount Responsibility Date - -------- ----- ------ -------------- ---- Contract Signature [**]% $[**] Functional Specifications (Roaming) [**]% $[**] BCGI [**] Final Design Specifications (Roaming) [**]% $[**] AGCS/BCGI [**] Integration Testing (Roaming) [**]% $[**] AGCS [**] Final Acceptance (Roaming) [**]% $[**] BCGI [**] Commercial Use (Roaming) [**]% $[**] BCGI [**] Integration testing: [**] for 1 platform ([**] WPS solution) [**]% $[**] [**] ---- ---------- TOTAL 100% $1,730,000
Payment terms are detailed in the Agreement document. Advance Payments In addition to above payments, BCGI will provide AGCS with advance payments to support the porting of [**] WPS to a [**] platform,[**], if BCGI desires this porting. BCGI will notify AGCS of which Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. platform to port to [**] by the end of [**]. At that time, BCGI will provide AGCS with a [**] advance payment against future [**] revenue sharing. BCGI will expect delivery of this software [**] following. At the time of acceptance of this ported software, BCGI will provide AGCS with another [**] advance payment. BCGI may also elect to ask AGCS to port the [**] WPS system to a [**] platform [**]. If BCGI chooses to ask AGCS to perform this [**] software port, BCGI will provide AGCS with [**] advance payment at the time of the request, and expect delivery of this additional ported software [**] following the request, and the original business arrangement described above will extend through [**]. Upon delivery and acceptance of this [**] ported software BCGI will provide AGCS with another [**] advance payment against future [**] revenue. This [**] platform will also be contingent on the details in the Platforms sections. AGCS will not be required to return these payments to BCGS if [**] service bureau revenue is not realized to cover these payments. 2. ROAMING SOLUTION Delivery of Roaming solution: [**]. Warranty for Roaming solution: [**] from commercial service Assumptions - Roaming solution 1. Roaming solution will be based on specification [**] and BCGI roaming functional specifications, to be provided by BCGI. 2. Final development and delivery schedule will be finalized by [**]. 3. All initial technical design issues will be resolved within [**] of contract signature date. 4. Application will execute on the [**]. 3. [**] WPS SOLUTION Platforms: The [**] WPS solution will run on any two of the following platforms:[**]. BCGI will notify AGCS as to which [**] will be done first by end of [**], at which time AGCS will have [**] to develop the application. BCGI will notify AGCS of the [**] by end of [**]. BCGI and AGCS will evenly split the cost for platforms on which to develop and test the [**] solutions, if these platforms are requested by BCGI. Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. BCGI may also elect to ask AGCS to port the [**] WPS system to a [**] platform [**]. If BCGI chooses to ask AGCS to perform this [**] software port, BCGI will provide AGCS with [**] advance payment at the time of the request, and expect delivery of this additional ported software [**] following the request, and the original business arrangement described above will extend through [**]. Upon delivery and acceptance of this [**] ported software BCGI will provide AGCS with another [**] advance payment against future [**] revenue. AGCS and BCGI will issue a joint statement to the industry that describes this agreement (to be developed). Delivery of [**] WPS solution [**]: [**]. Warranty for [**] WPS solution: [**] from commercial service of each platform. Assumptions 5. [**] WPS Application will be based on [**] and a WIN prepaid functional specification to be provided by BCGI. 6. [**] will be separate from the [**] and will be provided by BCGI. 7. [**] will be provided by BCGI. 8. Service uses [**] WIN technology; not [**] technology. 9. Application enhancements will be as is being defined by [**] for Prepaid Service, [**] and as defined by BCGI specifications 10. If BCGI elects to port to [**] platforms, BCGI and AGCS will evenly pay to provide these platforms to AGCS for development and testing purposes. 11. Relevant porting of BCGI's [**] will be done by BCGI. Major Network Interfaces 12. [**] WIN [**] messages over [**]. This document is subject to changes and additions as the [**] standards get specified.] 13. [**] WIN [**] messages over [**]. This document is subject to changes and additions as the [**] standards get specified.] 14. [**] WIN,[**] messages over [**]. This interface is used by [**] to obtain [**] information. 15. [**]: Proprietary BCGI message set over [**] or [**]. 16. Application will have all of the [**] necessary for its operation. 17. Optionally, application shall support portions of the [**] to be resident on the subscriber's [**], with the application using the WIN,[**] to obtain the information from the [**]. This option permits the service provider to not have to duplicate [**] items of the subscriber but with a concomitant increase in [**] and corresponding [**]. 18. The [**], prepaid database and proprietary BCGI message set will be provided by BCGI 19. [**] will be provided by BCGI Attachment 2 AG Communication Systems Certificate of Acceptance of ______________ Software PARTIES AG Communication Systems Corporation (AGCS) 2500 West Utopia Road Phoenix, AZ 85027 Cellular Express Inc. d/b/a Boston Communications Group (BCG) 100 Sylvan Road Woburn, Massachusetts 01801 Agreement dated ____________, 1998. Effective Date of Acceptance ________________, 1998. BCG hereby certifies that the _________________ Software provided by AGCS and identified above has passed the acceptance testing performed pursuant to the above-referenced agreement and order and, consequently, BCG accepts said _______________ Software. _________________________________ Company By: ____________________________ Name: _______________________ Title: _______________________ Date: _______________________ Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Attachment 3 DATA CONNECTION AGREEMENT Cellular Express, Inc., a Massachusetts corporation d/b/a Boston Communications Group ("BCG") and AG Communication Systems Corporation, a Delaware corporation ("AGCS") enter into this Data Connection Agreement as of November 16, 1998 ("Effective Date"). I. BACKGROUND A. AGCS and BCG have entered into the Agreement effective as of 11/16 1998, in which AGCS shall provide BCG with services described in that Agreement. Upon execution of this Data Connection Agreement, it shall be an Attachment to and part of the Agreement to enable the parties to create a temporary dial-up capability between them to facilitate the performance of both parties under the Agreement. This Data Connection Agreement shall govern the parameters of said dial-up capability. II. AGREEMENT In consideration of the Agreement and the mutual covenants contained therein, AGCS and BCG agree to connect AGCS data facilities with BCG data facilities as follows: A. Facilities. The facilities to be used to connect AGCS' data facilities with BCG's data facilities are not intended to be a permanent connection between the two companies, but solely to execute the purposes and objectives of the Agreement. Such facilities shall consist of a dial-up connection and two modems, one at each end of the dial-up connection. The modem at the AGCS side is owned exclusively by AGCS, and the modem at the BCG side is provided by BCG. The dial-up connection is made over the public telephone network and will be activated by AGCS on request of BCG. BCG will provide AGCS with a dial-up account in order to provide technical assistance when required. In order to prevent direct access to their respective internal networks, the connection between AGCS and BCG (via the dial- up connection) shall be connected outside the firewalls, or, if it is necessary to connect inside the firewalls, such connection shall be pursuant to the other party's security policy. Generally, the AGCS equipment will be connected to the AGCS subnet with the IP address of [**] and the BCG equipment will be connected to the BCG subnet with the IP address [**]. Both parties shall provide their complete IP subnet addresses to each other in writing. Such addresses may be changed from time to time as necessary, by written notification to the other party. B. Term. The term of this Data Connection Agreement is concurrent with the term of the agreement. Breach of the Agreement shall constitute a material breach of this Data Connection Agreement. Notwithstanding any other provisions of the agreement, termination of this Data Connection Agreement shall be governed by Paragraph F in this Data Connection Agreement. C. Information Transmitted ("Information") 1. In General. The information that is transmitted between AGCS and BCG pursuant to this Data Connection Agreement will be limited to such data as is necessary to carry out the intent of the parties in the Agreement. The dial-up connection between AGCS and BCG may be initiated only by AGCS on an as-needed basis. 2. Information transmitted or Accessed Under This Data Connection Agreement Subject to Non-Disclosure. AGCS and BCG will safeguard the Information transmitted between them under this Data Connection Agreement as confidential data. Such information will be subject to all nondisclosure provisions set fort herein and in the Agreement. Each party agrees: (i) to use the other party's Information only for purposes of performance under the Agreement, (ii) not to reveal the Information to third parties except as required by law, and (iii) to take all reasonable precautions to safeguard the Information, all as required by the Agreement and this Data Connection Agreement. 3. Survival of Nondisclosure. This nondisclosure obligation shall survive the termination or expiration of this Data Connection Agreement. D. Responsibilities of the Parties. 1. Right to Audit. Each party will provide access to the other party during normal business hours, and upon a mutually agreed schedule, for the purposes of auditing the facilities used in the transmission, to ensure compliance with the terms of this Data Connection Agreement. The right of audit includes, at a minimum, all of the systems or network endpoints that have access to the other party's data. Visiting employees performing the security audit as described herein will be escorted at all times by an employee of the facility owner. AGCS and BCG will use standard product features to provide for statistics and audit trails, when necessary. The auditing party is responsible for the cost of audits, including, but not limited to, the time and material to support the audit and travel expenses. 2. Right to Perform Security Tests. Each party will permit the other, during normal business hours and upon a mutually agreed schedule, to perform logical security tests by technicians or automated equipment designed to identify potential security risks. These tests shall be limited to discovering risks associated with the usage and/or connections established pursuant to this Data Connection Agreement. 3. Responsibility for Failed Components. All network-related problems will be managed to resolution by the respective organizations, AGCS or BCG, as appropriate to the ownership of the failed component. AGCS and BCG will be responsible for all networking components within their respective data centers. 4. Physical Access. All physical access to equipment and services required to transmit data in accordance with the terms of this Data Connection Agreement will be in secure locations. Verification of authorization will be required for access to all such secured locations. 5. Forbidden Use of Connection. Use of any modem, or connection components for services or access not contemplated by the Agreement is forbidden. Any exception, other than access by third party vendors for maintenance purposes, shall require a written amendment to the Agreement. E. Indemnification. Each party agrees to indemnify the other party and to hold the other party harmless for any loss or damages as the result of: 1. the unauthorized access to the data facilities of the indemnified party through the indemnifying party's data facilities or equipment; 2. the misuse of Information obtained through the indemnifying party's data facilities, or otherwise obtained by the indemnifying party; or 3. any unauthorized access to, or misuse of, the data facilities, or Information of the indemnified party by the indemnifying party or any of its employees, agents, contractors, or other persons perpetrating such act through the indemnifying party's data facilities or equipment. F. Termination. Either party may immediately suspend access to its data facilities or may immediately terminate this Data Connection Agreement, without cause, upon written notice to the other party. G Amendment. This Data Connection Agreement may only be amended in writing, signed by an authorized representative of each party hereto. This Data Connection Agreement supersedes and replaces all prior agreements, understandings, representations, promises and statements made by either party regarding the subject matter hereof. H. Assignment. The obligations and benefits of this Data Connection Agreement shall inure solely to the entities listed above, and not to any other entities, divisions or business units. This Data Connection Agreement shall immediately become void if it is assigned without the prior written consent of the other party. I. Execution. This Data Connection Agreement may be executed by the respective parties in counterparts, with each respective signature becoming effective upon receipt of a facsimile signature (original to be immediately delivered via overnight courier). WHEREFORE, the parties authorized representatives have set their signatures below. CELLULAR EXPRESS, INC. AG COMMUNICATION SYSTEMS CORPORATION By: /s/Kevin Thigpen By: /s/Charles Schulz ------------------------------- --------------------------- Name: Kevin Thigpen Name: Charles Schulz ----------------------------- ------------------------- Title: Vice President & Gen. Mgr. Title: VP & GM ---------------------------- ------------------------ Date: November 16, 1998 Date: 11/12/98 ----------------------------- ------------------------- EX-10.48 5 AGREEMENT BETWEEN MD TELECOM & THE COMPANY EXHIBIT 10.48 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Agreement No. __ MDTELECOM SOURCE LICENSE AGREEMENT This Source License Agreement for the use of a single copy of MDTelecom's MicroEOS/MDzeroplus source code ("Agreement") is made between MDTelecom, Inc., an Ohio corporation with its principal offices at 7345 Production Drive, Mentor, Ohio 44060-4858 ("Company") and Boston Communications Group, Inc., a Massachusetts corporation with its principal offices at 100 Sylvan Road, Woburn, MA 01801 ("Licensee"). 1. Definitions. ----------- A. Affiliate. Any person that directly, or indirectly through one --------- or more in intermediaries, controls or is controlled by, or is under common control with, the specified person. Control means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. B. Application Software. All modules of the Licensed Software -------------------- supplied by the Company, including any updates furnished to the Licensee by the Company, and all related documentation. C. Authorized User(s). Any employee of Licensee or its Affiliates, ------------------ together with authorized agents or subcontractors of Licensee who shall require access to or use of the Licensed Software solely in connection with the business of Licensee. D. Concurrent User. The number of users logged on to the system --------------- manager module or any other module of the Licensed Software. 1 E. Current Version. The latest release of the Licensed Software, --------------- including the most recent upgrades. F. Documentation. The user guides, manuals and associated ------------- documentation supplied by the the Company in connection with the Licensed Software. G. Licensed Software. The series of computer software programs ----------------- which is listed on Exhibit "A". H. Order. Company's standard procedure of ordering licenses of the ----- Licensed Software. I. Original Version. The release of the Licensed Software installed ---------------- in conjunction with this Agreement. J. Person. Any individual, corporation, partnership, trust, limited ------ liability company or any other entity. K. Prior Version. Any release of the Licensed Software preceding ------------- the most recent release. L. Proprietary Material. The Licensed Software in any form, and the -------------------- algorithms and know-how embodied therein. M. Subsidiaries. A corporation at least a majority of the voting ------------ capital stock of which is owned directly or indirectly by the Licensee. N. Updates. Any error corrections, enhancements or modifications ------- released from time-to-time by the Company and related Documentation relating to Licensed Software. O. Use. Loading or transferring the Licensed Software, or any --- portion thereof, into a computer and executing any portion of that program. 2. License. ------- A. Subject to the terms and conditions of this Agreement, the Company grants 2 to the Licensee, a non-exclusive, non-transferrable license to use MDTelecom's MicroEOS/MDzeroplus source code only for use on a Digital VMS/Open VMS operating system ("Licensed Software"). A list of all program modules included in the Licensed Software is on Exhibit "A". The Licensee is licensed to: i. install a single copy of the Licensed Software on a single network server at the Licensee's facilities listed on Exhibit "B", which is operating on a single computer network; and ii. use the Documentation only in conjunction with the installation and all uses permitted hereunder of the Licensed Software. B. The license granted hereunder shall be a license to use the machine-readable object code and the source code of the Licensed Software. Use of the source code shall be limited to support of the Licensee's internal operations only. Neither the object code nor the source code may be used in any way to develop, support or maintain any commercially available software product that performs functions performed by the Licensed Software, including but not limited to call completion, credit validation, or operator functions. All utilities written by the Company to build an application program for internal use (including use for services provided by Licensee to its customers) only by the Licensee will be included with the Licensed Software when the same are completed. Any and all tools, (including hardware or other software required for the Licensee to build such an application program), will be the sole responsibility of the Licensee, at its cost. A list of tools which the Company reasonably believes are necessary for the Licensee to build such an application is listed on Exhibit "C". If the Licensed Software is loaded on a second server, for any reasonable business purpose, the Licensed Software must be removed from the first server. C. In addition to the rights granted in Section 2(A), the Company grants to 3 the Licensee the right to modify the source code version of the Licensed Software for any reasonable business purpose limited to support of the Licensee's internal operations only. D. Licensee agrees not to use the Company's name, logo, or trademark to market Licensee's software application products, and to include a valid copyright notice on Licensee's software product. 3. Delivery and Training. --------------------- Company will load the Licensed Software onto the tools provided by the Licensee within a commercially reasonable period of time, not to exceed ten (10) business days from execution date of this Agreement. Company will load the Licensed Software and demonstrate a full build of the Licensed Software to a designated representative of the Licensee at the offices of the Licensee on the required tools provided by the Licensee. Company agrees to provide available documentation and training at the Company's facilities to designated representative(s) of the Licensee that will enable the Licensee to modify, support and maintain the Original Version Source Code. Licensee agrees to promptly undertake all due diligence it reasonably believes to be necessary, and thereafter to accept the Licensed Software, subject to the terms and conditions of this Agreement. If following the exercise of due diligence by Licensee, the Licensed Software is not acceptable to Licensee, Licensee may return all copies of the Licensed Software and any associated documentation, in their original condition, to Company and all license fees paid by Licensee shall be refunded. Prior to acceptance, the Licensee agrees not to utilize the source code except for the purpose of acceptance testing. 4. License Fees. ------------ In consideration of the License provided hereunder, the Licensee agrees to pay Company the fees set forth in the License Fee Schedule attached hereto as Exhibit "E". Prices 4 quoted by the Company do not include any federal, state, municipal or other governmental taxes of any kind or description all of which shall be the responsibility of the Licensee. 5. Ownership and Copies of Licensed Software. ----------------------------------------- A. All right, title and interest in and to the Licensed Software, Documentation, enhancements or updates developed by the Company and furnished to Licensee and the media on which the same are furnished to Licensee, and all copyrights, patents, trademarks, service marks or other intellectual property or proprietary rights relating thereto, are and shall remain the sole property of Company. Licensee acknowledges that no such right, title or interest in these items is granted under this Agreement, and that no such assertion shall be made by Licensee. Licensee acknowledges that it is granted only a limited right of use as set forth herein, which right of use is subject to termination in accordance with Section 12 of this Agreement. B. Except as provided in Section 14E of this Agreement, Licensee is prohibited from distributing, transferring possession of, encumbering, or otherwise making available the Licensed Software, Documentation, enhancements or updates to any person other than Authorized Users under the terms of this Agreement and from installing the Licensed Software, enhancements or updates for use on any workstation or computer not within the property owned or leased by Licensee. Licensee shall advise all Authorized Users that they are prohibited from reproducing, distributing, transferring possession of or otherwise making available copies of the Licensed Software, Documentation, enhancements or updates and from using or installing the Licensed Software, enhancements or updates on any computer at any other location. C. Licensee may only make those copies of the Documentation as are reasonably necessary under the terms of this Agreement. Licensee shall not make any additional 5 copies of the Licensed Software, enhancements or updates; provided, however, that Licensee may make up to two (2) additional copies of the Licensed Software for back-up or archival purposes and a reasonable number of copies for training purposes. All authorized copies of the Licensed Software shall contain all copyright notices or proprietary legends specified by the Company. D. Licensee is permitted to transfer the Licensed Software for use within and among the Licensee and its Affiliates, subject to the terms and conditions of this Agreement. In the event of a change of control of the Licensee, the Licensed Software may only be transferred with the Company's written consent, such consent not to be unreasonably withheld or delayed. Under no circumstances may the Licensed Software, in whole or in part, be transferred by sale, assignment or otherwise, nor may it be encumbered as the subject of a security interest of any Person, as a stand alone entity or as a part of a particular business unit of the Licensee or its affiliates, except as otherwise provided in this Agreement. 6. Confidentiality. --------------- A. The parties hereto may have access to information that is confidential to one another ("Confidential Information"). Confidential Information shall include but not be limited to the Licensed Software and updates, including all source and object code and Documentation related to such software, the terms and pricing under this Agreement, business or financial affairs of either party, including such financial results of operations, business methods, pricing, competitor and product information and all other information designated as confidential by the party disclosing the same. A party's Confidential Information shall not include any information which (i) becomes part of the public domain through no act or omission of the other party; (ii) is lawfully acquired by the other party from a third party without any breach of confidentiality; or (iii) is disclosed by a party to a third party without any obligation of 6 confidentiality. The parties agree to maintain the confidentiality of the Confidential Information and to protect as a trade secret any portion of the other party's Confidential Information by preventing any unauthorized copying, use, distribution, installation or transfer of possession of such information. Each party agrees to maintain at least the same procedures regarding Confidential Information that it maintains with respect to its own Confidential Information. Without limiting the generality of the foregoing, Licensee shall not permit any Person or Authorized User to remove any proprietary or other legend or restrictive notice contained or included in any material provided by the Company. B. Parties hereto acknowledge that any use or disclosure of the other party's Confidential Information in a manner inconsistent with the provisions of this Agreement may cause the non-disclosing party irreparable damage for which remedies other than injunctive relief may be inadequate. Parties hereto agree that the non-disclosing party shall be entitled to receive from a court of competent jurisdiction in Lake or Cuyahoga County, Ohio or Middlesex County, Massachusetts injunctive or other equitable relief to restrain or enjoin such use or disclosure in addition to other appropriate remedies. C. The terms and provisions of this Section 6 shall survive any termination of this Agreement for any reason for a period of five (5) years. D. This Section 6 incorporates by reference Ohio Revised Code Sections 1333.61, et seq. and 1333.81 copies of which are appended hereto as -- --- Exhibit "F". 7. Limited Warranties. ------------------ Company represents and warrants: A. That it is the lawful owner or licensee of the Licensed Software and has the full right and authority to grant the licenses hereunder. 7 B. That the magnetic media on which the Licensed Software or an update is recorded and any Documentation provided under the terms of this Agreement will be free from defects in material and workmanship under normal use for a period of ninety (90) days following acceptance by Licensee. C. That the Licensed Software will perform substantially in accordance with the specifications set forth in the Documentation for a period of ninety (90) days from the date it is accepted by the Licensee (the "Warranty Period"), and, during the Warranty Period, the Company will maintain the current version of the Licensed Software such that it conforms in all material respects with the functions described in the Company's current user manual for the Licensed Software, including enhancements developed specifically for Licensee. Company will provide up to sixty (60) hours of telephone or e-mail technical consulting support to the Licensee by representatives of the Company selected by the Company during the Warranty Period. For each of the eleven (11) subsequent ninety (90) day periods following the Warranty Period, the Company will provide in a timely manner up to thirty (30) hours of telephone or e-mail technical consulting support to the Licensee by qualified representatives of the Company selected by the Company, subject to the approval of the Licensee, which approval shall not be unreasonably withheld. Such consulting is limited to technical support covering the internal structure of the Original Version of the Licensed Software, and how to create an application build utilizing the Licensed Software. If during the term of this Agreement the Company and the Licensee enter into a contract for the provision of enhancements by the Company to the Original Version of the Licensed Software, such modifications would also be included under the terms of this Section 7. Additional consulting can be made available at the then prevailing hourly rates as established by the Company. 8 D. Company warrants that the Licensed Software, including any embedded third party software, will function without error or interruption related to Date Data (defined as any data or input which includes an indication of or reference to date), provided that all Date Data from any other source, of any type, includes an indication of century. No other warranty, express or implied, is made by the Company for the Licensed Software relating to year 2000 functions. 8. Warranty Limitation. ------------------- A. Company does not warrant that the functions contained in the Licensed Software or in any update will meet the requirements of the Licensee or Authorized Users or that the operation of the Licensed Software or any update will be uninterrupted or error-free. The warranties set forth in this Section do not cover any copy of the Licensed Software, update or any Documentation which has been altered or changed in any way by the Licensee or any Authorized User. Company is not responsible for problems caused by changes in, or modifications to, the operating characteristics of any computer hardware or operating system for which the Licensed Software or any update is procured, nor is the Company responsible for problems which occur as a result of the use of the Licensed Software in conjunction with software of third parties or with hardware which is incompatible with the operating system for which the Licensed Software is being procured. B. ANY IMPLIED WARRANTIES, TERMS OR CONDITIONS, INCLUDING WARRANTIES, TERMS OR CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ARE EXPRESSLY EXCLUDED. The warranties, terms and conditions contained in Section 8 of this Agreement are made in lieu of all other express warranties, terms or conditions, whether oral or written. Only an authorized officer of the Company may make modifications to this warranty or additional warranties binding on the 9 Company, and such modifications or additional warranties must be in writing. C. Licensee agrees that once Licensee has modified some or all of the source code included in the Licensed Software in any manner, the Company has no responsibility in any manner for the performance of any portion of the Licensed Software affected in any way by the modifications undertaken by the Licensee. D. Any service rendered by the Company to revise or repair any modifications to the Licensed Software by the Licensee will be on a consulting basis at the then prevailing hourly rates as set by the Company. 9. Limitation of Remedies. ---------------------- A. Company's entire liability and Licensee's exclusive remedy for the breach of the Company's warranty obligations in Section 8 shall be: (i) in the case of defects in media the replacement by the Company of any magnetic media or Documentation not meeting the Company's Limited Warranties, and (ii) in case of any nonconformity or defect in the Licensed Software, the Company shall use commercially reasonable efforts to provide maintenance modifications or fixes with respect to any such error in a timely manner or at its option replace the Licensed Software. The Company, shall not be obligated to correct, cure or otherwise remedy any error or defect in the Licensed Software not covered by Company's warranty contained in Section 8 of this Agreement including but not limited to corrections or remedies resulting from (i) modifications of the Licensed Software by Licensee, (ii) misuse or damage of the Licensed Software, or (iii) failure of Licensee to notify the Company of the existence and nature of such nonconformity or defect promptly upon its discovery. B. COMPANY DISCLAIMS ANY AND ALL LIABILITY FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOSS OF PROFITS) 10 ARISING OUT OF THIS AGREEMENT OR WITH RESPECT TO THE INSTALLATION, USE, OPERATION OR SUPPORT OF THE LICENSED SOFTWARE OR ANY UPDATE OF THE LICENSED SOFTWARE, EVEN IF THE COMPANY HAS BEEN APPRISED OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. C. Licensee agrees that any liability on the part of the Company arising from breach of warranty, breach of contract, negligence, strict liability in tort or any other legal theory shall not exceed the aggregate amounts paid by Licensee in software license fees for the Licensed Software, prorated over a five (5) year period from the date of this Agreement notwithstanding any failure of essential purpose of any limited remedy. 10. Taxes. ----- Licensee shall promptly pay all local, state and federal taxes (but excluding taxes imposed on the Company's income) levied or imposed by reason of the transactions contemplated in this Agreement. Licensee shall promptly pay to the Company any such taxes actually paid or required to be collected or paid by the Company. If the Licensee claims it is exempt from any taxes, it shall furnish the Company with a true copy of the certificate showing its exemption upon demand. 11. Definition of Default. --------------------- A default shall be and is hereby defined to mean any of the following: A. The breach or violation of any material term, condition or provision of this Agreement by the Licensee, which is not cured within fifteen (15) days after written notice by Company to Licensee. B. The bankruptcy or insolvency of the Licensee. 11 C. The filing of a voluntary bankruptcy proceeding or reorganization proceeding or the assignment for the benefit of creditors, or the filing against the Licensee of any involuntary bankruptcy or reorganization proceedings whether such proceedings are under federal or state law which adjudicates the Licensee as bankrupt or insolvent. D. The attachment of all or substantially all of the Licensee's property for the failure to pay any judgment or debt of that party. 12. Term, Default and Termination. ----------------------------- A. This Agreement is effective from the date of its execution and continues until terminated by either party as provided herein. The license granted under this Agreement is perpetual. B. The Company may terminate this Agreement by written notice to Licensee for default, as defined in Section 11, and upon such termination the license granted under this Agreement to use the Licensed Software shall be immediately revoked. Within ten (10) calendar days after the termination of this Agreement, for default as defined in Section 11, Licensee shall return to the Company all copies of the Licensed Software, and/or updates and Documentation in Licensee's possession, including all copies of the Licensed Software, and/or updates and Documentation under the supervision and control of the Licensee and Authorized Users. In the alternative, upon written request of the Company, Licensee shall destroy all such copies of the Licensed Software and/or updates and/or Documentation and certify in writing that they have been destroyed. C. Licensee may terminate this Agreement, and the license provided hereunder, at any time upon prior written notice to the Company. Upon any such termination, Licensee shall forthwith deliver the Licensed Software and all copies thereof, in whatever form, 12 and all documentation and other information relating to the Licensed Software to the Company; however, Licensee will remain obligated to make any payment which by the terms hereof is scheduled to be made after the date of such termination. D. TERMINATION SHALL NOT RELIEVE LICENSEE AND AUTHORIZED USERS OF THEIR OBLIGATIONS REGARDING THE CONFIDENTIALITY OF THE LICENSED SOFTWARE, UPDATES AND DOCUMENTATION, OR EITHER PARTY OF ITS CONFIDENTIALITY OBLIGATIONS REGARDING CONFIDENTIAL INFORMATION SUCH PARTY HAS RECEIVED. 13. Infringement Indemnity. ---------------------- Company, at its own expense, will indemnify and defend any action brought against Licensee to the extent that it is based on a claim that the Licensed Software or any update of the Licensed Software used within the scope of this Agreement infringes any United States patent or copyright provided that the Company is promptly notified in writing of such claim. Company shall have the right to control the defense of all such claims, lawsuits, and other proceedings. In no event shall Licensee settle any such claim, lawsuit, or proceeding without the Company's prior written approval. Company shall have no liability for any claim under this Section 13 if a claim for a United States patent or copyright infringement is based on the use of a superseded or altered version of the Licensed Software if such infringement would have been avoided by use of the latest unaltered version of the Licensed Software available as an update, or in the event such claim is based upon any modification or enhancement to the Licensed Software made by Licensee or Authorized Users. In the event a third party infringement claim is sustained in a final judgment from which no further appeal is taken or possible, or if Licensee's use of the Licensed Software is enjoined by a court, then the Company shall, in its sole election and at is 13 expense either: (i) procure for Licensee the right to continue to use the Licensed Software pursuant to this Agreement, (ii) replace or modify the Licensed Software to make it non-infringing, or (iii) terminate this Agreement and refund to Licensee the depreciated value of the Licensed Software, based on straight line depreciation over a period of five (5) years. The Company shall have no other liability or obligation to Licensee except as expressly set forth above. 14. Miscellaneous. ------------- A. This Agreement may not be modified or altered except by written instrument duly executed by both parties. All exhibits referred to in this Agreement are incorporated into and part of this Agreement. B. Any notice or other communication required or permitted in this Agreement shall be in writing and shall be deemed to have been duly given on the day of service if personally or by facsimile transmission with confirmation, or three (3) days mailing if mailed by First Class mail, registered or certified, postage prepaid, and addressed to the respective parties at the addresses set forth above, or at such other addresses listed below unless notified of a change in writing pursuant to the terms and provisions of this paragraph: If to MDTelecom: MDTelecom, Inc. 7345 Production Drive Mentor, OH 44060 Attention: Bruce Knox, President Telecopier No.: (440) 205-1922 With a copy to: Thomas J. Scanlon, Esq. Tim L. Collins, Esq. Donahue & Scanlon 3300 Terminal Tower 50 Public Square Cleveland, Ohio 44113 Telecopier No.: (216) 696-1166 14 If to BCG: Boston Communications Group, Inc. 100 Sylvan Road Woburn, MA 01801 Attn: Robert J. Sullivan, Vice President Telecopier: (617) 692-6230 With a copy to: Alan J. Bouffard, General Counsel Boston Communications Group, Inc. 100 Sylvan Road Woburn, MA 01801 Telecopier No.: (617) 692-6230 C. This Agreement and performance under this Agreement shall be governed by the laws of the State of Ohio. D. If any provision of this Agreement is invalid under any applicable statute or rule of law, it is to that extent to be deemed omitted. The remainder of the Agreement shall be valid and enforceable to the maximum extent possible. E. Licensee may not assign or sub-license, without the prior written consent of Company, its rights, duties, or obligations under this Agreement to any person or entity, in whole or in part, provided, however, that this Agreement may be assigned by Licensee without the consent of the Company to any successor corporation or entity whether by purchase of all or substantially all of the assets or outstanding capital stock of Licensee or by merger or consolidation, provided that the transferee of the Licensed Software or this Agreement agrees in writing to be bound by and subject to all of the terms and provisions of this Agreement. F. The waiver or failure of either party to exercise in any respect any right provided for in this Agreement shall not be deemed a waiver of any further right under this Agreement. 15 G. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and each of which together shall constitute a single instrument. H. Neither party shall be responsible for failure to perform in a timely manner under this Agreement when its failure results from any of the following causes: Acts of God or public enemies, civil war, insurrection or riot, fire, flood, explosion, earthquake or serious accident, strike, labor trouble or work interruption or any cause beyond its reasonable control. I. Licensee agrees to comply with all export and re-export restrictions and regulations ("Export Restrictions") imposed by the government of the United States. Licensee will not commit any act or omission which will result in a breach of any such Export Restrictions. Licensee agrees that it will comply in all respects with any governmental laws, orders or other restrictions on the export of the Licensed Software (and related information and Documentation) which may be imposed from time to time by the governments of the United State and Canada ("Export Requirements"). Licensee will take all actions which may be reasonably necessary to ensure that it does not contravene the Export Requirements. This Section shall survive the expiration or termination of this Agreement. J. For purposes of this Agreement Licensee is not an agent of the Company and Licensee has no express or implied authority to act on behalf of, or make any representations whatsoever on behalf of the Company. The Company has no right to control any activities of License outside the terms of this Agreement. The Company is an independent contractor and neither party shall have the power or authority to bind the other party to any control or obligation. K. Any action against Licensee arising out of or relating to Section 6 of this Agreement or to its breach shall be brought in any federal or state court sitting in Cuyahoga or 16 Lake County, Ohio and both parties hereby submit to the exclusive jurisdiction of the state and federal courts of Cuyahoga or Lake County, Ohio with respect to such action. The parties hereto consent to service of process by any means authorized by Ohio or federal law. The prevailing party shall be entitled to receive from the other party its reasonable attorneys' fees and costs incurred in connection with any action or proceeding hereunder. Any controversy or claim arising out of or relating to any section of this Agreement other than Section 6 or the breach thereof shall be settled by binding arbitration in the City of Cleveland, Ohio, in accordance with the rules then obtaining of the American Arbitration Association, and judgment upon the award rendered may be entered in any court having jurisdiction thereof, but the arbitrator may not change any of the terms of this Agreement. The prevailing party shall be entitled to receive from the other party its reasonable attorneys' fees and costs incurred in connection with any arbitration proceeding hereunder, but such arbitration proceedings shall preclude a party from obtaining immediate injunctive relief pending a decision in the arbitration proceeding. L. On the Company's request, no more frequently than annually, License shall furnish the Company with a signed certification: (i) verifying that the Licensed Software is being used pursuant to the terms of this Agreement, including any user limitations, and (ii) listing the locations, types and serial numbers of the computer on which the Licensed Software is being used. Licensee agrees to grant the Company reasonable access to Licensee's site, upon prior written notice during normal business hours to audit the use of the Licensed Software. M. Any undisputed amounts payable by Licensee which are not paid when due shall bear interest at a rate of 1% per month from the due date until such amount is paid. N. Each person signing this Agreement represents that such person is authorized to sign for and on behalf of the party for whom such person has signed this 17 Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in duplicate by their duly authorized representatives as of this 17th day of December, 1998. MDTELECOM, INC. By: /s/ Dan F. Fish --------------------------------------- Dan F. Fish, President & COO BOSTON COMMUNICATIONS GROUP, INC. By: /s/ Robert J. Sullivan ____________________ --------------------------------------- Robert J. Sullivan, Vice President 18 EXHIBIT A CALL PROCESS CUSTOMER INQUIRY CUSTOMER SERVICE OPERATOR PROCESS REPORTS 19 EXHIBIT B Boston Communications Group, Inc. 100 Sylvan Road Woburn, MA 01801 20 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT C REQUIRED TOOLS 1. DEC C compliler [**] on OpenVMS Alpha [**] 2. Other tools as provided with OpenVMS Alpha 21 EXHIBIT D ACCEPTANCE FORM IN WITNESS WHEREOF, the parties hereto accept the items within this Agreement by their duly authorized representatives as of this day of , 1998. --- --------- WITNESSES: BOSTON COMMUNICATIONS GROUP, INC. By: - ------------------------ ----------------------------------- Robert J. Sullivan, Vice President - ------------------------ 22 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT E SOURCE CODE PAYMENT SCHEDULE AMOUNT TIME OF PAYMENT - ------ --------------- [**] Upon execution of Agreement [**] Upon acceptance of Source Code by Licensee [**] In 12 equal quarterly payments commencing upon completion of training and provision of documentation by Company, which enables the Licensee to modify, support and maintain the Source Code. _______ [**] Total 23 EXHIBIT F OHIO REVISED CODE SECTIONS 1333.61, ET SEQ. AND 133.81 ------ 24 EX-10.49 6 AMENDMENT NO. 4 DATED 12-4-98 EXHIBIT 10.49 CUMMINGS PROPERTIES MANAGEMENT, INC. STANDARD FORM ------------- COMMERCIAL LEASE In consideration of the covenants herein contained, Cummings Properties Management, Inc., hereinafter called LESSOR, does hereby lease to Boston Communications Group, Inc. (a MA corp.), hereinafter called LESSEE, the following described premises, hereinafter called the leased premises: approximately 5,739 square feet (including 3.25% common area) at 100 Sylvan Road, Suite 650, Woburn, MA 01801 TO HAVE AND HOLD the leased premises for a term of five (5) years commencing at noon on October 15, 1998 and ending at noon on October 14, 2003 unless sooner terminated as herein provided. LESSOR and LESSEE now covenant and agree that the following terms and conditions shall govern this lease during the term hereof and for such further time as LESSEE shall hold the leased premises. 1. RENT. LESSEE shall pay to LESSOR base rent at the rate of one hundred fourteen thousand four hundred ninety three (114,493.00) U.S. dollars per year, drawn on a U.S. bank, payable in advance in monthly installments of $9,541.08 on the first day in each calendar month in advance, the first monthly payment to be made upon LESSEE's execution of this lease, including payment in advance of appropriate fractions of a monthly payment for any portion of a month at the commencement or end of said lease term. All payments shall be made to LESSOR or agent at 200 West Cummings Park, Woburn, Massachusetts 01001, or at such other place as LESSOR shall from time to time in writing designate. If the "Cost of Living" has increased as shown by the Consumer Price Index (Boston Massachusetts, all Items, all urban consumers), U.S. Bureau of Labor Statistics, the amount of base rent due during each calendar year of this lease and any extensions thereof shall be annually adjusted in proportion to any increase in the Index. All such adjustment shall take place with the rent due on January 1 of each year during the lease term. The base month from which to determine the amount of each increase in the Index shall be January 1998, which figure shall be compared with the figure for November 1998, and each November thereafter to determine the percentage increase (if any) in the base rent to be paid during the following calendar year. In the event that the Consumer Price Index as presently computed is discontinued as a measure of "Cost of Living" changes, any adjustment shall then be made on the basis of a comparable index than in general use. 2. SECURITY DEPOSIT. LESSEE shall pay to LESSOR a security deposit in the amount of nineteen thousand (19,000.00) dollars upon the execution of this lease by LESSEE, which shall be held as security for LESSEE's performance as herein provided and refunded to LESSEE without interest at the end of this lease subject to LESSEE's satisfactory compliance with the conditions hereof. LESSEE may not apply the security deposit to payment of the last month's rent, in the event of any default or breach of this lease by LESSEE, LESSOR shall immediately apply the security deposit first to any unamortized improvements completed for LESSEE's occupancy, then to offset any outstanding invoice or other payment due to LESSOR, with the balance applied to outstanding rent. If all or any portion of the security deposit is applied to cure a default or breach during the term of the lease. LESSEE shall be responsible for restoring said deposit forthwith and failure to do so shall be considered a substantial default under the lease. LESSEE's failure to remit the full security deposit or any portion thereof when due shall also constitute a substantial lease default. Until such time as LESSEE pays the security deposit and first month's rent, LESSOR may declare this lease null and void for failure of consideration. 3. USE OF PREMISES. LESSEE shall use the leased premises only for the purpose of executive and administrative offices. 4. ADDITIONAL RENT. LESSEE shall pay to LESSOR as additional rent a proportionate share (based on square footage leased by LESSEE as compared with the total leaseable square footage of the building of which the leased premises are a part) of any increase in the real estate taxes levied against the land and building of which the leased premises are a part, whether such increase is caused by an increase in the tax rate, or the assessment on the property, or a change in the method of determining real estate taxes. LESSEE shall make payment within thirty days (30) of written notice from LESSOR that such increased taxes are payable, and any additional rent shall be prorated should the lease terminate before the end of any tax year. The base from which to determine the amount of any increase in taxes shall be the rate and the assessment in effect as of July 1, 1998. 5. UTILITIES. LESSOR shall provide equipment per LESSOR's building standard specifications to heat the leased premises in season and to cool all office areas between May 1 and November 1. LESSEE shall pay all charges for utilities used on the leased premises, including electricity, gas, oil, water and sewer. LESSEE shall pay the utility provider or LESSOR, as applicable, for all such utility charges as determined by separate meters serving the leased premises and/or as a proportionate share of the utility charges for the building if not separately metered. LESSEE shall also pay LESSOR a proportionate share of any other fees and charges relating in any way to utility use at the building. No plumbing, construction or electrical work of any type shall be done without LESSOR's prior written approval and the appropriate municipal permit. 6. COMPLIANCE WITH LAWS. LESSEE acknowledges that no trade, occupation, activity or work shall be conducted in the leased premises or use made thereof which may be unlawful, improper, noisy, offensive, or contrary to any applicable statute, regulation, ordinance or bylaw. LESSEE shall keep all employees working in the leased premises covered with Worker's Compensation Insurance and shall obtain any licenses and permits necessary for LESSEE's occupancy. LESSEE shall be responsible for causing the leased premises and any alterations by LESSEE which are allowed hereunder to be in full compliance with any applicable statute, regulation, ordinance or bylaw. 7. FIRE, CASUALTY, EMINENT DOMAIN. Should a substantial portion of the leased premises, or of the property of which they are a part, be substantially damaged by fire or other casualty, or be taken by eminent domain, LESSOR may elect to terminate this lease. When such fire, casualty, or taking renders the leased premises substantially unsuitable for their intended use, a just and proportionate abatement of rent shall be made, and LESSEE may elect to terminate this lease if: (a) LESSOR fails to give written notice within thirty (30) days of intention to restore the leased premises, or (b) LESSOR fails to restore the leased premises to a condition substantially suitable for their intended use within ninety (90) days of said fire, casualty or taking. LESSOR reserves all rights for damages or injury to the leased premises for the taking by eminent domain, except for the damage to LESSEE's property or equipment. 8. FIRE INSURANCE. LESSEE shall not permit any use of the leased premises which will adversely affect or make voidable any insurance on the property of which the leased premises are a part, or on the contents of said property, or which shall be contrary to any law or regulation from time to time established by the Insurance Services Office (or successor), local Fire Department, LESSOR's insurer, or any similar body. LESSEE shall on demand reimburse LESSOR, and all other tenants, all extra insurance premiums caused by LESSEE's use of the leased premises. LESSEE shall not vacate the leased premises or permit same to be unoccupied other than during LESSEE's customary non-business days or hours. 9. MAINTENANCE OF PREMISES. LESSOR will be responsible for all structural maintenance of the leased premises and for the normal daytime maintenance of all space heating and cooling equipment, sprinklers, doors, locks, plumbing, and electrical wiring, but specifically excluding damage caused by the careless, malicious, willful, or negligent acts of LESSEE or others, chemical, water or corrosion damage from any source, and maintenance of any non "building standard" leasehold improvements, LESSEE agrees to maintain at the expense all other aspects of the leased premises in the same condition as they are at the commencement of the term or as they may be put in during the term of this lease, normal wear and tear and damage by fire or other casualty only excepted, and 2 whenever necessary, to replace light bulbs, plate glass and other glass therein, acknowledging that the leased premises are now in good order and the light bulbs and glass whole. LESSEE will promptly control or vent all solvents, degreasers, smoke, odors, etc, and shall not cause the area surrounding the leased premises to be in anything other than a neat and clean condition, depositing all waste in appropriate receptacles. LESSEE shall be solely responsible for any damage to plumbing equipment, sanitary lines, or any other portion of the building which results from the discharge or use of any acid or corrosive substance by LESSEE. LESSEE shall not permit the leased premises to be overloaded, damaged, stripped or defaced, nor suffer any waste, and will not keep animals within the leased premises. If the leased premises include any wooden mezzanine type space, the floor capacity of such space is suitable only for office use, light storage or assembly work. If the leased premises are carpeted or partially carpeted, LESSEE will protect carpet with plastic or masonite chair pads under any rolling chairs. Unless heat is provided at LESSOR's expense, LESSEE shall maintain sufficient heat to prevent freezing of pipes or other damage. Any increase in air conditioning equipment or electrical capacity, or any installation and/or maintenance of equipment which is necessitated by some specific aspect of LESSEE's use of the leased premises shall be at LESSEE's expense. All maintenance provided by LESSOR shall be during LESSOR's normal business hours. 10. ALTERATIONS. LESSEE shall not make structural alterations or additions of any kind to the leased premises, but may make nonstructural alterations provided LESSOR consents thereto in writing. All such allowed alterations shall be at LESSEE's expense and shall conform with LESSOR's construction specifications. If LESSOR provides any services or maintenance for LESSEE in connection with such alterations or otherwise under this lease, any just invoice will be promptly paid. LESSEE shall not permit any mechanics' liens, or similar liens, to remain upon the leased premises in connection with work of any character performed or claimed to have been performed at the direction of LESSEE and shall cause any such lien to be released or removed forthwith without cost to LESSOR. Any alterations or additions shall become part of the leased premises and the property of LESSOR. Any alterations completed by LESSOR shall be LESSOR's "building standard" unless noted otherwise. LESSOR shall have the right at any time to change the arrangement of parking areas, stairs, walkways or other common areas of the building. 11. ASSIGNMENT OR SUBLEASING. LESSEE shall not assign this lease or sublet or allow any other firm or individual to occupy the whole or any part of the leased premises without LESSOR's prior written consent. Notwithstanding such assignment or subleasing, LESSEE and GUARANTOR shall remain liable to LESSOR for the payment of all rent and for the full performance of the covenants and conditions of this lease. LESSEE shall pay LESSOR promptly for legal and administrative expenses incurred by LESSOR in connection with any consent requested hereunder by LESSEE. 12. SUBORDINATION. This lease shall be subject and subordinate to any and all mortgages and other instruments in the nature of a mortgage, now or at any time hereafter, and LESSEE shall, when requested, promptly execute and deliver such written instruments as shall be necessary to show the subordination of this lease to sold mortgages or other such instruments in the nature of a mortgage. 13. LESSOR'S ACCESS. LESSOR or agents of LESSOR may at any reasonable time enter to view the leased premises, to make repairs and alterations as LESSOR should elect to do for the leased premises, the common areas or any other portions of the building of which the leased premises are a part, to make repairs which LESSEE is required but has failed to do, and to show the leased premises to others. 14. SNOW REMOVAL. The plowing of snow from all roadways and unobstructed parking areas shall be at the sole expense of LESSOR. 3 The control of snow and ice on all walkways, steps and loading areas serving the leased premises and all other areas not readily accessible to plows shall be the sole responsibility of LESSEE. Notwithstanding the foregoing, however, LESSEE shall hold LESSOR and OWNER harmless from any and all claims by LESSEE's agents, representatives, employees callers or invitees for damage or personal injury resulting in any way from snow or ice on any area involving the leased premises. 15. ACCESS AND PARKING. LESSEE shall have the right without additional charge to use parking facilities provided for the leased premises in common with others entitled to the use thereof. Said parking areas plus any stairs, walkways, elevators or other common areas shall in all cases be considered a part of the leased premises to the extent that they are utilized by LESSEE, or LESSEE's employees, agents, callers or invitees. LESSEE will not obstruct in any manner any portion of the building or the walkways or approaches to said building, and will conform to all rules and regulations now or hereafter made by LESSOR for parking, and for the care, use, or alteration of the building, it's facilities and approaches. LESSEE further warrants that LESSEE will not permit any employee or visitor to violate this or any other covenant or obligation of LESSEE. No unattended parking will be permitted between 7:00 PM and 7:00 AM without LESSOR's prior written approval, and from December 1 through March 31 annually, such parking shall be permitted only in those areas specifically designated for assigned overnight parking. Unregistered or disabled vehicles, or storage trailers of any type, may not be parked at any time, LESSOR may tow, at LESSEE's sole risk and expense, any misparked vehicle belonging to LESSEE or LESSEE's agents, employees, invitees or callers, at any time, LESSOR shall not be responsible for providing any security services for the leased premises. 16. LIABILITY. LESSEE shall be solely responsible as between LESSOR and LESSEE for deaths or personal injuries to all persons whomsoever occurring in or on the leased premises (including any common areas that are considered part of the leased premises hereunder) from whatever cause arising, and damage to property to whomsoever belonging arising out of the use, control, condition or occupation of the leased premises by LESSEE; and LESSEE agrees to indemnify and save harmless LESSOR and OWNER from any and all liability, including but not limited to costs, expenses, damages, causes of action, claims, judgments and attorneys' fees caused by or in any way growing out of any matters aforesaid, except for death, personal injuries or property damage directly resulting from the sole negligence of LESSOR. 17. INSURANCE. LESSEE will secure and carry at its own expense a comprehensive general liability policy insuring LESSEE, LESSOR and OWNER against any claims "based" on bodily injury (including death) or property damage arising out of the condition of the leased premises (including any common areas that are considered part of the leased premises hereunder) or their use by LESSEE, such policy to insure LESSEE, LESSOR and OWNER against any claim up to One Million (1,000,000) Dollars in the case of any one accident involving bodily injury (including death), and up to One Million (1,000,000) Dollars against any claim for damage to property. LESSOR and OWNER shall be included in each such policy as additional insureds using ISO Form CG 20 26 11 85 or some other form approved by LESSOR. LESSEE will file with LESSOR prior to occupancy certificates and any applicable riders or endorsements showing that such insurance is in force, and thereafter will file renewal certificates prior to the expiration of any such policies. All such insurance certificates shall provide that such policies shall not be cancelled without at least ten (10) days prior written notice to each insured. In the event LESSEE shall fail to provide or maintain such insurance at any time during the term of this lease, then LESSOR may elect to contract for such insurance at LESSEE's expense. 18. SIGNS. LESSOR authorizes, and LESSEE at LESSEE's expense agrees to erect, signage for the leased premises in accordance with LESSOR's building standards for style, size, location, etc. LESSEE shall obtain the prior written consent of LESSOR before erecting any sign on the leased premises, which consent shall include approval as to size, wording, design and location. LESSOR may remove and dispose of any sign not approved, erected or displayed in conformance with this lease. 4 19. BROKERAGE. LESSEE warrants and represents to LESSOR that LESSEE has dealt with no broker or third person with respect to this lease and LESSEE agrees to indemnify LESSOR against any brokerage claims arising by virtue of this lease. LESSOR warrants and represents to LESSEE that LESSOR has employed no exclusive broker or agent in connection with the letting of the leased premises. 20. DEFAULT AND ACCELERATION OF RENT. In the event that: (a) any assignment for the benefit of creditors, trust mortgage, receivership or other insolvency proceeding shall be made or instituted with respect to LESSEE or LESSEE's property; (b) LESSEE shall default in the observance or performance of any of LESSEE's covenants, agreements, or obligations hereunder, other than substantial monetary payments as provided below, and such default shall not be corrected within ten (10) days after written notice thereof: or (c) LESSEE vacates the leased premises, then LESSOR shall have the right thereafter, while such default continues and without demand or further notice, to re-enter and take possession of the leased premises, to declare the term of this lease ended, and to remove LESSEE's effects, without being guilty of any manner of trespass, and without prejudice to any remedies which might be otherwise used for arrears of rent or other default or breach of the lease. If LESSEE shall default in the payment of the security deposit, rent, taxes, or any substantial invoice lot goods, and/or services or other sum herein specified, and such default shall continue for ten (10) days after written notice thereof, and, because both parties agree that nonpayment of said sums when due is a substantial breach of the lease, and, because the payment of rent in monthly installments is for the sole benefit and convenience of LESSEE, then in addition to the foregoing remedies the entire balance of rent which is due hereunder shall become immediately due and payable as liquidated damages, LESSOR, without being under any obligation to do so and without thereby waiving any default, may remedy same for the account and at the expense of LESSEE. If LESSOR pays or incurs any obligations for the payment of money in connection therewith, such sums paid or obligations incurred plus interest and costs, shall be paid to LESSOR by LESSEE as additional rent. Any sums received by LESSOR from or on behalf of LESSEE at any time shall be applied first to any unamortized improvements completed for LESSEE's occupancy, then to effect any outstanding invoice or other payment due to LESSOR, with the balance applied to outstanding rent. LESSEE agrees to pay reasonable attorney's fees and/or administrative costs incurred by LESSOR in enforcing any or all obligations of LESSEE under this lease at any time. LESSEE shall pay LESSOR interest at the rate of eighteen (18) percent per annum on any payment from LESSEE to LESSOR which is past due. 21. NOTICE. Any notice from LESSOR to LESSEE relating to the leased premises or to the occupancy thereof shall be deemed duly served when left at the leased premises addressed to LESSEE, or served by constable, or sent to the leased premises by certified mail, return receipt requested, postage prepaid, addressed to LESSEE. Any notice from LESSEE to LESSOR relating to the leased premises or to the occupancy thereof shall be deemed duly served when served by constable, or delivered to LESSOR by certified mail, return receipt requested, postage prepaid, addressed to LESSOR at 200 West Cummings Park, Woburn, MA 01801 or at LESSOR's last designated address. No oral notice or representation shall have any force or effect. Time is of the essence in service of any notice. 22. OCCUPANCY. In the event that LESSEE takes possession of said leased premises prior to the start of said term, LESSEE will perform and observe all of LESSEE's covenants from the date upon which LESSEE takes possession except the obligation for the payment of extra rent for any period of less than one month, LESSEE shall not remove LESSEE's goods or property from the leased premises other than in the ordinary and usual course of business, without having first paid and satisfied LESSOR for all rent which may become due during the entire term of this lease. LESSOR shall have the right to relocate LESSEE to another facility upon prior written notice to LESSEE and on terms comparable to those herein. In the event that LESSEE continues to occupy or control all or any part 5 of the leased premises after the agreed termination of this lease without the written permission of LESSOR, then LESSEE shall be liable to LESSOR for any and all lose, damages or expenses incurred by LESSOR, and all other terms of this lease shall continue to apply except that rent shall be due in full monthly installments at a rate of one hundred fifty (150) percent of that which would otherwise be due under this lease. It being understood between the parties that such extended occupancy is as a tenant at sufferance and is solely for the benefit and convenience of LESSEE and as such has greater rental value. LESSEE's control or occupancy of all or any part of the leased premises beyond upon on the last day of any monthly rental period shall constitute LESSEE's occupancy for any entire additional month, and increased rent as provided in this section shall be due and payable immediately in advance. LESSOR's acceptance of any payments from LESSEE during such extended occupancy shall not alter LESSEE's status as a tenant at sufference. 23. FIRE PREVENTION. LESSEE agrees to use every reasonable precaution against fire and agrees to provide and maintain approved, labeled fire extinguishers, emergency lighting equipment, and exit signs and complete any other modifications within the leased premises as required or recommended by the Insurance Services Office (or successor organization), OSHA, the local Fire Department, or any similar body. 24. OUTSIDE AREA. Any goods, equipment or things of any type or description held or stored in any common area without LESSOR's prior written consent shall be deemed abandoned and may be removed at by LESSOR at LESSEE's expense without notice. LESSEE shall maintain a building standard size dumpster in a location of approved by LESSOR, which dumpster shall be provided and serviced at LESSEE's expense by whichever disposal firm may from time to time be designated by LESSOR. Alternatively, if a shared dumpster or compactor is provided by LESSOR, LESSEE shall pay its proportionate share of the costs associated therewith. 25. ENVIRONMENT. LESSEE will so conduct and operate the leased premises as not to interfere in any way with the use and enjoyment of other portions of the same or neighboring buildings by others by reason of odors, smoke, smells, noise, pets, accumulation of garbage or trash, vermin or other pests, or otherwise, and will at its expense employ a professional pest control service if necessary. LESSEE agrees to maintain efficient and effective devices for preventing damage to heating equipment from solvents, degreasers, cutting oils, propellants, etc. which may be present at the leased premises. No hazardous materials or wastes shall be stored, disposed of, or allowed to remain at the leased premises at any time, and LESSEE shall be solely responsible for any and all corrosion or other damage associated with the use, storage and/or disposal of same by LESSEE. 26. RESPONSIBILITY. Neither LESSOR nor OWNER shall be held liable to anyone for loss or damage caused in any way by the use, leakage, seepage or escape of water from any source, or for the cessation of any service rendered customarily to said premises or buildings, or agreed to by the terms of this lease, due to any accident, the making of repairs, alterations or improvements, labor difficulties, weather conditions, mechanical breakdowns, trouble or scarcity in obtaining fuel, electricity, service or supplies from the sources from which they are usually obtained for said building, or any cause beyond LESSOR's immediate control. 27. SURRENDER. LESSEE shall at the termination of this lease remove all of LESSEE's goods and effects from the leased premises. LESSEE shall deliver to LESSOR the leased promises and all keys and locks thereto, all fixtures and equipment connected therewith, and all alterations, additions and improvements made to or upon the leased promises, whether completed by LESSEE, LESSOR or others, including but not limited to any offices, partitions, window blinds, floor coverings (including computer floors), plumbing and plumbing fixtures, air conditioning equipment and ductwork or any type, exhaust fans or heaters, water coolers, burglar alarms, telephone wiring, telephone equipment, air or gas 6 distribution piping, compressors, overhead cranes, hoists, trolleys or conveyors, counters, shelving or signs attached to walls or floors, all electrical work, including but not limited to lighting fixtures of any type, wiring, conduit, EMT, transformers, distribution panels, bus ducts, raceways, outlets and disconnects, and furnishings or equipment which have been bolted, welded, nailed, screwed, glued or otherwise attached to any wall, floor or ceiling, or which have been directly wired to any portion of the electrical system or which have been plumbed to the water supply, drainage or venting systems serving the leased premises. LESSEE shall deliver the leased premises sanitized from any chemicals or other contaminants, and broom clean and in the same condition as they were at the commencement of this lease or any prior lease between the parties for the leased premises, or as they were modified during said term with LESSOR's written consent, reasonable wear and tear and damage by fire or other casualty only excepted. In the event of LESSEE's failure to remove any of LESSEE's property from the leased premises upon termination of the lease, LESSOR is hereby authorized, without liability to LESSEE for loss or damage thereto, and at the sole risk of LESSEE, to remove and store any such property at LESSEE's expense, or to retain same under LESSOR's control, or to sell at public or private sale (without notice), any or all of the property not so removed and to apply the net proceeds of such sale to the payment of any sum due hereunder, or to destroy such abandoned property. In no case shall the leased premises be deemed surrendered to LESSOR until the termination date provided herein or such other date as may be specified in a written agreement between the parties, notwithstanding the delivery of any keys to LESSOR. 28. GENERAL (a) The invalidity or unenforceability of any provision of this lease shall not affect or render invalid or unenforceable any other provision hereof. (b) The obligations of this lease shall run with the land, and this lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that LESSOR and OWNER shall be liable only for obligations occurring while lessor, owner, or master lessee of the premises. (c) Any action or proceeding arising out of the subject matter of this lease shall be brought by LESSEE within one year after the cause of action has occurred and only in a court of the Commonwealth of Massachusetts. (d) If LESSOR is acting under or as agent for any trust or corporation, the obligations of LESSOR shall be binding upon the trust or corporation, but not upon any trustee, officer, director, shareholder, or beneficiary of the trust or corporation individually. (e) If LESSOR is not the owner (OWNER) of the leased premises, LESSOR represents that said OWNER has agreed to be bound by the terms of this lease unless LESSEE is in default hereto. (f) This lease is made and delivered in the Commonwealth of Massachusetts, and shall be interpreted, construed, and enforced in accordance with the laws thereof. (g) This lease was the result of negotiations between parties of equal bargaining strength, and when executed by both parties shall constitute the entire agreement between sold parties. No other oral or written representation shall have any effect hereon, and this agreement may not be altered, extended or amended except by written agreement attached hereto or as otherwise provided herein. (h) Notwithstanding any other statements herein, LESSOR makes no warranty, express or implied, concerning the suitability of the leased premises for LESSEE's intended use. (i) LESSEE agrees that if LESSOR does not deliver possession of the leased premises as herein provided for any reason, LESSOR shall not be liable for any damages to LESSEE for such failure, but LESSOR agrees to use reasonable efforts to deliver possession to LESSEE at the earliest possible date, and a proportionate abatement of rent for such time as LESSEE may be deprived of possession said leased premises shall be LESSEE's sole remedy. (j) Neither the submission of this lease form, nor the prospective acceptance of the security deposit and/or rent shall constitute a reservation of or option for the leased premises, or any offer to lease, it being expressly understood and agreed that this lease shall not bind either party in any manner whatsoever until it has been executed by both parties. (k) LESSEE shall not be entitled to exercise any option contained 7 herein if LESSEE is in default of any forms or conditions hereof. (l) Except as otherwise provided herein, LESSOR, OWNER and LESSEE shall not be liable for any special, incidental or consequential damages, including but not limited to lost profits or loss of business, arising out of or in any way connected with performance or nonperformance under this lease, even if any party has knowledge of the possibility of such damages. (m) The headings in this lease are for convenience only and shall not be considered part of the terms hereof. (m) No endorsement by LESSEE on any check shall bind LESSOR in any way. (n) No endorsement by LESSEE on any check shall bind LESSOR in any way. (o) LESSOR and LESSEE hereby waive any and all rights to a jury trial in any proceeding in any way arising out of this lease. 29. SECURITY AGREEMENT. LESSEE hereby grants LESSOR a continuing security interest in all existing or hereafter acquired property of LESSEE which is in the leased premises to secure the payment of rent, the cost of leasehold improvements, and the performance of any other obligations of LESSEE under this lease. Default in the payment or performance of any of LESSEE's obligations hereunder is a default under this Security Agreement, and shall entitle LESSOR to immediately exercise all of the rights and remedies of a Secured Party under the Uniform Commerical Code. LESSEE also agrees to execute a UCC-1 Financing Statement and any other financing agreement required by LESSOR in connection with this security interest. 30. WAIVERS, ETC. No consent or waiver, express or implied, by LESSOR, to or of any breach of any covenant, condition or duty of LESSEE shall be construed as a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. If LESSEE is several persons, several corporations or a partnership, LESSEE's obligations are joint or partnership and also several. Unless repugnant to the context, "LESSOR" and "LESSEE" mean the person or persons, natural or corporate, named above as LESSOR and as LESSEE respectively, and their respective heirs, executors, administrators, successors and assigns. 31. AUTOMATIC FIVE-YEAR EXTENSIONS. This lease, including all terms, conditions, escalations, etc. shall be automatically extended for additional successive periods of five (5) years each unless LESSOR or LESSEE shall serve written notice, either party to the other, of either party's desire not to so extend the lease. The time for serving such written notice shall be not more than twelve (12) months or less than six (6) months prior to the expiration of the then current lease period. Time is of the essence. 32. ADDITIONAL PROVISIONS. (Continued on attached rider(s) if necessary. - See Attached Rider- IN WITNESS WHEREOF, LESSOR AND LESSEE have hereunto set their hands and common seals and intend to be legally bound hereby this 1st day of September 1998. LESSOR: CUMMINGS PROPERTIES LESSEE: BOSTON COMMUNICATIONS GROUP, MANAGEMENT, INC. INC. By: /s/ Douglas Stephens By: /s/ Fritz von Mering -------------------------------- ------------------------------ Executive Vice President Treasurer 8 STANDARD FORM RIDER TO LEASE The following additional provisions are incorporated into and made a part of the attached lease. A. * LESSEE shall have the right to assign this lease or sublet the leased premises to an affiliated corporation, namely a corporation in which LESSEE owns at least a 50 percent interest, a corporation which owns at least a 50 percent interest in LESSEE, a corporation with which LESSEE merges, or a corporation which is formed as a result of a merger or consolidation involving LESSEE, without further consent from LESSOR, provided LESSEE serves LESSOR with prior written notice to that effect. The provisions of Section 11 shall govern said assignment in all other respects. B. * LESSEE shall have access to the leased premises seven (7) days per week, Twenty-four (24) hours per day. LESSEE acknowledges and agrees that LESSOR has no responsibility for providing any security services for the leased premises, and LESSEE assumes any and all risks in that regard. C. * LESSEE's use of common area parking spaces for its employees and business invitees in the leased premises shall not at any time exceed LESSEE's proportionate share of the total number of spaces provided for the building under applicable municipal zoning regulations. D. * LESSOR, at LESSOR's cost, shall repair and repaint all drywall partitions, replace glass and light bulbs as needed, change all lock cylinders and clean all carpet before or about the time LESSEE takes possession of the leased premises. LESSOR: CUMMINGS PROPERTIES LESSEE: BOSTON COMMUNICATIONS GROUP, MANAGEMENT, INC. INC. By: /s/ Douglas Stephens By: /s/ Fritz von Mering -------------------------------- ------------------------------ Executive Vice President Treasurer 9 AMENDMENT TO LEASE #1 --------------------- In connection with a lease currently in effect between the parties at 100 Sylvan Road, Suite 650 Woburn, Massachusetts, executed on September 3, 1998 and terminating October 14, 2003 and in consideration of the mutual benefits to be derived herefrom, Cummings Properties Management, Inc., LESSOR, and Boston Communications Group, Inc., LESSEE, hereby agree to amend said lease as follows: 1. The commencement of the lease is hereby changed to noon on March 1, 1999. The termination shall remain noon on October 14, 2003, and so the initial term of the lease shall be shortened from five years to four years and seven and one-half months. 2. If LESSOR obtains possession of the leased premises from the current occupant prior to March 1, 1999, LESSEE shall accept possession of the leased premises and begin payment of monthly rent under this lease upon notice of such availability from LESSOR. Time is of the essence. 3. If LESSOR does not deliver possession of the leased premises to LESSEE on or before March 15, 1999, LESSEE may elect to cancel the lease by serving LESSOR with written notice to that effect on or before March 19, 1999. Cancellation of the lease and the proportionate abatement of rent provided for in Section 28 of the lease shall be LESSEE's sole remedies for any delay or failure by LESSOR in delivering possession of the leased premises. Time is of the essence. In the event of cancellation, LESSOR shall return the security deposit of $19,000.00 to LESSEE. 4. LESSEE waives any and all claims it may now have, or may ever in the future have, against LESSOR on account of any delay by LESSOR in delivering, or failure by LESSOR to deliver, possession of the leased premises to LESSEE. All other terms, conditions and covenants of the present lease shall continue to apply. This amendment shall be effective upon full execution and shall continue through the balance of the lease and any extensions thereof unless further modified by written amendments. In Witness Whereof, LESSOR and LESSEE have hereunto set their hands and common seals this 4th day of December, 1998. LESSOR: CUMMINGS PROPERTIES LESSEE: BOSTON COMMUNICATIONS GROUP, MANAGEMENT, INC. INC. By: /s/ Douglas Stephens By: /s/ Fritz von Mering -------------------------------- ------------------------------ Executive Vice President Treasurer 10 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, 1998: Reserves and allowances deducted from asset accounts: Allowance for billing adjustments and uncollectible accounts 1,304 $ -- $1,557 $1,353 $1,508 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
(1) Billing adjustments recorded as a reduction of revenue. (2) Settlement of billing adjustments. 11 EX-21 7 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. BCGII Foreign Sales Corp. Barbados BCGII Foreign Sales Corp. 5. BCG de Mexico, S.r.l. Mexico Boston Communications Group
EX-23.1 8 CONSENT OF ERNST & YOUNG 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 Nos. 333-11191) pertaining to the Boston Communications Group, Inc. Non-Qualified Stock Options Pursuant to Written Option Agreements, (Form S-8 No. 333-11195) pertaining to the Boston Communications Group, Inc. 1996 Employee Stock Purchase Plan, (Form S-8 No. 333- 57643) pertaining to the Boston Communications Group, Inc.1998 Stock Incentive Plan and (Form S-8 No. 333-57641) pertaining to the Boston Communications Group, Inc. Non-Statutory Stock Option of our report dated January 29, 1999, 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, 1998. /s/ Ernst & Young LLP Boston, Massachusetts March 29, 1999 EX-27 9 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 12-MOS DEC-31-1998 DEC-31-1998 OCT-01-1998 JAN-01-1998 DEC-31-1998 DEC-31-1998 18,523 18,523 7,086 7,086 18,432 18,432 (1,508) (1,508) 3,525 3,525 49,953 49,953 56,497 56,497 (18,442) (18,442) 91,760 91,760 12,556 12,556 0 0 0 0 0 0 164 164 78,494 78,494 91,760 91,760 23,671 86,482 23,671 86,482 15,527 60,367 23,550 89,631 0 0 0 0 (306) (1,349) 427 (1,800) 0 0 427 (1,800) 0 0 0 0 0 0 427 (1,800) 0.03 (0.11) 0.03 (0.11)
-----END PRIVACY-ENHANCED MESSAGE-----