| BOSTON COMMUNICATIONS GROUP INC Item 1A RISK FACTORS Certain Factors That May Affect Future Results If we lose, in whole or significant part, our appeal of the Freedom Wireless lawsuit in the US Court of Appeals for the Federal Circuit (“Appeals Court”) or the lawsuits with Freedom Wireless in United States District Court in Massachusetts (“District Court”), it would have a material adverse impact on our business, including potential asset impairment charges and the possibility of bankruptcy, impairing our ability to continue as a going concern |
| Although we have filed to appeal the entire judgment in the Freedom Wireless lawsuit involving us and Cingular, the Appeals Court may uphold the judgment in whole or in part, which currently stands at dlra165 million and exceeds our ability to pay |
| In addition, any significant delay in the Appeals Court issuing a final ruling could impair our business going forward due to ongoing uncertainty and additional legal costs |
| Freedom Wireless has also filed two separate patent infringement lawsuits against us and Sprint Nextel Corporation and us and Alltel Corporation and other carriers |
| Although we are contesting the lawsuits, there can 16 ______________________________________________________________________ [37]Table of Contents be no assurance of a favorable outcome in these matters |
| We are obligated to indemnify Sprint Nextel, Alltel and the other carriers for damages they may incur with respect to any finding of infringement by bcgi’s technology |
| Regardless of the outcome in these lawsuits, we have already incurred approximately dlra26dtta8 million in legal and other costs as of December 31, 2005 and will continue to incur significant expenses to support our ongoing defense |
| Ongoing legal costs may fluctuate from time to time, depending on the nature of our legal proceedings |
| We may continue to seek a settlement agreement with Freedom Wireless but we may not be able to reach a reasonable settlement or we may reach a settlement that could negatively impact our financial performance |
| We have engaged in settlement discussions with Freedom Wireless at various times; however, we have been unable to reach mutual agreement with Freedom Wireless and the other defendants in the cases |
| We continue to believe that we do not infringe the Freedom Wireless patents and believe that the patents are invalid, and that the size of the damages awarded bears no relationship to a reasonable royalty that bcgi or any company would have paid for a license of the patents |
| Nevertheless, in light of the adverse judgment and the negative effect that it is having on our business, we may engage in additional settlement discussions with Freedom Wireless in the future |
| Despite our desire to reach a reasonable settlement agreement, we may not be able to do so |
| Even if we are able to obtain a settlement, any settlement agreement and license may carry terms unfavorable to us and may significantly restrict our cash and/or future ability to generate profits |
| Additionally, a settlement may not be able to mitigate the adverse impact the judgment has already had on our business |
| The Funding of Security for Appeal (“Appeal Agreement”) with Cingular Wireless, in addition to any future requirement to provide additional security on our own, may substantially reduce our working capital and access to cash |
| With the current uncertainties facing us and the potential for unforeseen changes in our business and estimates, including but not limited to loss of customers and/or higher than expected legal costs, we may need additional working capital |
| In such circumstances, we may not have access to the dlra41dtta5 million placed in escrow as security for our appeal |
| We also may need to provide additional security for potential additional damages or royalties |
| If we are unable to secure additional capital or finance sufficient assets, we may need to seek protection under the US Bankruptcy Code |
| A class action lawsuit has been filed against us, which may result in litigation that is costly to defend and the outcome of which is uncertain and may harm our business |
| A putative class action complaint was filed in June 2005 and has been subsequently amended in the US District Court for the District of Massachusetts, against us, our Chief Executive Officer and our Chief Financial Officer on behalf of persons who purchased our common stock between June 6, 2002 and May 20, 2005 |
| The amended complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act as well as Rule 10b-5 promulgated thereunder by allegedly failing to disclose adverse facts regarding the Freedom Wireless, Inc |
| lawsuit, including that we had willfully infringed the Freedom Wireless patents |
| We intend to contest the lawsuit vigorously and believe that bcgi and the two executive officers named as defendants have meritorious defenses to the allegations set forth in the lawsuit |
| We can provide no assurance as to the outcome of this complaint |
| Any conclusion of this matter in a manner adverse to us could have a material adverse affect on our financial position and results of operations |
| In addition, the costs to us of defending any litigation or other proceeding could be substantial, even if such litigation or proceedings are resolved in our favor |
| Furthermore, there can be no assurance that our directors’ and officers’ insurance will be sufficient to cover any potential damages from this lawsuit |
| Such litigation could also substantially divert the attention of our management and our resources in general |
| Uncertainties resulting from the initiation and continuation of any litigation or other proceeding could harm our ability to compete in the marketplace |
| 17 ______________________________________________________________________ [38]Table of Contents As the uncertainty surrounding the status of the Freedom Wireless lawsuits continues, we face significant challenges retaining existing customers, vendors and employees and attracting new customers, vendors and employees, all of which has had a material adverse effect on our business |
| The status of the Freedom Wireless lawsuit remains unresolved and may remain unresolved for an indefinite period of time |
| This uncertainty has and will likely continue to significantly impact our existing business in the following ways: • Our ability to sell our products and services, including our products and services that are not related to the Freedom Wireless claims, to new and existing customers has been and may continue to be limited; • Alltel Corporation and other existing customers have terminated, failed to renew or are seeking to terminate their current contracts with us; • Existing customers may reduce their prepaid sales and marketing efforts with respect to our products in order to mitigate their potential exposure to litigation from Freedom Wireless; • Current employees have sought and may continue to seek other employment prior to a final resolution of the Freedom Wireless matter; • Prospective employees have not accepted and may continue not to accept our employment offers; and • Current and potential vendors have imposed and may continue to impose restrictions on us, including higher pricing, advance payment requirements and other terms in order for us to obtain their products and services |
| As a result, even if we are successful in our appeal and in the other Freedom Wireless lawsuits, our business may have been irreparably harmed |
| If our business substantially deteriorates further, we may need to seek protection under the US Bankruptcy Code before our appeal is decided |
| The loss or significant reduction of business from one of our major customers, including Verizon Wireless, Cingular Wireless or Sprint Nextel Corporation, would have a material adverse effect on our business |
| Historically, a significant portion of our revenues in any particular period has been attributable to a limited number of customers in the wireless telecommunications business |
| The following table summarizes the percentage of our total revenue received from Sprint Nextel Corporation, Verizon Wireless and Cingular Wireless for the three and twelve months ended December 31, 2005: Three months ended _________________________________________________________________ Year ended _________________________________________________________________ Sprint Nextel Corporation 46 % 38 % Verizon Wireless 22 % 24 % Cingular Wireless 9 % 14 % Verizon Wireless, Cingular Wireless and Alltel Corporation are also anticipated to be fully migrated off of our Real-Time Billing platform by June, 2006 |
| Thus, revenues from Verizon, Cingular and Alltel will substantially decrease, resulting in a reduction of overall revenue from our Real-Time Billing business from these three customers |
| We can provide no assurance that other customers may not migrate off of our platform due to concerns regarding our viability |
| Therefore, our wireless operator customers have used and/or tested and continue to use and/or test their own services or services of our competitors in certain markets |
| In addition, certain of our contracts are up for renewal in 2006 and beyond, including Sprint Nextel Corporation whose contract expires in the first quarter of 2007 |
| If and when each of the contracts is renewed, some contractual rates may be lower than in previous years and at lower rates than we have estimated |
| In addition, we 18 ______________________________________________________________________ [39]Table of Contents depend on our wireless customers to market and sell our solutions to consumers |
| We can provide no assurance that they will do so successfully, and therefore, that there will be a significant market for our mobile services platform |
| Sprint Nextel became our largest customer in 2005 and we expect that revenue from Sprint Nextel will constitute an even larger percentage of our revenue in 2006 |
| We can provide no assurance that Sprint Nextel will continue to use our services beyond the term of their contract with us |
| If we were to lose Sprint Nextel as a customer, our business would be materially and adversely impacted and we would likely need to seek protection under the US Bankruptcy Code |
| Additionally, there are a limited number of US customers available in the marketplace and if we are unable to add new customers, our business would be materially and adversely impacted |
| Our future success depends partly on the global acceptance of our new products, including bcgi Access Management, Payment Manager and bcgi Network |
| We have introduced bcgi Access Management, Payment Manager and bcgi Network product offerings to the global marketplace |
| The acceptance of these new products is critical to our strategy to diversify and grow our revenue base |
| Our success in gaining acceptance of these offerings will depend on our ability to integrate these products into existing wireless operator billing platforms |
| In addition, the success of bcgi Access Management will depend on wireless operator and subscriber acceptance of the capabilities of this product |
| To date, we have not had any significant deployments of these products, and in light of the current status of the Freedom Wireless litigation, our ability to sell new products is impaired |
| The failure or delay of any of these offerings to be accepted in the marketplace could have a material adverse effect on our business, financial condition and results of operations |
| Our future operating results are difficult to predict and may materially fluctuate, which may result in significant fluctuations in our stock price |
| We have experienced fluctuations in our quarterly operating results and such fluctuations may continue and could intensify |
| Additionally, as discussed in the overview section of management’s discussion and analysis of financial condition and results of operations, we anticipate that our global expansion and expanded product suite may result in more revenues from licensed sales, which tend to be less predictable |
| Our quarterly operating results may vary significantly depending on a number of factors, including: • Developments in the Freedom Wireless matter, including the cost of royalties, license fees, additional damages and legal support; • The loss of additional customers or the inability to effectively sell our products and services to new customers; • The lack of acceptance or delayed acceptance of our newest solutions, including bcgi Access Management and Payment Manager; • Variations in volumes of minutes of use generated by our wireless customers’ subscribers; • The number and significance of network outages in a particular quarter and the severity and timing of penalties that result from such outages; • Rates charged and paid by our customers; • Our wireless customers’ ability to generate additional prepaid subscribers using our solutions; • The extent of our wireless customers’ emphasis on promoting prepaid solutions and the timing of related marketing initiatives, including our wireless operators’ allocation of marketing resources for initiatives other than prepaid wireless services, such as data services, new technologies, etc; • Our wireless customers’ ability to minimize “churn” (the percentage of total prepaid subscribers that terminate service on our network); 19 ______________________________________________________________________ [40]Table of Contents • The relatively long sales cycles for many of our products; • Seasonal trends, particularly in the second and third quarters when wireless operators are not usually marketing and selling prepaid services as aggressively as in the first and fourth quarters of the year; and • Consolidation within the wireless industry, which could lead to the loss of a major customer or the reduction in rates per minute paid by our customers |
| We expect that our revenues and net income will decline in future quarters, as Verizon, Cingular and Alltel generate less revenue due to customer concerns regarding our viability |
| Also, a significant portion of our expenses is fixed |
| Accordingly, our results of operations are particularly sensitive to fluctuations in revenues |
| If our revenues fall below our expectations, we would most likely not be able to reduce our fixed or other expenses in time to sufficiently respond to such a shortfall |
| Additionally, due to all of the foregoing factors, it is possible that in some future quarter our results of operations will fall below our expectations and/or the expectations of public market analysts and investors |
| In such event, the price of our common stock would likely be materially and adversely affected and could potentially result in the delisting of our stock |
| If we do not continue to develop and offer more desirable functionality and features in our solutions at competitive prices, including bcgi Billing, bcgi Access Management, bcgi Payment, bcgi Network and the new solutions currently in our pipeline, we will not be able to compete effectively, and our business will be materially and adversely affected |
| Our business will not be successful if we do not develop and offer more functionality and features in our solutions than those available in competitive offerings, or if we are unable to develop new solutions to offer our wireless customers |
| In addition, we may be unable to leverage our existing infrastructure to provide enhancements to our current solutions or new solutions cost-effectively |
| If we cannot develop and provide more desirable functionality and features than our competitors, if we cannot sell new solutions, including bcgi Access Management, bcgi Network or bcgi Payment, or if we are unable to keep our costs down to provide new and enhanced solutions at competitive prices, we would likely lose market share or be required to reduce our pricing, which would have a material adverse effect on our business, financial condition and results of operations |
| In addition, if we do not successfully continue to upgrade our software and hosting environment as new wireless technologies evolve, we may lose existing and prospective customers |
| Our international sales and operations subject us to additional risks that can adversely affect our operating results |
| We are expanding our sales and operations internationally and expect to derive a greater portion of our revenues from customers outside the United States |
| Additionally, we have recently acquired businesses in India and Israel and opened sales offices in Singapore, Spain, Mexico and the United Kingdom |
| Our international operations are subject to a variety of risks, including: • General economic conditions in each country or region; • The overlap of different tax regimes; • Fluctuations in currency exchange rates and difficulties in transferring funds from certain countries; • The difficulty of managing an organization operating in various countries; • Compliance with a variety of international laws and regulations, including trade restrictions, local labor ordinances and changes in tariff rates; • Longer payment cycles and difficulties in collecting accounts receivable; • Import and export licensing requirements; • Political unrest, terrorism and the potential for other hostilities, particularly in areas in which we have facilities; and • Reduced protection for intellectual property rights in some countries |
| 20 ______________________________________________________________________ [41]Table of Contents Our success depends, in part, on our ability to anticipate and address these risks |
| We cannot guarantee that these or other factors will not adversely affect our business or operating results |
| We entered into a strategic investment agreement with an early stage entity with which we have a commercial relationship |
| In exchange for cash totaling dlra1dtta5 million, we received secured convertible promissory notes for the same amount |
| The notes are convertible at any time into the borrower’s common stock or preferred stock, as defined in the agreement |
| If the entity does not execute on its strategic plan, our investment could become impaired and therefore, may not be recovered |
| We rely on complex information technology systems and networks to operate our business |
| If any significant system or network disruption occurs, we will be subject to financial penalties that could adversely affect our business and operating results |
| We rely on the efficient and uninterrupted operation of complex information technology systems and networks |
| All information technology systems and networks are potentially vulnerable to damage or interruption from a variety of sources, including but not limited to computer viruses, security breaches, natural disasters, fire, power loss, terrorism, war, telecommunication failure or similar events |
| We have implemented various measures to guard against these risks |
| However, each quarter we have experienced network outages, some of which have resulted in significant reductions in revenue due to penalty clauses contained in certain of our wireless customer contracts |
| Our Bedford and Woburn, Massachusetts facilities are redundant, and each facility is able to provide all significant processing functions of our network |
| We still may not be protected from a natural disaster within the greater Boston, Massachusetts area |
| There may also be system or network disruptions if new or upgraded business management systems are defective or are not installed properly |
| However, there can be no assurance that a system or network failure or significant disruption will not have a material adverse impact on our business and our operating results |
| In addition, in the event of such a disruption or failure, we may incur significant costs to remedy the damages caused by such a situation |
| Our business would be materially adversely impacted if we cannot protect our intellectual property |
| Our success and ability to compete depends in part upon our proprietary technology and our ability to protect such technology |
| We have a number of patent applications pending to protect our proprietary technology in the United States and internationally |
| If these patent applications are not approved, we may not be able to prevent others from using similar technologies and we may be subject to additional patent infringement lawsuits or royalty payments to use the technology |
| We rely on a combination of contractual provisions, confidentiality procedures, and patent, trademark, trade secret and copyright laws to protect the proprietary aspects of our technology |
| These legal protections afford only limited protection and competitors may gain access to our intellectual property that may result in the loss of customers |
| In addition, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our technology or to obtain and use our proprietary information |
| Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others |
| Any litigation could result in substantial costs and diversion of resources with no assurance of success and could seriously harm our business and operating results |
| We may never realize the anticipated benefits of any acquisitions |
| A key part of our growth and diversification strategy has been to engage in acquisitions |
| We regularly review acquisition opportunities and have acquired companies in the recent past |
| There can be no assurance that we will be able to identify any appropriate acquisition candidates or that any identified acquisition opportunities will be available on terms and conditions acceptable to us |
| Additionally, we may be restricted from making acquisitions that would be attractive to us due to the uncertainty associated with the Freedom Wireless litigation |
| 21 ______________________________________________________________________ [42]Table of Contents We also may not be able to successfully integrate past or future acquisitions |
| Acquisitions involve numerous risks, including, among other things: • Possible decreases in capital resources or dilution to existing stockholders; • Risk that the acquired company’s technology infringes on an existing patent; • Difficulties and expenses incurred in connection with the acquisitions and the subsequent assimilation of the operations and the services or products of the acquired company; • Difficulties of operating a new business; • Potential inherited liability for the past actions of the acquired company; • Risk that any acquired company’s internal controls may not be adequate; • Diversion of management’s attention from other business concerns; • Limited ability to predict future operating results of the acquired company; and • Potential loss of key employees and customers of the acquired company |
| In the event that the operations of an acquired business do not meet expectations, we may be required to restructure the acquired business or write-off the value of some or all of the assets of the acquired business |
| There can be no assurance that any acquisition will be successfully integrated into our operations or will have the intended financial or strategic results |
| We may not be able to effectively manage the expansion of our business, which would adversely impact our ability to offer competitive solutions and grow |
| We have expanded our operations rapidly and continue to invest in new products and features, including expanding internationally |
| This has created significant demands on our technical, management, operational, development and administrative personnel and other resources |
| Any additional expansion by us may further strain our management, financial and other resources |
| There can be no assurance that our systems, procedures, controls and existing space will be adequate to support expansion of our operations or that we will be successful in our expansion strategy |
| Inability of our management to manage operational changes effectively would materially and adversely affect the quality of our solutions, our ability to retain key personnel and our business, financial condition and results of operations |
| Additionally, there can be no assurance that our investments will result in generating revenues within a reasonable time or that they will be sufficient to generate a reasonable return |
| Competition for employees with the skills we require is intense |
| Our success will depend on our ability to attract and retain key employees, including members of the executive management team as well as those employees in crucial technical, marketing and staff positions |
| The Freedom Wireless litigation has made it more challenging for us to attract and retain critical employees |
| The loss of one or more key employees, our inability to attract additional qualified employees, or the delay in hiring key personnel could have a material adverse impact on our business, financial condition and results of operations |
| The market for our solutions is very competitive and depends on the growth and health of the wireless industry and wireless operators |
| We have historically provided our solutions almost exclusively to wireless carriers |
| The market for solutions to wireless operators is highly competitive and subject to rapid change as new technologies are continually 22 ______________________________________________________________________ [43]Table of Contents introduced in the wireless marketplace |
| We anticipate continued growth and competition in the wireless services industry and, consequently, the entrance of new competitors in the future |
| Our competitors include independent providers of prepaid and other solutions to wireless operators and the wireless operators themselves who provide, or can provide, in-house services similar to ours |
| These wireless operators, and many of the independent service providers, have significantly greater financial and other resources than we do |
| In addition, the wireless industry is subject to consolidation, which could potentially result in the loss of carrier customers and/or subscribers |
| Competitive pressures may make it difficult for us to acquire and retain customers and may require us to reduce the price of our service solutions |
| We cannot be certain that we will be able to compete successfully with existing or new competitors |
| Our failure to maintain and enhance our competitive position would limit our ability to retain and increase our market share, resulting in serious harm to our business and operating results |
| To provide our solutions, we depend on a number of third-party software, hardware and service vendors, and our business, financial condition and results of operations would be materially adversely affected if we are unable, or are delayed in our ability to obtain these components and applications |
| Our operations are supported by many hardware components and software applications from third-party vendors, sometimes licensed from single vendors |
| There can be no assurance that these vendors will continue to license these components and applications to us or that they will do so at reasonable prices |
| In addition, there can be no assurance that these hardware components and software applications will function in accordance with specifications agreed upon by us and our vendors |
| If we cannot obtain these components and applications from our existing vendors, we may not be able to timely procure or develop replacement software and hardware at commercially reasonable costs, or at all |
| If we are unable to do so, we may be required to delay the development or sale of our current or future solutions, which would materially and adversely affect our business, financial condition and results of operations |
| Changes in government regulations could adversely impact our business |
| Proposals to intensify or reduce government regulations of the wireless telephone industry continue to be discussed at both the federal and state levels |
| Such changes may decrease the growth of the wireless telephone industry, result in new competitors or industry consolidation, limit the number of potential customers for our solutions or impede our ability to offer competitive solutions to the wireless market or otherwise have a material adverse effect on our business, financial condition and results of operations |