<PAGE>
BI INCORPORATED
Index
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<CAPTION>
Part I - Financial Information: Page No.
Item 1 - Financial Statements
<S> <C>
Balance Sheet
at September 30, 1997 and June 30, 1997 2
Statement of Operations
for the three months ended September 30, 1997 and 1996 3
Statement of Cash Flows
for the three months ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5 & 6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 7 through 11
Signatures 11
</TABLE>
Part II - Other Information:
Item 1 - Legal Proceedings: Incorporated by reference to Note 3 to Consolidated
Financial Statements in Part I.
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BI INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands, unaudited)
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<CAPTION>
September 30, June 30,
1997 1997
------------------- -------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $767 $1,694
Short-term investments 0 450
Receivables, net 8,926 8,647
Investment in sales-type leases, net 4,216 3,993
Inventories 3,549 3,861
Deferred income taxes 779 779
Prepaid expenses 993 665
------------------- -------------------
Total current assets 19,230 20,089
Investment in sales-type leases, net 4,161 2,764
Rental and monitoring equipment, net 4,214 4,366
Property and equipment, net 11,204 10,667
Software, net 2,208 1,987
Intangibles, net 12,592 12,908
Other assets 2,647 2,640
------------------- -------------------
$56,256 $55,421
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $1,232 $1,836
Accrued compensation and benefits 1,786 1,409
Capital lease obligation 98 82
Accrued product warranty 297 151
Deferred revenue 1,311 1,362
Income taxes payable 377 404
Other liabilities 483 304
------------------- -------------------
Total current liabilities 5,584 5,548
------------------- -------------------
Capital lease obligation 7,003 7,030
Deferred revenue 2,597 2,223
Stockholders' equity
Common stock, no par value, 75,000 shares
authorized; 7,422 shares issued Sept. 30, 1997
and 7,417 shares issued June 30, 1997 32,484 32,460
Retained earnings 8,588 8,160
------------------- -------------------
41,072 40,620
------------------- -------------------
$56,256 $55,421
=================== ===================
</TABLE>
The accompanying notes are an integral
part of the financial statements.
2
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BI INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts, unaudited)
<TABLE>
<CAPTION>
For the three months
ended September 30,
-------------------------------------
1997 1996
--------------- ------------------
<S> <C> <C>
Revenues
Net sales $4,519 $2,801
Service and monitoring income 10,037 5,616
Rental income 260 215
Other income 51 91
--------------- ------------------
Total revenues 14,867 8,723
--------------- ------------------
Costs and expenses
Cost of net sales 2,200 1,533
Cost of service and monitoring income 5,205 2,778
Cost of rental income 57 83
Selling, general and administrative expenses 4,509 2,892
Provision for doubtful accounts 595 58
Depreciation and amortization 801 401
Research and development expenses 755 712
--------------- ------------------
Total costs and expenses 14,122 8,457
--------------- ------------------
Income before income taxes 745 266
Income tax provision (317) (109)
--------------- ------------------
Net income $428 $157
=============== ==================
Net Income per common and common equivalent share $0.06 $0.02
=============== ==================
Weighted average number of common and common equivalent
shares outstanding 7,613 7,402
=============== ==================
</TABLE>
The accompanying notes are an integral
part of the financial statements.
3
<PAGE>
BI INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
For the three months
ended September 30,
-------------------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $428 $157
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 1,609 1,498
Provision for losses on accounts receivable and STLs 595 58
Changes in assets and liabilities:
Receivables (886) 1,217
Investment in STLs (1,620) 219
Inventories, net 312 (403)
Accounts payable (604) (580)
Accrued expenses 704 (430)
Deferred revenue 337 (123)
Current income taxes payable (27) (501)
Other (340) 201
-------------------------------------
Net cash from operating activities 508 1,313
-------------------------------------
Cash flows from investing activities:
Capital expenditures (1,102) (261)
Increase in rental and monitoring equipment (467) (520)
Increase in capitalized software (329) (277)
Change in short-term investments 450 (86)
-------------------------------------
Net cash used in investing activities (1,448) (1,144)
-------------------------------------
Cash flows from financing activities:
Payments on capital lease obligation (11) 0
Proceeds from issuance of common stock 24 304
-------------------------------------
Net cash from financing activities 13 304
-------------------------------------
Net change in cash and cash equivalents (927) 473
Cash and cash equivalents at beginning of year 1,694 4,263
-------------------------------------
Cash and cash equivalents as of September 30 $767 $4,736
=================== =============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
4
<PAGE>
BI Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
------------------------------------------
Note 1 - Preparation of Financial Statements
- --------------------------------------------
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual report.
The interim financial data are unaudited; however, in the opinion of the
management of the Company, the interim data includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results for the interim periods.
Note 2 - Net Income per Common and Equivalent Share
- ---------------------------------------------------
Net income per common and common equivalent share is computed on the basis of
the weighted average number of shares of common and common equivalent shares
outstanding during the period. Common equivalent shares are determined using
the treasury stock method, which assumes that proceeds from exercise of certain
outstanding stock options and warrants are utilized to repurchase outstanding
shares of the Company at the average fair market value during such period.
SFAS No. 128, "Earnings per Share," was issued in February, 1997. The Company
will be required to apply this statement in its consolidated financial
statements for the quarter ending December 31, 1997. This pronouncement
establishes new standards for computing and presenting EPS on a basis that is
more comparable to international standards and provides for the presentation of
basic and diluted EPS, replacing the currently required primary and fully-
diluted EPS. The basic EPS will be computed by dividing net income by the
weighted average number of shares outstanding during the period. Diluted EPS
will be computed in a manner similar to the current method for calculating
fully-diluted EPS. Prior period EPS will be restated to conform with the new
statement. The pro forma effect of applying SFAS No. 128 on the Company's
historical consolidated financial statements is as follows
(in thousands, except per share data):
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<CAPTION>
For the three months
ended September 30,
1997 1996
---- ----
<S> <C> <C>
EPS as reported
Primary EPS $ .06 $ .02
Weighted average common shares outstanding 7,613 7,402
Proforma EPS
Basic EPS Computation:
Basic EPS $ .06 $ .02
Weighted average common shares outstanding 7,420 7,035
Diluted EPS Computation:
Diluted EPS $ .06 $ .02
Weighted average common shares outstanding 7,613 7,402
assuming dilution
</TABLE>
5
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Note 3 - Legal Proceedings
On August 27, 1997, the Company received notice of a class action complaint
filed against it and certain of its officers and directors. The complaint
includes various claims under securities law as well as for common law fraud.
The complaint alleges, among other things, that various public filings and press
releases made by the Company during 1996 contained material misstatements and
omissions, including inflated Company revenues and earnings. The complaint
further claims that these misstatements and omissions occurred as a result of
shipping products to customers with the understanding that the customers had no
obligation to pay for the products and could return them at any time. In
addition, the complaint alleges that the Company failed to disclose (a) the
nature of competition in its monitoring services line of business and (b) that
one of the Company's products related to in-home alcohol testing did not work
properly. The complaint seeks rescission, unspecified damages and attorney's
fees on behalf of all persons who purchased the Company's common stock between
April 24, 1996 and September 12, 1996. The Company believes the complaint is
without merit but is currently unable to (a) determine the ultimate outcome of
resolution of the complaint, (b) determine whether resolution of this matter
will have a material adverse impact on the Company's financial position or
results of operations, or (c) estimate reasonably the amount of loss, if any,
which may result from resolution of this matter.
The Company is involved in four additional legal proceedings; one alleging
negligence in monitoring and detention; one alleging wrongful death from general
negligence, one alleging malfunction in equipment, and the last alleging
negligence in manufacturing. Two of the claimants seek damages up to
$3,000,000, one seeks damages in the amount of $150,000 and the fourth seeks
unspecified damages. The Company is also aware of certain unasserted potential
claims. Management believes the Company has adequate legal defenses and/or
insurance coverage against all claims and intends to defend them. There can be
no assurances however, that any individual case will result in an outcome
favorable to the Company. In the event of any adverse outcome, neither the
amount nor the likelihood of any potential liability which might result is
reasonably estimable. The Company currently believes that the amount of the
ultimate potential loss would not be material to the Company's financial
position or results of operations. However, an adverse future outcome in any
individual case, including legal defense costs, could have a material effect on
the Company's reported results of operations in a particular quarter.
6
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information in "Management's Discussion and Analysis" and other
statements periodically reported by the Company contain forward-looking
statements that involve risks and uncertainties. Management believes that its
expectations are based on reasonable assumptions. However, no assurances can be
given that its goals will be achieved. It should be noted that the earnings
history of the Company has not been consistent year to year. Factors that could
cause actual results to differ materially include, but are not limited to:
fluctuations due to timing of award of government contracts; pricing pressures;
liability in excess of insurance coverage; changes in federal, state and local
regulations; new product introductions by competitors or unexpected delays of
new product introductions by the Company; raw material availability; changes in
telecommunications regulations or technologies; or the loss of a material
contract through lack of appropriation or otherwise.
Results of Operations
- ---------------------
The following table provides a breakdown of selected results by Business Unit.
The Company's Business Units consist of Electronic Monitoring (EM), Community
Correctional Services (CCS) and Corrections Information Systems (CIS).
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Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
-------------------------------- -----------------------------------
EM CCS CIS Total EM CCS CIS Total
-------------------------------- -----------------------------------
(unaudited) (unaudited)
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Recurring Revenue
Service & Monitoring 6,111 3,881 45 10,037 5,194 370 52 5,616
Rental 260 260 215 215
Other Income 51 51 91 91
Net Sales 3,992 527 4,519 2,708 93 2,801
-------------------------------- -----------------------------------
Total Revenue 10,414 3,881 572 14,867 8,208 370 145 8,723
Gross Profit 5,823 1,483 99 7,405 4,233 192 (96) 4,329
Gross Profit % 55.9% 38.2% 17.3% 49.8% 51.6% 51.9% (66.2%) 49.6%
</TABLE>
7
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The three-month period ended September 30, 1997 (fiscal 1998), compared to the
three-month period ended September 30, 1996 (fiscal 1997):
Revenue
Total revenue for the three months ended September 30, 1997, increased 70.4% to
$14,867,000 compared to $8,723,000 in the corresponding period a year ago. The
Company is continuing to expand recurring revenue which includes service,
monitoring and rental income although there can be no assurances that the
Company will be successful in continuing this expansion. These revenue sources,
which are generated within all three business units increased to $10,297,000 or
69.3% of total revenue in fiscal 1998 from $5,831,000 or 66.8% of total revenue
in fiscal 1997. All three business units reported revenue increases for fiscal
1998 as compared to fiscal 1997.
The EM business unit revenue increased 26.9% to $10,414,000 in fiscal 1998
compared to $8,208,000 in fiscal 1997. Some government agencies purchase
equipment and run their own monitoring programs, others elect to utilize both
monitoring equipment and services offered by the Company, while other agencies
purchase equipment from the Company and then contract with the Company for the
service portion of the monitoring. Recurring revenue which is comprised of
electronic monitoring and rental income increased 17.8% to $6,371,000 in fiscal
1998 from $5,409,000 in fiscal 1997. This increase in recurring revenue relates
to the continuing trend of government agencies to contract for electronic
monitoring rather than purchasing equipment. Net sales revenue increased 47.4%
to $3,992,000 in fiscal 1998 from $2,708,000 in fiscal 1997. This significant
improvement in net sales was due to a relatively high backlog of orders carried
into the first quarter of fiscal 1998 and relatively low revenue in the first
quarter of fiscal 1997. The Company has implemented a change in market strategy
emphasizing recurring revenue which will slow the growth rate of net sales for
fiscal year 1998.
The CCS business unit recurring revenue increased approximately tenfold to
$3,881,000 in fiscal 1998 compared to $370,000 in fiscal 1997. The 1998 growth
was primarily due to service revenue associated with acquisitions of two
companies, in October 1997 and January 1998, which provide probation services
throughout Georgia, Tennessee and South Carolina as well as day reporting
services in Colorado, New Mexico and Oregon. These two acquisitions accounted
for $3,539,000 of revenue in the first quarter of fiscal 1998. The fiscal 1997
revenue was generated through the Company's automated reporting and collections
products (PROFILE and PROFILE PLUS). The Company anticipates continued revenue
growth in this business unit for fiscal year 1998.
The CIS business unit increased revenue 294.5% to $572,000 in fiscal 1998
compared to $145,000 in fiscal 1997. Net sales revenue associated with the
Institutional Management System (IMS) applications software product increased to
$527,000 in fiscal 1998 from $93,000 in fiscal 1997. The CIS business unit has
contracts lasting from one month to approximately eighteen months in duration.
This substantial increase in revenue is a direct result of the $3,524,000 of
backlog carried into fiscal year 1998. The Company expects continued significant
increases in net sales revenue for fiscal year 1998 compared to fiscal year
1997. Recurring revenue which is comprised of software service agreements
decreased slightly to $45,000 in fiscal 1998 from $52,000 in fiscal 1997.
8
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Gross Profit
Total gross profit as a percentage of total revenue for the three months ended
September 30, 1997, increased to 49.8% or $7,405,000 compared to 49.6% or
$4,329,000 in the corresponding period a year ago.
The EM business unit increased its total gross profit to 55.9% or $5,823,000 in
fiscal 1998 compared to 51.6% or $4,233,000 for the same period in fiscal 1997.
This increase was due to substantial improvements in gross profits on recurring
revenue as well as net sales revenue. EM recurring revenue gross profit
increased to 55.5% in fiscal 1998 compared to 52.2% in fiscal 1997. Electronic
monitoring gross profit improved in fiscal 1998 as a result of increased
equipment utilization as well as labor and telephone efficiencies gained from
improvements to the monitoring software. Net sales gross profit increased to
56.1% in fiscal 1998 compared to 48.7% in fiscal 1997 as a result of
manufacturing efficiencies on increased units shipped during fiscal 1998.
The CCS business unit decreased its gross profit to 38.2% for the three months
ended September 30, 1997 compared to 51.9% in the corresponding period a year
ago. This business unit has changed its product offering substantially in fiscal
1998 compared to fiscal 1997 as a result of two acquisitions in the probation
and day reporting services area. These services require relatively high direct
labor costs which are recognized as direct costs of sales which reduce gross
profit. The Company expects cost reductions and improved operating efficiencies
to increase the CCS gross profit percentage over time.
The CIS business unit improved its gross profit to 17.3% in the first quarter of
fiscal 1998 compared to (66.2)% for the same period in fiscal 1997. This
improvement is a result of continued cost reductions and increased order volume.
The Company anticipates CIS revenue to increase. This increase revenue along
with the implementation of additional efficiency improvements is expected to
increase the CIS gross profit percentage through fiscal year 1998.
Selling, General and Administrative (S,G&A)
S,G&A expenses for the three months ended September 30, 1997, increased
$1,617,000 to $4,509,000 compared to $2,892,000 in the corresponding period a
year ago. The Company expects S,G&A expenses for fiscal year 1998 to decrease as
a percentage of total revenue as compared to fiscal year 1997.
The EM business unit increased its S,G&A expenses $459,000 in fiscal 1998. This
increase is related to market expansion and diversification as well as increases
in account management and technical services related to increasing customer
satisfaction and growth of existing customer sites. The Company expects to
increase marketing expenses associated with continuing market expansion
activities throughout fiscal year 1998.
The CCS business unit increased its S,G&A expenses in the first quarter of
fiscal 1998 as compared to the same period in fiscal 1997 as a result of the
consolidation of two acquisitions in the probation and day reporting services
area.
The CIS business unit increased its S,G&A expenses $176,000 in fiscal 1998 but
decreased to 56.8% of CIS revenue in fiscal 1998 compared to 102.7% in fiscal
1997. This increase was associated with market expansion and infrastructure
costs necessary to manage deployment and implementation of existing contracts.
9
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Provision for Doubtful Accounts
The provision for doubtful accounts for the three months ended September 30,
1997, increased $537,000 to $595,000 compared to $58,000 in the corresponding
period a year ago. In the comparable period of 1997, revenue was generated by
either government agencies or qualified service providers, both of which carried
an extremely low risk of payment default. Accordingly, the EM business unit
recognized a small increase of $31,000 in fiscal 1998 compared to fiscal 1997.
The remaining $506,000 increase in fiscal 1998 expense compared to fiscal 1997
relates to the CCS business unit. Probation service revenue is 100% paid by the
offender and carries a higher risk of default. In response to this, the Company
accrued approximately 17% of probation service revenue to allowance for doubtful
accounts during the first quarter of fiscal 1998. The Company is implementing
additional collection procedures to reduce payment defaults within the CCS
business unit.
Amortization and Depreciation (A&D)
A&D expense for the three months ended September 30, 1997, increased $400,000 to
$801,000 compared to $401,000 in the corresponding period a year ago. The EM
business unit increased its A&D expense $214,000 in the first quarter of fiscal
1998 compared to the first quarter of fiscal 1997. This increase is the result
of continuing investments in capital expenditures within the business unit. The
CCS business unit increased its A&D expense $188,000 in the first quarter of
fiscal 1998 from $6,000 in the first quarter of fiscal 1997. Approximately two
thirds of the fiscal 1998 increase is associated with amortization of goodwill
related to the acquisition of two companies. The remaining increase is
associated with depreciation of fixed assets purchased through the acquisitions.
Research and Development Expenses (R&D)
R&D expense for the three months ended September 30, 1997, increased $43,000 to
$755,000 in fiscal 1998 compared to $712,000 in the corresponding period a year
ago. The EM business unit increased its R&D expenses to $653,000 or 6.3% of EM
revenue. These expenses relate largely to enhancements of current products and
evaluating future technologies. The CIS business unit increased its R&D expenses
$65,000 in the first quarter of fiscal 1998 as compared to the same period in
fiscal 1997. This increase is the result of the continued development of the
Institutional Management System (IMS) software.
Net Income and Income Taxes
The Company recorded income tax expense of $317,000 and $109,000 for the three
months ended September 30, 1997 and 1996, respectively, which differs from the
statutory rate largely as a result of state income taxes and non-deductible
goodwill amortization expense.
10
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Liquidity and Capital Resources
- -------------------------------
For the three months ended September 30, 1997 the Company generated $508,000 of
cash from operating activities, realized $450,000 through the liquidation of
short-term investments, expended $1,102,000 for capital equipment and leasehold
improvements, expended $467,000 for equipment associated with rental and
monitoring contracts, and expended $329,000 of cash for capitalized internally
developed software. The total of all cash flow activities resulted in a decrease
in the balance of cash and cash equivalents of $927,000 for the three months
ended September 30, 1997.
Working capital decreased $895,000 to $13,646,000 at September 30, 1997. This
decrease was primarily the result of a decrease in cash associated with the
Company's investments in capital expenditures, monitoring equipment, and
internally developed software.
The Company has a $5,000,000 line of credit with BankOne, Boulder, Colorado
which expires in October 1999. No amounts were drawn against this line as of
September 30, 1997.
Working capital may be obtained by financing certain operating and sales-type
leases under recourse and non-recourse borrowing arrangements. These borrowings
would be collateralized with a security interest in the leased equipment. At
September 30, 1997, the Company had unfunded leases in the amount of $8,377,000
which could be used as collateral for future borrowing arrangements.
The Company believes its existing sources of liquidity will provide adequate
cash to fund the Company's anticipated capital needs through fiscal 1998.
Recent Pronouncements
- ---------------------
The Company has determined that the adoption of recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
will not have a material impact on its results of operations. The proforma
effect of SFAS No. 128 is disclosed in Note 2 of the Consolidated Financial
Statements.
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BI Incorporated
Date October 28, 1997 By
----------------------- -----------------------------------
David J. Hunter
President and Chief Executive Officer
--------------------------------------
Jacqueline A. Chamberlin
Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 767
<SECURITIES> 0
<RECEIVABLES> 13,142
<ALLOWANCES> 0
<INVENTORY> 3,549
<CURRENT-ASSETS> 19,230
<PP&E> 11,204
<DEPRECIATION> 0
<TOTAL-ASSETS> 56,256
<CURRENT-LIABILITIES> 5,584
<BONDS> 0
0
0
<COMMON> 32,484
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<TOTAL-LIABILITY-AND-EQUITY> 56,256
<SALES> 14,816
<TOTAL-REVENUES> 14,867
<CGS> 7,462
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