<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-12410
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BI Incorporated
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(Exact name of issuer as specified in charter)
Colorado 84-0769926
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6400 Lookout Road, Boulder, Colorado
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80301
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(Address of principal executive offices)
(Zip Code)
(303) 530-2911
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of no par
value common stock outstanding at May 6, 1997 is 7,406,181.
<PAGE>
BI INCORPORATED
INDEX
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PART I - FINANCIAL INFORMATION: Page No.
Item 1 - Financial Statements
Balance Sheet
at March 31, 1997 and June 30, 1996 2
Statement of Operations
for the three and the nine months ended March 31, 1997 and 1996 3
Statement of Cash Flows
for the nine months ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 7
Signatures 9
PART II - OTHER INFORMATION:
Item 1 - Legal Proceedings: Incorporated by reference to Notes to Financial
Statements in Part I.
<PAGE>
Part I - Financial Statements
BI INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $2,781 $4,263
Short-term investments 469 1,099
Receivables, net 7,384 9,043
Investment in sales-type leases, net 3,824 4,345
Inventories
Raw materials 1,366 923
Work in process 1,551 1,033
Finished goods 691 1,064
Deferred income taxes 321 302
Prepaid expenses 658 893
--------------- ---------------
Total current assets 19,045 22,965
Investment in sales-type leases, net 2,735 3,446
Investment in Limited Liability Corporation 2,394
Rental and monitoring equipment, net 4,451 4,088
Property and equipment, net 9,964 2,564
Software, net 1,933 1,906
Intangibles, net 13,559 7,232
Other assets 1,267 619
--------------- ---------------
$55,348 $42,820
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $1,985 $1,486
Accrued compensation and benefits 1,652 1,581
Capital lease obligation 283
Accrued product warranty 158 193
Deferred revenue 1,253 1,086
Other liabilities 692 447
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Total current liabilities 6,023 4,793
--------------- ---------------
Capital lease obligation 6,624
Deferred revenue 3,003 821
Stockholders' equity
Common stock, no par value, 75,000 shares
authorized; 7,402 shares issued March 31, 1997
and 7,004 shares issued June 30, 1996 32,287 30,879
Retained earnings 7,411 6,327
--------------- ---------------
39,698 37,206
--------------- ---------------
$55,348 $42,820
=============== ===============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
2
<PAGE>
BI INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts, unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended March 31, ended March 31,
------------------------- --------------------------
1997 1996 1997 1996
---------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
Revenues
Net sales $3,391 $3,859 $9,245 $11,022
Service and monitoring income 9,504 5,279 23,578 15,715
Rental income 265 209 754 622
Other income 129 141 251 327
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Total revenues 13,289 9,488 33,828 27,686
---------- ------------- ---------- --------------
Costs and expenses
Cost of net sales 1,641 1,820 4,947 5,629
Cost of service and monitoring income 4,548 2,640 11,245 7,515
Cost of rental income 63 74 221 216
Selling, general and administrative expenses 4,189 2,667 10,782 7,948
Provision for doubtful accounts 471 30 1,038 90
Depreciation and amortization 489 355 1,358 1,015
Research and development expenses 848 678 2,307 1,931
---------- ------------- ---------- --------------
Total costs and expenses 12,249 8,264 31,898 24,344
---------- ------------- ---------- --------------
Income before income taxes 1,040 1,224 1,930 3,342
Income tax provision (471) (499) (846) (1,369)
---------- ------------- ---------- --------------
Net income $569 $725 $1,084 $1,973
========== ============= ========== ==============
Net Income per common and common equivalent share $0.08 $0.10 $0.15 $0.28
========== ============= ========== ==============
Weighted average number of common and common equivalent
shares outstanding 7,500 7,095 7,431 7,065
========== ============= ========== ==============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
3
<PAGE>
BI INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
For the nine months
ended March 31,
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1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $1,084 $1,973
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 4,701 4,265
Provision for losses on accounts receivable and STLs 1,038 169
Changes in assets and liabilities net of aquisition:
Receivables 1,170 (1,550)
Investment in STLs 1,232 (879)
Inventories (553) (105)
Accounts payable 299 474
Accrued expenses (401) (217)
Deferred revenue (333) 133
Other (76) 275
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Net cash from operating activities 8,161 4,538
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Cash flows from investing activities:
Capital expenditures (1,218) (1,079)
Increase in rental and monitoring equipment (2,474) (2,095)
Increase in capitalized software (646) (552)
Investment in Patent (309)
Net cash required for acquisitions (4,125) (35)
Change in investments 630 (165)
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Net cash from investing activities (8,142) (3,926)
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Cash flows from financing activities:
Decrease in capital lease obligation (110)
Purchase of common stock (2,560) (970)
Proceeds from issuance of common stock 1,169 897
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Net cash from financing activities (1,501) (73)
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Net change in cash and cash equivalents (1,482) 539
Cash and cash equivalents at June 30 4,263 2,358
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Cash and cash equivalents at March 31 $2,781 $2,897
================== ==================
</TABLE>
Supplemental disclosure of non-cash financing activities:
On October 10, 1996, the Company acquired 100% of Community Corrections
Corporation, Justice Alternatives Inc. and Tennessee Probation Services Inc. for
400,000 shares of common stock and $3,000,000 cash. The fair value of assets
acquired was $759,000 and liabilities assumed were $752,000.
In October 1996, the Company signed a 14 year non-cancelable lease. The present
value of the aggregate future minimum lease payments was $7,017,000, which is
reflected on the consolidated balance sheet as property and equipment. In
exchange for signing the lease the Company received a 25% interest in the
Limited Liability Corporation which owns the building. This interest was
$2,394,000.
On January 31, 1997, the Company acquired 100% of Peregrine Corrections
Incorporated for 157,895 shares of common stock and $1,125,000 cash. The fair
value of assets acquired was $514,000 and liabilities assumed were $323,000.
The accompanying notes are an integral
part of the financial statements.
4
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BI INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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.
Note 3 - Acquisition
- --------------------
On October 10, 1996, the Company effected a purchase of 100% of the outstanding
stock of Community Corrections Corporation (CCC), Justice Alternatives, Inc.
(JAI) and Tennessee Probation Services, Inc. (TPS). The purchase price was
400,000 shares of restricted common stock of the Company and $3,000,000 in cash.
The acquisition was accounted for as a purchase and the assets acquired and
liabilities assumed were recorded at their estimated fair values at the date of
acquisition. The excess of the purchase price over the fair value of assets
acquired was recorded as goodwill to be amortized over its estimated useful life
of 15 years. The operating results of the Company's wholly-owned subsidiaries
CCC, JAI and TPS have been included in the results of operations since October
1, 1996.
On January 31, 1997, the Company effected a purchase of 100% of the outstanding
stock of Peregrine Corrections Incorporated (PCI). The purchase price was
157,895 shares of restricted common stock of the Company and $1,125,000 in cash.
The acquisition was accounted for as a purchase and the assets acquired and
liabilities assumed were recorded at their estimated fair values at the date of
acquisition. The excess of the purchase price over the fair value of assets
acquired was recorded as goodwill to be amortized over its estimated useful life
of 15 years. The operating results of the Company's wholly-owned subsidiary,
PCI, has been included in the results of operations since February 1, 1997.
5
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Note 4 - Purchase of Treasury Stock
- -----------------------------------
On September 24, 1996, the Company announced its intention to purchase up to
$2,500,000 of its common stock in the open market. As of January 9, 1997, the
Company completed this program and had repurchased 359,700 shares at a weighted
average price of $7.12 per share. These shares were subsequently retired.
Note 5 - Legal Proceedings
- --------------------------
The Company is involved in three legal proceedings; two alleging negligence in
monitoring and detention; and one alleging defective product. One of the
proceedings involves the claimant seeking damages up to $3,000,000, a second
proceeding relates to the claimant seeking damages up to $200,000 and the third
proceeding has no stated damages amount. Management believes the Company has
adequate legal defenses and/or insurance coverage against all claims and intends
to defend them vigorously. There can be no assurance 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. No provisions for any such potential loss has been made
in the accompanying financial statements.
6
<PAGE>
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; misrepresented political or media statements; 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 THREE-MONTH PERIOD ENDED MARCH 31, 1997 (FISCAL 1997), COMPARED TO THE
THREE-MONTH PERIOD ENDED MARCH 31, 1996 (FISCAL 1996):
Total revenue for the three months ended March 31, 1997, increased 40.1% to
$13,289,000 compared to $9,488,000 in the corresponding period a year ago. The
increase related to an increase in service, monitoring and rental income of
$4,281,000 or 78.0% which was partially offset by a decrease in net sales of
468,000 or 12.1%.
The increase in service, monitoring and rental income related to the continuing
trend of government agencies to contract for electronic monitoring rather than
purchasing equipment. In addition, the Company generated income from providing
probation services throughout Georgia, Tennessee and South Carolina as well as
providing day reporting services in Colorado, New Mexico and Oregon related to
the acquisitions discussed in Note 3. The decrease in net sales revenue
resulted from lower electronic monitoring equipment purchases by government
agencies and qualified service providers.
Total gross profit was 53.0% in fiscal 1997 compared to 52.2% in fiscal 1996.
Service, monitoring and rental gross profit increased to 52.8% in the fiscal
1997 period from 50.6% for the same period last fiscal year. This increase was
due to the addition of probation services in fiscal 1997, see note 3, with
margins of 51.9% and improved monitoring margins of 53.7% in fiscal 1997
compared to 48.8% in the corresponding period a year ago. These margins can
fluctuate slightly from quarter-to-quarter due to differences in the total labor
required to supervise or monitor fluctuating offender populations.
Selling, general and administrative (S,G&A) expenses increased $1,522,000 to
$4,189,000 in fiscal 1997 from $2,667,000 in fiscal 1996. This increase related
largely to S,G&A expenses from the acquired companies discussed in Note 3. In
addition, certain expenditures were incurred related to market expansion and
sales activities.
7
<PAGE>
The provision for doubtful accounts increased $441,000 in fiscal 1997. This
relates largely to the Company's new probation service income. In the
comparable period of 1996, revenue was generated by either government agencies
or qualified service providers, both of which carried an extremely low risk of
payment default. Probation service income is 100% paid by the offender and
carries a higher risk of default. In response to this, the Company accrues
approximately 16% of probation service income to allowance for doubtful
accounts. The Company is implementing additional collection procedures to reduce
payment defaults.
Amortization expense increased $86,000 during fiscal 1997 as the result of
acquisition goodwill discussed in Note 3.
Research and development expenses increased $170,000 to $848,000, or 6.4% of
total revenue, compared to $678,000, or 7.2% in fiscal 1996. Research and
development expenses relate largely to enhancements of current products and
evaluating future technologies.
The Company recorded income tax expense of $471,000 and $499,000 for the three
months ended March 31, 1997 and 1996, respectively, which differs from the
statutory rate largely as a result of state income taxes and non-deductible
goodwill amortization expense.
THE NINE-MONTH PERIOD ENDED MARCH 31, 1997 (FISCAL 1997), COMPARED TO THE NINE-
MONTH PERIOD ENDED MARCH 31, 1996 (FISCAL 1996):
Total revenue increased 22.2% to $33,828,000 for fiscal 1997 from $27,686,000 in
fiscal 1996. Recurring revenue which includes service, monitoring and rental
income increased to $24,332,000 in fiscal 1997 or 48.9% from $16,337,000 in
fiscal 1996 due to the continuing trend by government agencies to contract
electronic monitoring services versus purchasing equipment. In addition,
service income for fiscal 1997 includes six months of probation service income
and two months of day reporting income from the acquisitions discussed in Note
3. Net sales income decreased to $9,245,000 in fiscal 1997 from $11,022,000 in
fiscal 1996. This revenue source can fluctuate from quarter to quarter based on
purchases of electronic monitoring units by government agencies and qualified
service providers.
Total gross profit on net sales, service, monitoring and rental income decreased
slightly to 51.1% in fiscal 1997 from 51.2% in fiscal 1996 largely as a result
of unabsorbed fixed costs from the Company's Jail Management System software.
Selling, general and administrative expenses increased $2,834,000 to $10,782,000
in fiscal 1997 from $7,948,000 in fiscal 1996. The increase was largely related
to higher sales expenses on expanded revenues, market expansion expenses and
related expenses as a result of the acquisitions discussed in Note 3.
Research and development expenses increased $376,000 to $2,307,000 or 6.8% of
revenue in fiscal 1997 from $1,931,000 or 7.0% of revenue in fiscal 1996. The
increase was due largely to factors discussed above.
The Company's income tax expense for fiscal 1997 and 1996 was $846,000 and
$1,369,000 respectively, which was higher than the expected statutory rate
largely as a result of state income taxes and non-deductible goodwill
amortization expense.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has significant net accounts receivable and net sales-type leases
totaling approximately $14 million, which could be used as collateral for future
borrowing arrangements.
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
March 31, 1997.
During the nine months ended March 31, 1997, the Company generated $8,161,000
from operating activities and expended $4,338,000 for capital equipment, rental
and monitoring equipment, and internally developed software. The Company
received $1,169,000 from the exercise of stock options and the Company's
employee stock purchase plan.
Working capital decreased $5,150,000 to $13,022,000 as of March 31, 1997. This
decrease was primarily the result of a decrease in cash associated with the
Company's $2,560,000 purchase of its common stock and the $4,125,000 of cash
associated with acquisitions discussed in Note 3.
In October 1996, the Company received a 25% ownership in the office building it
leases with a value of $2,394,000 in exchange for signing a 14 year non-
cancelable capital lease for the same building. The present value of the
aggregate future minimum lease payments on March 31, 1997 was $6,808,000. The
lease includes commitments over a four year period to lease an additional 20,600
square feet.
The Company believes its existing sources of liquidity to be generated from
operations will provide adequate cash to fund the Company's anticipated capital
needs through fiscal 1997.
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 May 7, 1997 By /s/ David J. Hunter
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David J. Hunter
President and Chief Executive Officer
/s/ Jacqueline A. Chamberlin
-------------------------------------
Jacqueline A. Chamberlin
Chief Financial Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,781
<SECURITIES> 469
<RECEIVABLES> 11,208
<ALLOWANCES> 0
<INVENTORY> 3,608
<CURRENT-ASSETS> 19,054
<PP&E> 9,964
<DEPRECIATION> 0
<TOTAL-ASSETS> 55,348
<CURRENT-LIABILITIES> 6,023
<BONDS> 0
0
0
<COMMON> 32,287
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 55,348
<SALES> 33,577
<TOTAL-REVENUES> 33,828
<CGS> 16,413
<TOTAL-COSTS> 31,898
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,930
<INCOME-TAX> 846
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,084
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
