<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 December 31, 1996
-----------------
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
- ------------------------------- ------------------------
(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
----- -----
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 January 24, 1997 is 7,230,909.
<PAGE>
BI INCORPORATED
INDEX
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PART I - FINANCIAL INFORMATION: Page No.
Item 1 - Financial Statements
Balance Sheet
at December 31, 1996 and June 30, 1996 2
Statement of Operations
for the three and the six months ended December 31, 1996 and 1995 3
Statement of Cash Flows
for the six months ended December 31, 1996 and 1995 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.
Item 4 - Submission of matters to a vote of security holders.
a) BI Incorporated's 1996 Annual Meeting of Stockholders was held on November
7, 1996.
b) At the annual meeting the following persons were elected to the Board of
Directors: William E. Coleman, Mckinley C. Edwards, Jr., David J. Hunter,
Perry M. Johnson, Jeremy N. Kendall, Frank L. Randall, Jr., Byam K. Stevens,
Jr., and Beverly J. Haddon.
c) The following matters were authorized by a vote of the majority of the
outstanding shares of 7,041,912 at record date as follows:
Approval of the Company's 1996 Stock Option Plan. For = 2,174,474;
Against = 1,215,715; Abstained = 48,675; Broker non-votes = 2,322,316.
Ratification of Price Waterhouse, the independent auditor. For =
5,725,296; Against 15,607; Abstained = 20,278; Broker non-votes = 0.
Item 6 - Exhibits and Reports on Form 8-K:
b) Form 8-K filed with the Securities and Exchange Commission on October 24,
1996. Form 8, amendment No. 1, reporting items 7a. and b. was filed on
November 12, 1996. Both filings are incorporated by reference.
<PAGE>
Part I - Financial Statements
BI INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $2,168 $4,263
Short-term investments 554 1,099
Receivables, net 7,399 9,043
Investment in sales-type leases, net 4,264 4,345
Inventories
Raw materials 1,215 923
Work in process 1,437 1,033
Finished goods 742 1,064
Deferred income taxes 364 302
Prepaid expenses 711 893
--------------- ---------------
Total current assets 18,854 22,965
Investment in sales-type leases, net 2,925 3,446
Investment in Limited Liability Corporation 2,394
Rental and monitoring equipment, net 3,907 4,088
Property and equipment, net 9,685 2,564
Software, net 1,932 1,906
Intangibles, net 11,805 7,232
Other assets 1,119 619
--------------- ---------------
$52,621 $42,820
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $1,179 $1,486
Accrued compensation and benefits 1,466 1,581
Capital lease obligation 420
Accrued product warranty 160 193
Deferred revenue 1,392 1,086
Other liabilities 485 447
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Total current liabilities 5,102 4,793
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Capital lease obligation 6,554
Deferred revenue 3,077 821
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Stockholders' equity
Common stock, no par value, 75,000 shares
authorized; 7,146 shares issued December 31, 1996
and 7,004 shares issued June 30, 1996 31,046 30,879
Retained earnings 6,842 6,327
--------------- ---------------
37,888 37,206
--------------- ---------------
$52,621 $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 six months
ended December 31, ended December 31,
---------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Net sales $3,278 $4,129 $6,113 $7,163
Service and monitoring income 8,200 5,370 13,816 10,436
Rental income 273 194 488 413
Other income 31 117 122 185
---------- ---------- ---------- ----------
Total revenues 11,782 9,810 20,539 18,197
---------- ---------- ---------- ----------
Costs and expenses
Cost of net sales 1,828 2,315 3,363 3,809
Cost of service and monitoring income 3,832 2,547 6,642 4,875
Cost of rental income 74 71 158 142
Selling, general and administrative expenses 3,684 2,781 6,577 5,280
Provision for doubtful accounts 509 30 568 60
Depreciation and amortization 485 333 883 660
Research and development expenses 747 638 1,458 1,253
---------- ---------- ---------- ----------
Total costs and expenses 11,159 8,715 19,649 16,079
---------- ---------- ---------- ----------
Income before income taxes 623 1,095 890 2,118
Income tax provision (265) (448) (375) (870)
---------- ---------- ---------- ----------
Net income $358 $647 $515 $1,248
========== ========== ========== ==========
Net Income per common and common equivalent share $0.05 $0.09 $0.07 $0.18
========== ========== ========== ==========
Weighted average number of common and common equivalent
shares outstanding 7,395 7,052 7,398 7,025
========== ========== ========== ==========
</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 six months
ended December 31,
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1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income $515 $1,248
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 3,113 2,839
Provision for losses on accounts receivable and STLs 568 112
Changes in assets and liabilities net of aquisition:
Receivables 1,286 (742)
Investment in STLs 602 (246)
Inventories (347) 146
Accounts payable (443) 685
Accrued expenses (562) 98
Deferred revenue (119) (109)
Other 173 5
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Net cash from operating activities 4,786 4,036
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Cash flows from investing activities:
Capital expenditures (671) (657)
Increase in rental and monitoring equipment (1,239) (1,565)
Increase in capitalized software (446) (311)
Net cash required for acquisition (3,135) (35)
Change in investments 545 (164)
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Net cash from investing activities (4,946) (2,732)
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Cash flows from financing activities:
Decrease in capital lease obligation (43)
Purchase of common stock (2,323) (962)
Proceeds from issuance of common stock 431 768
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Net cash from financing activities (1,935) (194)
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Net change in cash and cash equivalents (2,095) 1,110
Cash and cash equivalents at June 30 4,263 2,358
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Cash and cash equivalents at December 31 $2,168 $3,468
================== ==================
</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.
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.
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.
Note 4 - Allowance for Doubtful Accounts
- ----------------------------------------
Probation service income is recognized upon completion of the service provided
to the probationer. The provision for uncollectible accounts arises as a result
of (a) the Court suspending amounts due to the Company because of the inability
of the probationer to pay; (b) the probationer being incarcerated for committing
a different offense while under the supervision of the Company or; (c) the
probationer absconding while under the supervision of the Company.
CCC and TPS record an allowance for doubtful accounts for estimated probationer
accounts deemed uncollectible. However, if probationers fail to meet the terms
of their probation and a warrant is issued for their arrest, the related account
receivable is written off. Any amounts subsequently recovered are a reduction
to bad debt expense. For the quarter and six months ended December 31, 1996,
CCC and TPS accrued $430,000 for doubtful accounts and wrote off $372,000.
5
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Note 5 - Capital Lease and Investment in Limited Liability Corporation
- ----------------------------------------------------------------------
In October 1996, the Company signed a 14 year lease arrangement for the building
it currently occupies. The present value of aggregate future minimum lease
payments related to the new lease was $7,017,000, which is reflected on the
consolidated balance sheet as property and equipment.
In exchange for signing the non-cancelable lease the Company received a 25%
interest in the Limited Liability Corporation (LLC) which owns the building.
This interest of $2,394,000 was recorded on the consolidated balance sheet as an
investment in the LLC and deferred revenue and will be amortized on a straight-
line basis over the life of the lease.
Note 6 - 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.
Note 7 - Legal Proceedings
- --------------------------
The Company is involved in four legal proceedings; one alleging wrongful
termination of a distributor contract; two alleging negligence in monitoring and
detention; and one alleging defective product. One of the claimants seeks
damages up to $2,700,000. Management believes the Company has adequate legal
defenses and/or insurance coverage against all claims and intends to defend
them. 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
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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; 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 DECEMBER 31, 1996 (FISCAL 1997), COMPARED TO THE
THREE-MONTH PERIOD ENDED DECEMBER 31, 1995 (FISCAL 1996):
Total revenue for the three months ended December 31, 1996, increased 20.1% to
$11,782,000 compared to $9,810,000 in the corresponding period a year ago. The
increase related to an increase in service, monitoring and rental income of
$2,909,000 or 52.3% which was partially offset by a decrease in net sales of
$851,000 or 20.6%.
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 and Tennessee by the three companies
acquired during the period (see Note 3). The decrease in net sales revenue
resulted from lower electronic monitoring equipment purchases.
Total gross profit was 51.3% in fiscal 1997 compared to 49.7% in fiscal 1996.
Service, monitoring and rental gross profit increased to 53.9% in the fiscal
1997 period from 52.9% for the same period last fiscal year. Both monitoring
and probation services margins were approximately 53%. These margins can
fluctuate slightly from quarter-to-quarter largely from variances in labor
required to supervise or monitor fluctuating offender populations. Gross profit
margins on net sales of electronic monitoring equipment were approximately 50%
for both fiscal periods. These net sales, margins for both fiscal periods, were
offset by unabsorbed fixed costs from the Company's Jail Management System (JMS)
software.
Selling, general and administrative (S,G&A) expenses increased $903,000 to
$3,684,000 in fiscal 1997 from $2,781,000 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.
Allowance for doubtful accounts increased $479,000 in fiscal 1997. This relates
largely to the Company's new probation service income. In the past, revenue was
generated by either government agencies or qualified service providers, both of
which carried an extremely low risk for defaulting on
7
<PAGE>
payments. Probation service income is 100% paid by the offender and carries a
higher risk of default. In response to this, the Company accrues approximately
18% of probation service income to bad debt.
Amortization expense increased $86,000 during fiscal 1997 as the result of the
acquisition discussed in Note 3.
Research and development expenses increased $109,000 to $747,000, or 6.3% of
total revenue, compared to $638,000, or 6.5% in fiscal 1996. This increase
largely related to enhancements of current products and evaluating future
technologies.
The Company recorded income tax expense of $265,000 and $448,000 for the three
months ended December 31, 1996 and 1995, respectively, which differs from the
statutory rate largely as a result of state income taxes and non-deductible
goodwill amortization expense.
THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1996 (FISCAL 1997), COMPARED TO THE SIX-
MONTH PERIOD ENDED DECEMBER 31, 1995 (FISCAL 1996):
Total revenue increased 12.9% to $20,539,000 for fiscal 1997 from $18,197,000 in
fiscal 1996. Recurring revenue which includes service, monitoring and rental
income increased to $14,304,000 in fiscal 1997 or 31.8% from $10,849,000 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 three months of probation service income
from the acquisition discussed in Note 3. Net sales income decreased to
$6,113,000 in fiscal 1997 from $7,163,000 in fiscal 1996. This revenue source
can fluctuate from quarter to quarter based on the number of agencies and
electronic monitoring units purchased.
Total gross profit on net sales, service, monitoring and rental income decreased
to 50.5% in fiscal 1997 from 51.5% in fiscal 1996 largely as a result of
unabsorbed fixed costs from the JMS product as discussed above.
Selling, general and administrative expenses increased $1,297,000 to $6,577,000
in fiscal 1997 from $5,280,000 in fiscal 1996. The increase was largely related
to increased sales and marketing expenses on increased revenues and the
acquisition as discussed above.
Research and development expenses increased $205,000 to $1,458,000 in fiscal
1997 from $1,253,000 in fiscal 1996, but remained approximately 7% of total
revenue in both periods. The increase was due largely to factors discussed
above.
The Company's income tax expense for fiscal 1997 and 1996 was $375,000 and
$870,000, respectively, which was higher than the expected statutory rate as
discussed above.
Liquidity and Capital Resources
- -------------------------------
The Company has significant net accounts receivable and net sales-type leases
available to borrow against 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 at
December 31, 1996.
8
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During the six months ended December 31, 1996, the Company generated $4,786,000
from operating activities and expended $2,356,000 for capital equipment, rental
and monitoring equipment, and internally developed software. The Company
received $431,000 from the exercise of stock options during the period.
Working capital decreased $4,420,000 to $13,752,000 at December 31, 1996. This
decrease was primarily the result of a decrease in cash associated with the
Company's $2,323,000 purchase of its common stock and the $3,135,000 associated
with the acquisition of three companies (see Note 3).
The Company recorded $5,078,000 of goodwill associated with an acquisition on
October 10, 1996. This intangible will be amortized on a straight-line basis
over 15 years.
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 was $7,017,000. The lease includes
commitments over a four year period to lease an additional 26,000 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. Use of the Company's line of credit or term debt may
be required in connection with possible acquisitions during 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_________________ By /s/ David J. Hunter
---------------------------------------
David J. Hunter
President and Chief Executive Officer
/s/ Jacqueline A. Chamberlin
---------------------------------------
Jacqueline A. Chamberlin
Chief Financial Officer
9
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2168
<SECURITIES> 554
<RECEIVABLES> 11663
<ALLOWANCES> 0
<INVENTORY> 3394
<CURRENT-ASSETS> 18854
<PP&E> 9685
<DEPRECIATION> 0
<TOTAL-ASSETS> 52621
<CURRENT-LIABILITIES> 5102
<BONDS> 0
0
0
<COMMON> 31046
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<TOTAL-LIABILITY-AND-EQUITY> 52621
<SALES> 20417
<TOTAL-REVENUES> 20539
<CGS> 10163
<TOTAL-COSTS> 19649
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