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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, 1998
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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
----- -----
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 April 20, 1998 was 7,622,174.
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BI INCORPORATED
Index
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION: Page No.
Item 1 - Financial Statements
<S> <C>
Balance Sheet
at March 31, 1998 and June 30, 1997 2
Statement of Operations
for the three and nine months ended March 31, 1998 and 1997 3
Statement of Cash Flows
for the nine months ended March 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 6 through 13
Signatures 13
</TABLE>
PART II - OTHER INFORMATION:
Item 1 - Legal Proceedings: Incorporated by reference to Note 4 to Consolidated
Financial Statements in Part I.
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BI INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands, unaudited)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
---------------------- ----------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,701 $ 1,694
Short-term investments 0 450
Receivables, net 10,000 8,647
Investment in sales-type leases, net 4,207 3,993
Inventories ,net 3,451 3,861
Deferred income taxes 787 779
Prepaid expenses 1,219 665
---------------------- ----------------------
Total current assets 21,365 20,089
Investment in sales-type leases, net 3,809 2,764
Rental and monitoring equipment, net 4,710 4,366
Property and equipment, net 12,455 10,667
Software, net 2,242 1,987
Intangibles, net 12,049 12,908
Other assets 2,902 2,640
---------------------- ----------------------
$59,532 $55,421
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,923 $ 1,836
Accrued compensation and benefits 1,909 1,409
Deferred revenue 1,465 1,362
Income taxes payable 579 404
Other liabilities 817 537
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Total current liabilities 6,693 5,548
---------------------- ----------------------
Capital lease obligation 6,934 7,030
Deferred revenue 2,438 2,223
Stockholders' equity
Common stock, no par value, 75,000 shares
authorized; 7,613 shares issued March 31, 1998
and 7,417 shares issued June 30, 1997 33,613 32,460
Retained earnings 9,854 8,160
---------------------- ----------------------
43,467 40,620
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$59,532 $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 For the nine months
ended March 31, ended March 31,
---------------------------------------- ----------------------------------
1998 1997 1998 1997
----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues
Service and monitoring income $10,992 $9,292 $31,724 $23,108
Rental income 207 265 596 753
Net sales 3,887 3,603 12,486 9,716
Other income 39 129 128 251
----------------- ----------------- -------------- --------------
Total revenues 15,125 13,289 44,934 33,828
----------------- ----------------- -------------- --------------
Costs and expenses
Cost of service and monitoring income 5,736 4,462 16,347 11,104
Cost of rental income 53 63 160 221
Cost of net sales 1,648 1,727 5,901 5,090
Selling, general and administrative expenses 4,462 4,189 13,131 10,766
Provision for doubtful accounts 324 471 1,510 1,039
Amortization and depreciation 885 489 2,496 1,372
Research and development expenses 700 848 2,398 2,306
----------------- ----------------- -------------- --------------
Total costs and expenses 13,808 12,249 41,943 31,898
----------------- ----------------- -------------- --------------
Income before income taxes 1,317 1,040 2,991 1,930
Income tax provision (586) (471) (1,297) (846)
----------------- ----------------- -------------- --------------
Net income $731 $569 $1,694 $1,084
================= ================= ============== ==============
Basic earnings per share $0.10 $0.08 $0.23 $0.15
================= ================= ============== ==============
Weighted average number of common
shares outstanding 7,541 7,331 7,468 7,200
================= ================= ============== ==============
Diluted earnings per share $0.09 $0.08 $0.22 $0.15
================= ================= ============== ==============
Weighted average number of common
and common equivalent shares outstanding 8,034 7,488 7,761 7,426
================= ================= ============== ==============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
3
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BI INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED MARCH 31,
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1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,694 $ 1,084
Adjustments to reconcile net income
to net cash from operating activities:
Amortization and depreciation 4,954 4,701
Provision for losses on accounts receivable and STLs 1,510 1,038
Changes in assets and liabilities:
Receivables (3,163) 1,170
Investment in STLs (1,259) 1,232
Inventories, net 410 (553)
Accounts payable 87 299
Accrued expenses 741 (401)
Deferred revenue 368 (333)
Deffered taxes 167 0
Other (567) (76)
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Net cash from operating activities 4,942 8,161
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Cash flows from investing activities:
Capital expenditures (3,575) (1,218)
Increase in rental and monitoring equipment (2,282) (2,474)
Increase in capitalized software (625) (646)
Investment in Patent 0 (309)
Cash paid for acquisitions net of cash acquired 0 (4,125)
Change in short-term investments 450 630
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Net cash used in investing activities (6,032) (8,142)
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Cash flows from financing activities:
Payments on capital lease obligation (56) (110)
Proceeds from issuance of common stock 1,153 1,169
Purchase of Common Stock 0 (2,560)
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Net cash from (used in) financing activities 1,097 (1,501)
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Net change in cash and cash equivalents 7 (1,482)
Cash and cash equivalents at beginning of period 1,694 4,263
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Cash and cash equivalents at end of period $ 1,701 $ 2,781
================================================
</TABLE>
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
------------------------------------------
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 presentation of the
results for the interim periods.
NOTE 2 - RECLASSIFICATION
- -------------------------
Certain 1997 amounts have been reclassified to be comparable with the 1998
presentation.
NOTE 3 - NET INCOME PER COMMON AND EQUIVALENT SHARE
- ---------------------------------------------------
The Company adopted SFAS No. 128, "Earnings per Share" during the three month
period ended 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 previously reported primary and fully-diluted EPS. The basic
EPS has been computed by dividing net income by the weighted average number of
shares outstanding during each period. Diluted EPS has been computed by
dividing net income by the weighted average common and common equivalent shares
outstanding during each period using the treasury stock method. The difference
between the Basic and Diluted weighted average shares is due to common stock
equivalent shares resulting from outstanding stock options. Prior periods' EPS
have been restated to conform with the new statement.
NOTE 4 - 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.
As of March 31st 1998, the Company was a defendant in three additional legal
proceedings; one alleging wrongful death from general negligence, one alleging
wrongful death from negligence in the design, manufacture, marketing and
installation of the equipment, and the other alleging malfunction in equipment.
One of the plaintiffs seeks damages in the amount of $3,000,000, another seeks
damages in the amount of $150,000, and the third seeks damages in an unspecified
amount.
As of March 31, 1998 the Company was aware of a lawsuit that has been filed, but
has not yet been served. The lawsuit alleges wrongful death from negligence in
the design, manufacture, marketing, assembly, testing and inspection of the
equipment. The claimant seeks damages of $250,000,000.
Subsequent to March 31, 1998 the Company was named as a defendant in an
additional lawsuit, which alleges wrongful death from the negligence in the
design, manufacture and testing of the equipment, and from general negligence.
The Claimant seeks damages in excess of $150,000.
Management believes the Company has adequate legal defenses and/or insurance
coverage against all claims and
5
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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.
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).
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31,1998 March 31,1997
------------------------------------ ------------------------------------
EM CCS CIS Total EM CCS CIS Total
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue (unaudited, in thousands) (unaudited, in thousands)
Recurring Revenue
Service & Monitoring 6,837 4,109 46 10,992 5,820 3,430 42 9,292
Rental 207 207 265 265
Net Sales 3,096 791 3,887 3,490 113 3,603
Other Income 39 39 129 129
------------------------------------ ------------------------------------
Total Revenue 10,179 4,109 837 15,125 9,704 3,430 155 13,289
Gross Profit 5,892 1,480 316 7,688 5,549 1,598 (110) 7,037
Gross Profit % 57.9% 36.0% 37.8% 50.8% 57.2% 46.6% (71.0%) 53.0%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
March 31,1998 March 31,1997
EM CCS CIS Total EM CCS CIS Total
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue (unaudited, in thousands) (unaudited, in thousands)
Recurring Revenue
Service & Monitoring 19,590 12,002 132 31,724 16,424 6,536 148 23,108
Rental 596 596 753 753
Net Sales 10,189 2,297 12,486 9,411 305 9,716
Other Income 128 128 251 251
------------------------------------ ------------------------------------
Total Revenue 30,503 12,002 2,429 44,934 26,839 6,536 453 33,828
Gross Profit 17,235 4,512 779 22,526 14,541 3,222 (350) 17,413
</TABLE>
6
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<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Profit % 56.5% 37.6% 32.1% 50.1% 54.2% 49.3% (77.3%) 51.5%
</TABLE>
THE THREE-MONTH PERIOD ENDED MARCH 31, 1998 (FISCAL 1998), COMPARED TO THE
THREE-MONTH PERIOD ENDED MARCH 31, 1997 (FISCAL 1997):
Revenue
Total revenue for the three months ended March 31, 1998, increased 13.8% to
$15,125,000 compared to $13,289,000 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 $11,199,000 or
74.0% of total revenue in fiscal 1998 from $9,557,000 or 71.9% 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 4.9% to $10,179,000 in fiscal 1998
compared to $9,704,000 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 15.8% to $7,044,000 in fiscal
1998 from $6,085,000 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. The Company was awarded a renewal
of a significant monitoring contract representing 26% of fiscal 1998 monitoring
revenue. Net sales revenue decreased to $3,096,000 in fiscal 1998 from
$3,490,000 in fiscal 1997. Net sales revenue can be volatile from quarter to
quarter due to the timing of specific contract awards. The Company anticipates
an improvement in net sales in the fourth of fiscal 1998 relative to the fourth
quarter of fiscal 1997.
The CCS business unit recurring revenue increased $679,000 or 19.8% to
$4,109,000 in fiscal 1998 compared to $3,430,000 in fiscal 1997. The 1998 growth
was partially due to service revenue associated with the acquisition of a day
reporting company in January 1998 which provides services in Colorado, New
Mexico and Oregon. This acquisition accounted for $581,000 of revenue in the
third quarter of fiscal 1998 and $386,000 revenue in the corresponding period in
fiscal 1997. The remaining increase is related to growth in probation services
revenue. The Company anticipates continued revenue growth in this business unit
for fiscal year 1998.
The CIS business unit significantly increased revenue by 440.0% to $837,000 in
fiscal 1998 compared to $155,000 in fiscal 1997. Net sales revenue associated
with the Institutional Management System (IMS) applications software product
increased to $791,000 in fiscal 1998 from $113,000 in fiscal 1997. The CIS
business unit has contracts lasting from one month to approximately twenty four
months in duration. This substantial increase in revenue is a direct result of
the significant increase in new contracts awarded which is reflected in the
$6,165,000 of backlog as of the end of the current period. The Company expects
continued increases in net sales revenue for fiscal year 1998 compared to fiscal
year 1997.
Gross Profit
Total gross profit as a percentage of total revenue for the three months ended
March 31, 1997, decreased to 50.8% or $7,688,000 compared to 53.0% or $7,037,000
in the corresponding period a year ago. The decline in overall gross profit
reflects the increasing significance of the CCS business unit. Probation and day
reporting services offered through the CCS business unit require relatively high
direct labor costs which are recognized as direct costs of sales which reduce
gross profit
The EM business unit increased its total gross profit to 57.9% or $5,892,000 in
fiscal 1998 compared to 57.2% or $5,549,000 for the same period in fiscal 1997.
This increase was due to a substantial improvement in gross profits
7
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on net sales revenue. EM recurring revenue gross profit was comparable in both
periods at approximately 56%. Net sales gross profit increased to 62.1% in
fiscal 1998 compared to 56.7% in fiscal 1997 as a result of manufacturing cost
improvements and favorable production variances during fiscal 1998.
The CCS business unit had a decrease in its gross profit to 36.0% for the three
months ended March 31, 1998 compared to 46.6% in the corresponding period a year
ago. The 1998 decrease was due to additional integration costs incurred in
fiscal 1998 associated with the probation and day reporting service acquisitions
in fiscal 1997 as well as start up expenses associated with new probation and
day reporting service offices in the southeast, central and northwest regions.
In addition, the 1998 decrease was partially due to the acquisition of the day
reporting company in January 1997 which provides services in Colorado, New
Mexico and Oregon. This acquisition affected gross profits for two months of
fiscal 1997 and for three months of fiscal 1998. Day reporting 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 substantially to 37.8% in the
third quarter of fiscal 1998 compared to (71.0)% 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 for the remainder
of fiscal year 1998. This increased revenue along with the completion of the
open system architecture in this current period is expected to improve the CIS
gross profit percentage over time.
Selling, General and Administrative (S,G&A)
S,G&A expenses for the three months ended March 31, 1997, increased $273,000 to
$4,462,000 compared to $4,189,000 in the corresponding period a year ago. S,G&A
expense as a percentage of total revenue decreased to 29.5% in fiscal 1998
compared to 31.5% in fiscal 1997. The Company expects S,G&A expenses for fiscal
year 1998 to continue to decrease as a percentage of total revenue as compared
to fiscal year 1997.
The EM business unit increased its S,G&A expenses $110,000 in fiscal 1998
resulting in expenses of 29.9% of EM revenue in fiscal 1998 compared to 30.2% in
fiscal 1997. 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 $48,000 in the third quarter
of fiscal 1998 as compared to the same period in fiscal 1997 resulting in
expenses of 26.6% of CCS revenue in fiscal 1998 compared to 30.4% in fiscal 1997
as a result investments in infrastructure and staffing to support the growth of
the business unit.
The CIS business unit increased its S,G&A expenses $115,000 in fiscal 1998 but
decreased expenses to 39.5% of CIS revenue in fiscal 1998 compared to 139.4% in
fiscal 1997. This increase was associated with infrastructure costs necessary to
manage deployment and implementation of existing contracts.
Provision for Doubtful Accounts
The provision for doubtful accounts for the three months ended March 31, 1997,
decreased $147,000 to $324,000 compared to $471,000 in the corresponding period
a year ago or 2.1% of total revenue in fiscal 1998 as compared to 3.5% in fiscal
1997. The Company is continuing to implement additional collection procedures to
reduce payment defaults within the CCS business unit. Probation service revenue
is 100% paid by the offender and carries a higher risk of default. Day reporting
revenue for fiscal 1998 was 31% paid by the offender and the remaining paid by
government agencies. In response to this, the Company accrued approximately 8%
of CCS revenue to allowance for
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doubtful accounts during the third quarter of fiscal 1998 compared to
approximately 12% in fiscal 1997.
Amortization and Depreciation (A&D)
A&D expense for the three months ended March 31, 1998, increased $396,000 to
$885,000 compared to $489,000 in the corresponding period a year ago. The EM
business unit increased its A&D expense $285,000 in the third quarter of fiscal
1998 compared to the third 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 to $210,000 in the third quarter of
fiscal 1998 from $90,000 in the third quarter of fiscal 1997. Approximately 28%
of the fiscal 1998 increase is associated with amortization of goodwill related
to the acquisition of the day reporting company. The remaining increase is
associated with depreciation of fixed assets purchased through the acquisitions
and to continued investments in capital assets for the CCS business unit..
Research and Development Expenses (R&D)
R&D expense for the three months ended March 31, 1998, decreased $148,000 to
$700,000 in fiscal 1998 compared to $848,000 in the corresponding period a year
ago. The EM business unit decreased its R&D expenses to $575,000 or 5.6% of EM
revenue in fiscal 1998 compared to 7.1% in fiscal 1997. These expenses relate
largely to enhancements of current products and evaluating future technologies.
The CIS business unit increased its R&D expenses slightly to $125,000 in the
third quarter of fiscal 1998 from $122,000 in fiscal 1997. These expenses
consist of engineering management costs; indirect labor costs associated with
the continued development of the Institutional Management System (IMS) software,
and non-billable expenses.
Net Income and Income Taxes
The Company recorded income tax expense of $586,000 and $471,000 for the three
months ended March 31, 1998 and 1997, respectively, which differs from the
statutory rate largely as a result of state income taxes and non-deductible
goodwill amortization expense.
9
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THE NINE-MONTH PERIOD ENDED MARCH 31, 1998 (FISCAL 1998), COMPARED TO THE NINE-
MONTH PERIOD ENDED MARCH 31, 1997 (FISCAL 1997):
Revenue
Total revenue for the nine months ended March 31, 1998, increased 32.8% to
$44,934,000 compared to $33,828,000 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 $32,320,000 or
71.9% of total revenue in fiscal 1998 from $23,861,000 or 70.5% 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 13.7% to $30,503,000 in fiscal 1998
compared to $26,839,000 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 17.5% to $20,186,000 in fiscal
1998 from $17,177,000 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 8.3% to
$10,189,000 in fiscal 1998 from $9,411,000 in fiscal 1997. This increase 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 CCS business unit recurring revenue increased 83.6% to $12,002,000 in fiscal
1998 compared to $6,536,000 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 $10,900,000 of revenue in the nine
months ended March 31, 1998. The fiscal 1997 revenue was generated through six
months of revenue from the probation services acquisition and two months of
revenue from the day reporting services acquisition for $5,553,000 and 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 significantly increased revenue by more than four fold to
$2,429,000 in fiscal 1998 compared to $453,000 in fiscal 1997. Net sales revenue
associated with the Institutional Management System (IMS) applications software
product increased to $2,297,000 in fiscal 1998 from $305,000 in fiscal 1997. The
CIS business unit has contracts lasting from one month to approximately twenty
four months in duration. This substantial increase in revenue is a direct result
of the increase in new contracts awarded which is reflected in the $6,165,000 of
backlog as of the end of the current period. The Company expects continued
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 $132,000 in fiscal 1998 from $148,000 in fiscal 1997.
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Gross Profit
Total gross profit as a percentage of total revenue for the nine months ended
March 31, 1998, decreased to 50.1% or $22,526,000 compared to 51.5% or
$17,413,000 in the corresponding period a year ago.
The EM business unit increased its total gross profit substantially to 56.5% or
$17,235,000 in fiscal 1998 compared to 54.2% or $14,541,000 for the same period
in fiscal 1997. This increase was due to significant improvements in gross
profits on recurring revenue as well as net sales revenue. EM recurring revenue
gross profit increased to 55.9% in fiscal 1998 compared to 54.6% 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 and other monitoring center
cost reductions . Net sales gross profit increased to 57.2% in fiscal 1998
compared to 52.2% in fiscal 1997 as a result of manufacturing efficiencies on
increased units shipped and cost improvements during fiscal 1998.
The CCS business unit had a decrease in its gross profit to 37.6% for the nine
months ended March 31,1998 compared to 49.3% 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 October 1996 and
January 1997, which provide probation and day reporting services. 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 substantially to 32.1% in fiscal
1998 compared to (77.3)% 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 for the remainder of fiscal year 1998. This
increased revenue along with the completion of the open system architecture is
expected to improve the CIS gross profit percentage over time.
Selling, General and Administrative (S,G&A)
S,G&A expenses for the nine months ended March 31, 1998, increased $2,365,000 to
$13,131,000 compared to $10,766,000 in the corresponding period a year ago.
S,G&A expense as a percentage of total revenue decreased to 29.2% in fiscal 1998
compared to 31.8% in fiscal 1997. The Company expects S,G&A expenses as a
percentage of total revenue for fiscal year 1998 to continue to be lower than
fiscal year 1997.
The EM business unit increased its S,G&A expenses $756,000 in fiscal 1998 but
decreased expenses to 29.0% of EM revenue compared to 30.2% in fiscal 1997. This
increase is related to market expansion activities 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 $1,246,000 in fiscal 1998 as
compared to the same period in fiscal 1997 primarily 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 $363,000 in fiscal 1998 but
decreased its expenses to 36.9% of CIS revenue compared to 117.7% in fiscal
1997. This increase was associated with market expansion and infrastructure
costs necessary to manage deployment and implementation of existing contracts.
11
<PAGE>
Provision for Doubtful Accounts
The provision for doubtful accounts for the nine months ended March 31, 1998,
increased $471,000 to $1,510,000 compared to $1,039,000 in the corresponding
period a year ago. The EM business unit decreased doubtful account expenses by
$104,000 in fiscal 1998 compared to fiscal 1997 due to emphasizing collection
improvements. The 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. Day reporting revenue for fiscal
1998 was 26% paid by the offender and the remaining paid by government agencies.
In response to this, the Company accrued approximately 12% of CCS revenue to
allowance for doubtful accounts during the nine months of fiscal 1998 compared
to approximately 13% in fiscal 1997. 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 nine months ended March 31, 1998, increased $1,124,000 to
$2,496,000 compared to $1,372,000 in the corresponding period a year ago. The EM
business unit increased its A&D expense $717,000 in fiscal 1998 compared to
fiscal 1997. This increase is the result of continuing investments in capital
expenditures within the EM business unit. The CCS business unit increased its
A&D expense to $609,000 for the nine months ended March 31, 1998 from $184,000
for the corresponding period in fiscal 1997. Approximately 38% 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 and continued
investments in capital expenditures within CCS.
Research and Development Expenses (R&D)
R&D expense for the nine months ended March 31, 1998, increased $92,000 to
$2,398,000 in fiscal 1998 compared to $2,306,000 in the corresponding period a
year ago. The EM business unit increased its R&D expenses to $1,988,000 or 6.5%
of EM revenue compared to $1,938,000 or 7.2% in fiscal 1997. These expenses
relate largely to enhancements of current products and evaluating future
technologies. The CIS business unit increased its R&D expenses to $410,000 in
fiscal 1998 or 16.9% of CIS revenue compared to $231,000 in fiscal 1997. These
expenses consist of engineering management costs, indirect labor costs
associated with the continued development of the Institutional Management System
(IMS) software, and non-billable expenses.
Net Income and Income Taxes
The Company recorded income tax expense of $1,297,000 and $846,000 for the nine
months ended March 31, 1998 and 1997, respectively, which differs from the
statutory rate largely as a result of state income taxes and non-deductible
goodwill amortization expense.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the nine months ended March 31, 1998 the Company generated $4,942,000 of
cash from operating activities, realized $450,000 through the liquidation of
short-term investments, received $1,153,000 from the issuance of common stock
associated with the exercise of stock options and the employee stock purchase
plan, expended $3,575,000 for capital equipment and leasehold improvements,
expended $2,282,000 for equipment associated with rental and monitoring
contracts, and expended $625,000 of cash for capitalized internally developed
software. The total of all cash flow activities resulted in a slight increase in
the balance of cash and cash equivalents of $7,000 for the nine months ended
March 31, 1998.
Working capital increased $131,000 to $14,672,000 at March 31, 1998 from
$14,541,000 at June 30, 1997. This increase was primarily the result of
increases in accounts receivable as a result of increased sales volume in fiscal
1998 and investment in sales-type leases. The Company is emphasizing improved
collections and has reduced its past due receivable balances as compared to June
30, 1997. During fiscal 1998 net sales customers have increasingly requested and
obtained financing through the Company in the form of sales-type leases.
Investments in lease financing has increased $1,259,000 during fiscal 1998. Such
lease financing carries a low risk of default and is at favorable interest rates
to the Company.
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, 1998.
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
March 31, 1998 the Company had unfunded leases in the amount of $8,016,000 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.
SIGNATURES
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 April 28, 1998 By
--------------------- ------------------------------------
David J. Hunter
President and Chief Executive Officer
--------------------------------
Jacqueline A. Chamberlin
Chief Financial Officer
13
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