<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, 1997
-----------------
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 14, 1998 was 7,486,076.
<PAGE>
BI INCORPORATED
Index
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION: Page No.
<S> <C>
Item 1 - Financial Statements
Balance Sheet
at December 31, 1997 and June 30, 1997 2
Statement of Operations
for the three and six months ended December 31, 1997 and 1996 3
Statement of Cash Flows
for the six months ended December 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 6 through 13
Signatures 13
</TABLE>
PART II - OTHER INFORMATION:
Item 1 - Legal Proceedings: Incorporated by reference to Note 3 to Consolidated
Financial Statements in Part I.
Item 4 - Submission of matters to a vote of security holders.
a) BI Incorporated's 1997 Annual Meeting of Stockholders was held on November
13, 1997.
b) At the annual meeting the following persons were elected to the Board of
Directors as follows:
<TABLE>
<CAPTION>
For Withheld
------------ --------
<S> <C> <C>
William E. Coleman 4,674,959 953,009
Mckinley C. Edwards, Jr. 4,677,145 950,823
Beverly J. Haddon 4,674,491 953,477
David J. Hunter 4,672,536 955,432
Perry M. Johnson 4,669,634 958,334
Jeremy N. Kendall 4,675,484 952,484
Byam K. Stevens, Jr. 4,669,759 958,209
</TABLE>
c) The ratification of Price Waterhouse, as the Company's independent auditor,
was also approved at the annual meeting as follows: For = 5,590,140;
Against = 16,511; Abstained = 21,317.
<PAGE>
BI INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands, unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 868 $ 1,694
Short-term investments 0 450
Receivables, net 8,566 8,647
Investment in sales-type leases, net 4,791 3,993
Inventories ,net 3,107 3,861
Deferred income taxes 787 779
Prepaid expenses 917 665
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Total current assets 19,036 20,089
Investment in sales-type leases, net 4,089 2,764
Rental and monitoring equipment, net 4,522 4,366
Property and equipment, net 11,912 10,667
Software, net 2,345 1,987
Intangibles, net 12,450 12,908
Other assets 2,840 2,640
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$57,194 $55,421
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,765 $ 1,836
Accrued compensation and benefits 1,930 1,409
Deferred revenue 1,386 1,362
Income taxes payable 106 404
Other liabilities 665 537
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Total current liabilities 5,852 5,548
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Capital lease obligation 6,971 7,030
Deferred revenue 2,559 2,223
Stockholders' equity
Common stock, no par value, 75,000 shares
authorized; 7,470 shares issued December 31, 1997
and 7,417 shares issued June 30, 1997 32,689 32,460
Retained earnings 9,123 8,160
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41,812 40,620
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$57,194 $55,421
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
BI INCORPORATED
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,
-------------------- ------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Service and monitoring income $10,695 $ 8,200 $20,732 $13,816
Rental income 129 273 389 488
Net sales 4,080 3,278 8,599 6,113
Other income 38 31 89 122
------- ------- ------- -------
Total revenues 14,942 11,782 29,809 20,539
------- ------- ------- -------
Costs and expenses
Cost of service and monitoring income 5,407 3,832 10,611 6,642
Cost of rental income 49 74 107 158
Cost of net sales 2,053 1,828 4,253 3,363
Selling, general and administrative expenses 4,314 3,684 8,822 6,577
Provision for doubtful accounts 591 509 1,186 568
Amortization and depreciation 810 485 1,611 883
Research and development expenses 789 747 1,544 1,458
------- ------- ------- -------
Total costs and expenses 14,013 11,159 28,134 19,649
------- ------- ------- -------
Income before income taxes 929 623 1,675 890
Income tax provision (395) (265) (712) (375)
------- ------- ------- -------
Net income $ 534 $ 358 $ 963 $ 515
======= ======= ======= =======
Basic earnings per share $ 0.07 $ 0.05 $ 0.13 $ 0.07
======= ======= ======= =======
Weighted average number of common shares outstanding 7,444 7,238 7,432 7,136
======= ======= ======= =======
Diluted earnings per share $ 0.07 $ 0.05 $ 0.13 $ 0.07
======= ======= ======= =======
Weighted average number of common and common
equivelent shares outstanding 7,639 7,389 7,626 7,396
======= ======= ======= =======
</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 six months
ended December 31,
------------------
1997 1996
------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 963 $ 515
Adjustments to reconcile net income
to net cash from operating activities:
Amortization and depreciation 3,147 3,113
Provision for losses on accounts receivable and STLs 1,186 568
Changes in assets and liabilities:
Receivables (1,315) 1,286
Investment in STLs (2,123) 602
Inventories, net 754 347
Accounts payable (72) (443)
Accrued expenses 622 (562)
Deferred revenue 360 (119)
Deferred taxes (306) 0
Other (241) 173
------------------
Net cash from operating activities 2,975 4,786
------------------
Cash flows from investing activities:
Capital expenditures (2,419) (671)
Increase in rental and monitoring equipment (1,432) (1,239)
Increase in capitalized software (598) (446)
Cash paid for acquisitions net of cash acquired 0 (3,135)
Change in short-term investments 450 545
------------------
Net cash used in investing activities (3,999) (4,946)
------------------
Cash flows from financing activities:
Payments on capital lease obligation (31) (43)
Proceeds from issuance of common stock 229 431
Purchase of common stock 0 (2,323)
------------------
Net cash from (used in) financing activities 198 (1,935)
------------------
Net change in cash and cash equivalents (826) (2,095)
Cash and cash equivalents at beginning of period 1,694 4,263
------------------
Cash and cash equivalents at end of period $ 868 $ 2,168
======= =======
</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
- ---------------------------------------------------
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 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 two additional legal proceedings; one alleging
wrongful death from general negligence, and the other alleging malfunction in
equipment. One of the claimants seeks damages up to $3,000,000, and the other
seeks damages in the amount of $150,000. Management believes the Company has
adequate legal defenses and/or insurance coverage against all claims and intends
to defend them. There can be no 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.
During the three month period ended December 31, 1997, the legal proceeding
alleging negligence in monitoring and detention was dismissed with prejudice.
Also during the period, the Company received a summary judgment in its favor for
the legal proceeding alleging negligence in manufacturing.
5
<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; 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
December 31, 1997 December 31,1996
------------------------------------ ------------------------------------
EM CCS CIS Total EM CCS CIS Total
------------------------------------ ------------------------------------
Revenue (unaudited, in thousands) (unaudited, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Recurring Revenue
Service & Monitoring 6,643 4,011 41 10,695 5,410 2,736 54 8,200
Rental 129 129 273 273
Net Sales 3,101 979 4,080 3,179 99 3,278
Other Income 38 38 31 31
------------------------------------ ------------------------------------
Total Revenue 9,911 4,011 1,020 14,942 8,893 2,736 153 11,782
Gross Profit 5,522 1,547 364 7,433 4,757 1,432 (141) 6,048
Gross Profit % 55.7% 38.6% 35.7% 49.7% 53.5% 52.3% (92.2%) 51.3%
Six Months Ended Six Months Ended
December 31,1997 December 31,1996
------------------------------------ ------------------------------------
EM CCS CIS Total EM CCS CIS Total
------------------------------------ ------------------------------------
Revenue (unaudited, in thousands) (unaudited, in thousands)
Recurring Revenue
Service & Monitoring 12,754 7,892 86 20,732 10,604 3,106 106 13,816
Rental 389 389 488 488
Net Sales 7,093 1,506 8,599 5,921 192 6,113
Other Income 89 89 122 122
------------------------------------ ------------------------------------
Total Revenue 20,325 7,892 1,592 29,809 17,135 3,106 298 20,539
Gross Profit 11,344 3,031 463 14,838 8,992 1,624 (240) 10,376
Gross Profit % 55.8% 38.4% 29.1% 49.8% 52.5% 52.3% (80.5%) 50.5%
</TABLE>
6
<PAGE>
THE THREE-MONTH PERIOD ENDED DECEMBER 31, 1997 (FISCAL 1998), COMPARED TO THE
THREE-MONTH PERIOD ENDED DECEMBER 31, 1996 (FISCAL 1997):
Revenue
Total revenue for the three months ended December 31, 1997, increased 26.8% to
$14,942,000 compared to $11,782,000 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 $10,824,000 or
72.4% of total revenue in fiscal 1998 from $8,473,000 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 11.4% to $9,911,000 in fiscal 1998
compared to $8,893,000 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 19.2% to $6,772,000 in fiscal
1998 from $5,683,000 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 decreased
slightly to $3,101,000 in fiscal 1998 from $3,179,000 in fiscal 1997 as a result
of the Company's change in market strategy emphasizing recurring revenue.
The CCS business unit recurring revenue increased $1,275,000 or 46.6% to
$4,011,000 in fiscal 1998 compared to $2,736,000 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 $658,000 of revenue in the
second quarter of fiscal 1998 and no 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 566.7% to $1,020,000 in
fiscal 1998 compared to $153,000 in fiscal 1997. Net sales revenue associated
with the Institutional Management System (IMS) applications software product
increased to $979,000 in fiscal 1998 from $99,000 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 significant increase in new contracts awarded which is reflected in the
$3,156,000 of backlog carried into the current period. 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 to $41,000 in fiscal 1998 from $54,000 in fiscal
1997.
7
<PAGE>
Gross Profit
Total gross profit as a percentage of total revenue for the three months ended
December 31, 1997, decreased to 49.7% or $7,433,000 compared to 51.3% or
$6,048,000 in the corresponding period a year ago.
The EM business unit increased its total gross profit to 55.7% or $5,522,000 in
fiscal 1998 compared to 53.5% or $4,757,000 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 56.3% in fiscal 1998 compared to 55.3% 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
53.8% in fiscal 1998 compared to 49.9% in fiscal 1997 as a result of
manufacturing cost improvements during fiscal 1998.
The CCS business unit had a decrease in its gross profit to 38.6% for the three
months ended December 31,1997 compared to 52.3% in the corresponding period a
year ago. This business unit has changed its product offering in fiscal 1998
compared to fiscal 1997 as a result of an acquisition in the day reporting
services area. Probation and 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 35.7% in the
second quarter of fiscal 1998 compared to (92.2)% 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 for the remainder
of fiscal year 1998. This increase revenue along with the implementation of
additional efficiency improvements is expected to improve 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 December 31, 1997, increased $630,000
to $4,314,000 compared to $3,684,000 in the corresponding period a year ago.
S,G&A expense as a percentage of total revenue decreased to 28.9% in fiscal 1998
compared to 31.3% 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 $300,000 in fiscal 1998
resulting in expenses of 29.5% of EM revenue in fiscal 1998 compared to 29.5% 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 $214,000 in the second
quarter of fiscal 1998 as compared to the same period in fiscal 1997 as a result
of the consolidation of the acquisition in the day reporting service area.
8
<PAGE>
The CIS business unit increased its S,G&A expenses $116,000 in fiscal 1998 but
decreased expenses to 27.8% of CIS revenue in fiscal 1998 compared to 109.8% in
fiscal 1997. This increase was associated with market expansion and
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 December 31,
1997, increased $82,000 to $591,000 compared to $509,000 in the corresponding
period a year ago. The EM business unit decreased doubtful account expenses by
$47,000 in fiscal 1998 compared to fiscal 1997 as the result of the Company's
efforts to improve collections. The remaining $129,000 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. Day reporting revenue for fiscal 1998 was 32% paid by the offender and
the remaining paid by government agencies. In response to this, the Company
accrued approximately 14% of CCS revenue to allowance for doubtful accounts
during the second 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 December 31, 1997, increased $325,000 to
$810,000 compared to $485,000 in the corresponding period a year ago. The EM
business unit increased its A&D expense $213,000 in the second quarter of fiscal
1998 compared to the second 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 $117,000 in the second quarter of
fiscal 1998 from $88,000 in the second quarter of fiscal 1997. Approximately 30%
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.
Research and Development Expenses (R&D)
R&D expense for the three months ended December 31, 1997, increased $42,000 to
$789,000 in fiscal 1998 compared to $747,000 in the corresponding period a year
ago. The EM business unit increased its R&D expenses to $652,000 or 6.6% 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
to $137,000 in the second quarter of fiscal 1998. These expenses are 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 $395,000 and $265,000 for the three
months ended December 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.
9
<PAGE>
THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 (FISCAL 1998), COMPARED TO THE SIX-
MONTH PERIOD ENDED DECEMBER 31, 1996 (FISCAL 1997):
Revenue
Total revenue for the six months ended December 31, 1997, increased 45.1% to
$29,809,000 compared to $20,539,000 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 $21,121,000 or
70.9% of total revenue in fiscal 1998 from $14,304,000 or 69.6% 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 18.6% to $20,325,000 in fiscal 1998
compared to $17,135,000 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 18.5% to $13,143,000 in fiscal
1998 from $11,092,000 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 19.8%
to $7,093,000 in fiscal 1998 from $5,921,000 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 Company has implemented a change in market strategy emphasizing
recurring revenue which will slow the growth rate of net sales in the latter
half of fiscal year 1998 relative to fiscal year 1997.
The CCS business unit recurring revenue increased 154.1% to $7,892,000 in fiscal
1998 compared to $3,106,000 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 $7,216,000 of revenue in the six
months ended December 31, 1998. The fiscal 1997 revenue was generated through
three months of revenue from the probation services acquisition for $2,431,000
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 434.2% to $1,592,000 in
fiscal 1998 compared to $298,000 in fiscal 1997. Net sales revenue associated
with the Institutional Management System (IMS) applications software product
increased to $1,506,000 in fiscal 1998 from $192,000 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 significant increase in new contracts awarded which is reflected in the
$3,524,000 of backlog carried into fiscal 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 to $86,000 in fiscal 1998 from $106,000 in fiscal 1997.
10
<PAGE>
Gross Profit
Total gross profit as a percentage of total revenue for the six months ended
December 31, 1997, decreased to 49.8% or $14,838,000 compared to 50.5% or
$10,376,000 in the corresponding period a year ago.
The EM business unit increased its total gross profit substantially to 55.8% or
$11,344,000 in fiscal 1998 compared to 52.5% or $8,992,000 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 53.5% 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 55.1% in fiscal 1998 compared to 49.6% 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 38.4% for the six
months ended December 31,1997 compared to 52.3% 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 29.1% in fiscal
1998 compared to (80.5)% 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
increase revenue along with the implementation of additional efficiency
improvements is expected to improve the CIS gross profit percentage through
fiscal year 1998.
Selling, General and Administrative (S,G&A)
S,G&A expenses for the six months ended December 31, 1997, increased $2,245,000
to $8,822,000 compared to $6,577,000 in the corresponding period a year ago.
S,G&A expense as a percentage of total revenue decreased to 29.6% in fiscal 1998
compared to 32.0% 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 $755,000 in fiscal 1998 but
decreased expenses to 29.1% of EM revenue 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 $1,197,000 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.
11
<PAGE>
The CIS business unit increased its S,G&A expenses $292,000 in fiscal 1998 but
decreased its expenses to 38.3% of CIS revenue compared to 106.4% in fiscal
1997. This increase was associated with market expansion and infrastructure
costs necessary to manage deployment and implementation of existing contracts.
Provision for Doubtful Accounts
The provision for doubtful accounts for the six months ended December 31, 1997,
increased $618,000 to $1,186,000 compared to $568,000 in the corresponding
period a year ago. The EM business unit decreased doubtful account expenses by
$17,000 in fiscal 1998 compared to fiscal 1997. The remaining 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 24% paid by the offender and
the remaining paid by government agencies. In response to this, the Company
accrued approximately 14% of CCS revenue to allowance for doubtful accounts
during the six months 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 six months ended December 31, 1997, increased $728,000 to
$1,611,000 compared to $883,000 in the corresponding period a year ago. The EM
business unit increased its A&D expense $431,000 in fiscal 1998 compared to
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 $305,000 for the six months ended December 31, 1998 from $94,000 for the
corresponding period in fiscal 1997. Approximately one half 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 six months ended December 31, 1997, increased $86,000 to
$1,544,000 in fiscal 1998 compared to $1,458,000 in the corresponding period a
year ago. The EM business unit increased its R&D expenses to $1,305,000 or 6.4%
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 to $239,000 in fiscal 1998. These expenses are 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 $712,000 and $375,000 for the six
months ended December 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.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the six months ended December 31, 1997 the Company generated $2,975,000 of
cash from operating activities, realized $450,000 through the liquidation of
short-term investments, expended $2,419,000 for capital equipment and leasehold
improvements, expended $1,432,000 for equipment associated with rental and
monitoring contracts, and expended $598,000 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 $826,000 for the six months ended
December 31, 1997.
Working capital decreased $1,357,000 to $13,184,000 at December 31, 1997 from
$14,.541,000 at June 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 as well as
a decrease in inventories related to the Company's emphases on improved
inventory management. The accounts receivable balance has increased as of
December 31, 1997 compared to December 31, 1996 as a result of increased sales
volume. The Company is emphasizing improved collections and has reduced its past
due receivable balances as compared to June 30, 1997.
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
December 31, 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
December 31, 1997 the Company had unfunded leases in the amount of $8,880,000
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.
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 January 21, 1998 By _______________________________
----------------------- David J. Hunter
President and Chief Executive Officer
________________________________
Jacqueline A. Chamberlin
Chief Financial Officer
13
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