<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, 1998
-----------------
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
-------
BI Incorporated
-------------------------------------------------
(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
-------------------------------------
80301
--------------------
(Address of principal executive offices)
(Zip Code)
(303) 530-2911
----------------------------------------------
(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 25, 1999 was 7,727,877.
<PAGE>
BI INCORPORATED
Index
-----
PART I - FINANCIAL INFORMATION: Page No.
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet 2
at December 31, 1998 and 1997
Consolidated Statement of Operations
for the six months ended December 31, 1998 and 1997 3
Consolidated Statement of Cash Flows
for the six months ended December 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 14
PART II - OTHER INFORMATION:
Item 1 - Legal Proceedings: Incorporated by reference to Note 4 to Consolidated
Financial Statements in Part I.
Item 4 - Submission of matters to a vote of security holders.
a) BI Incorporated's 1998 Annual Meeting of Stockholders was held on November
5, 1998.
b) The ratification of Amendment to 1996 Stock Option Plan was as follows: For
= 3,955,027; Against = 1,269,157; Abstained = 30,663: Broker Non Vote =
1,738,763
c) At the annual meeting the following persons were elected to the Board of
Directors as follows:
For Withheld
William E. Coleman 6,384,001 609,610
Mckinley C. Edwards, Jr. 6,388,267 605,344
Beverly J. Haddon 6,385,108 608,503
David J. Hunter 6,390,267 603,344
Perry M. Johnson 6,384,691 608,920
Jeremy N. Kendall 6,388,251 605,360
Barry J. Nidorf 6,381,052 612,559
Byam K. Stevens, Jr. 6,386,151 607,460
d) The ratification of PriceWaterhouseCoopers LLP, as the Company's
independent auditor, was also approved at the annual meeting as follows:
For = 6,937,013; Against = 35,169; Abstained = 21,429.
<PAGE>
BI INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands, unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
----------------------- -----------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 811 $ 1,146
Receivables, net 11,764 10,603
Costs and estimated earnings in excess
of billings on uncompleted contracts 2,119 1,585
Investment in sales-type leases, net 4,293 4,337
Inventories, net 2,886 3,393
Deferred income taxes 749 751
Prepaid expenses 895 866
----------------------- -----------------------
Total current assets 23,517 22,681
Investment in sales-type leases, net 3,318 3,529
Rental and monitoring equipment, net 5,261 4,872
Property and equipment, net 13,984 13,250
Software, net 2,253 2,282
Intangibles, net 12,074 12,047
Other assets 3,322 3,328
----------------------- -----------------------
$ 63,729 $ 61,989
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,244 $ 3,163
Accrued compensation and benefits 2,878 1,940
Deferred revenue 1,684 1,647
Income taxes payable 348 347
Other liabilities 825 759
----------------------- -----------------------
Total current liabilities 7,979 7,856
----------------------- -----------------------
Capital lease obligation 6,814 6,897
Deferred revenue 2,180 2,329
Stockholders' equity
Common stock, no par value, 75,000 shares authorized;
7,709 shares issued and outstanding December 31, 1998 and
7,640 shares issued and outstanding June 30, 1998 34,444 34,076
Retained earnings 12,312 10,831
----------------------- -----------------------
Total stockholders' equity 46,756 44,907
----------------------- -----------------------
$ 63,729 $ 61,989
======================= =======================
</TABLE>
The accompanying notes are an integral
part of these consolidated 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,
---------------------------------------------- ----------------------------------------------
1998 1997 1998 1997
--------------------- --------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Revenues
Service and monitoring
income $ 13,603 $ 10,695 $ 26,631 $ 20,732
Rental income 161 129 268 389
Direct sales 4,576 4,080 7,946 8,599
Other income 38 38 68 89
--------------------- --------------------- --------------------- --------------------
Total revenues 18,378 14,942 34,913 29,809
--------------------- --------------------- --------------------- --------------------
Costs and expenses
Cost of service and
monitoring income 6,811 5,407 13,444 10,611
Cost of rental income 96 49 175 107
Cost of direct sales 2,440 2,053 4,087 4,253
Selling, general and
administrative expenses 5,151 4,314 10,142 8,822
Provision for doubtful
accounts 498 591 908 1,186
Amortization and
depreciation 877 810 1,716 1,611
Research and development
expenses 818 789 1,818 1,544
--------------------- --------------------- --------------------- --------------------
Total costs and expenses 16,691 14,013 32,290 28,134
--------------------- --------------------- --------------------- --------------------
Income before income taxes 1,687 929 2,623 1,675
Income tax provision (734) (395) (1,141) (712)
--------------------- --------------------- --------------------- --------------------
Net income $ 953 $ 534 $ 1,482 $ 963
===================== ===================== ===================== ====================
Basic earnings per share $ 0.12 $ 0.07 $ 0.19 $ 0.13
===================== ===================== ===================== ====================
Weighted average number of
common shares outstanding 7,682 7,444 7,661 7,432
===================== ===================== ===================== ====================
Diluted earnings per share $ 0.12 $ 0.07 $ 0.19 $ 0.13
===================== ===================== ===================== ====================
Weighted average number of
common and common equivalent
shares outstanding 7,891 7,639 7,900 7,626
===================== ===================== ===================== ====================
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
3
<PAGE>
BI INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
For the six months
ended December 31,
-------------------------------------------------------------
1998 1997
-------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,482 $ 963
Adjustments to reconcile net income
to net cash from operating activities:
Amortization and depreciation 3,480 3,147
Provision for doubtful accounts 908 1,186
Changes in assets and liabilities:
Receivables (2,069) (880)
Costs and estimated earnings in excess
of billings on uncompleted contracts (534) (435)
Investment in STLs 255 (2,123)
Inventories, net 507 754
Accounts payable (919) (72)
Accrued expenses 979 622
Deferred revenue (76) 360
Income taxes payable 3 (306)
Prepaids and other assets (58) (241)
-------------------------------------------------------------
Net cash from operating activities 3,958 2,975
-------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (2,107) (2,419)
Increase in rental and monitoring equipment (1,898) (1,432)
Increase in capitalized software (300) (598)
Investment in Intangibles (297) 450
-------------------------------------------------------------
Net cash used in investing activities (4,602) (3,999)
-------------------------------------------------------------
Cash flows from financing activities:
Payments on capital lease obligation (59) (31)
Proceeds from issuance of common stock 368 229
-------------------------------------------------------------
Net cash from (used in) financing activities 309 198
-------------------------------------------------------------
Net change in cash and cash equivalents (335) (826)
Cash and cash equivalents at beginning of period 1,146 1,694
-------------------------------------------------------------
Cash and cash equivalents at end of period $ 811 $ 868
========================= ===========================
</TABLE>
The accompanying notes are an integral
part of these consolidated 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 presentation of the
results for the interim periods.
NOTE 2 - RECLASSIFICATION
- -------------------------
Certain fiscal 1998 amounts have been reclassified to be comparable with the
fiscal 1999 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.
There is an additional legal proceeding by a customer alleging non-
performance on a Jail Management System contract. The customer is seeking
$675,000 in damages. The company and the customer are currently negotiating a
mutually agreeable plan to assure a settlement of this action.
The Company is also involved in five additional legal proceedings; one
alleging negligence in manufacturing and general negligence, one alleging
malfunction in equipment, another alleging negligence and misrepresentation
resulting in a wrongful death, the fourth alleging negligence under product
liability, and the last suit alleges wrongful death from general negligence.
One of the claimants seeks damages in excess of $150,000, another seeks damages
of $3,000,000, a third seeks damages of $3,977,500, the fourth seeks $250
million in damages, and the last seeks damages in excess of $100,000.
Management believes the Company has adequate legal defenses and/or insurance
coverage against all claims and intends to defend itself vigorously against
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 adverse
effect on the Company's reported results of operations in a particular quarter.
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; the inability of the Company or
others upon which it depends to adequately address and correct problems
resulting from "Year 2000" issue; 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, 1998 December 31, 1997
------------------------------- -----------------------------------
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 8,154 5,365 84 13,603 6,643 4,011 41 10,695
Rental 161 161 129 129
Direct Sales 3,484 1,092 4,576 3,101 979 4,080
Other Income 38 38 38 38
------------------------------- -----------------------------------
Total Revenue 11,837 5,365 1,176 18,378 9,911 4,011 1,020 14,942
Gross Profit 6,651 2,258 122 9,031 5,522 1,547 364 7,433
Gross Profit % 56.2% 42.1% 10.4% 49.1% 55.7% 38.6% 35.7% 49.7%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
December 31, 1998 December 31, 1997
-------------------------------- -----------------------------------
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 16,053 10,432 146 26,631 12,754 7,892 86 20,732
Rental 268 268 389 389
Direct Sales 6,103 1,843 7,946 7,093 1,506 8,599
Other Income 68 68 89 89
-------------------------------- -----------------------------------
Total Revenue 22,492 10,432 1,989 34,913 20,325 7,892 1,592 29,809
Gross Profit (Loss) 12,911 4,334 (38) 17,207 11,344 3,031 463 14,838
Gross Profit % 57.4% 41.5% (1.9%) 49.3% 55.8% 38.4% 29.1% 49.8%
</TABLE>
6
<PAGE>
THE THREE-MONTH PERIOD ENDED DECEMBER 31, 1998 (FISCAL 1999), COMPARED TO THE
THREE-MONTH PERIOD ENDED DECEMBER 31, 1997 (FISCAL 1998):
Revenue
Total revenue for the three months ended December 31, 1998 increased 23.0%
to $18,378,000 compared to $14,942,000 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 27.2% in fiscal
1999 compared to fiscal 1998. Recurring revenue increased to $13,764,000 or
74.9% of total revenue in fiscal 1999 from $10,824,000 or 72.4% of total revenue
in fiscal 1998. All three business units reported recurring revenue increases
for fiscal 1999 as compared to fiscal 1998.
The EM business unit revenue increased to $11,837,000 for the three months
ended December 31, 1998 compared to $9,911,000 in the corresponding period a
year ago. 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 22.8% to $8,315,000 in fiscal 1999 from $6,772,000 in
fiscal 1998. This increase in recurring revenue relates to the continuing trend
of government agencies to contract for electronic monitoring rather than
purchasing equipment. Direct sales revenue increased to $3,484,000 in fiscal
1999 from $3,101,000 in fiscal 1998.
The CCS business unit recurring revenue increased $1,354,000 or 33.8% to
$5,365,000 in fiscal 1999 compared to $4,011,000 in fiscal 1998. CCS provides
community correctional supervision and services in 12 states through its 82
correctional service centers. The Company currently provides services for
approximately 39,000 offenders. The Company intends to continue to broaden the
services provided to the offender and anticipates continued revenue growth in
this business unit for fiscal year 1999.
The CIS business unit increased revenue by 15.3% to $1,176,000 in fiscal
1999 compared to $1,020,000 in fiscal 1998. Direct sales revenue associated with
the Institutional Management System (IMS) applications software product
increased to $1,092,000 in fiscal 1999 from $979,000 in fiscal 1998. The CIS
business unit has contracts lasting from one month to approximately twenty four
months in duration. This increase in revenue is a direct result of the increase
in new contracts awarded which is reflected in the $6,116,000 of backlog as of
the end of the current period. On August 25, 1998, the Company announced that it
has engaged an investment banker to attempt to sell the CIS business unit.
Gross Profit
Total gross profit as a percentage of total revenue for the three months
ended December 31, 1998 and December 31, 1997 was consistent at approximately
49%. Gross profit for fiscal 1999 was $9,031,000 compared to $7,433,000 in the
corresponding period a year ago.
The EM business unit increased its total gross profit to 56.2% or
$6,651,000 in fiscal 1999 compared to 55.7% or $5,522,000 in fiscal 1998. This
percentage increase was due to an improvement in gross profits on direct sales
revenue. Direct sales gross profit increased as a result of manufacturing cost
improvements and favorable production variances during fiscal 1999. EM
recurring revenue gross profit remained constant at approximately 56% in fiscal
1999 and fiscal 1998.
7
<PAGE>
The CCS business unit increased its gross profit to 42.1% for fiscal 1999
compared to 38.6% in fiscal 1998. The 1999 increase was due to cost reductions
and operating efficiency improvements throughout the 82 correctional service
centers. Probation and day reporting services require relatively high direct
labor costs which are recognized as direct costs of sales which reduce gross
profit compared to EM gross profit.
The CIS business unit decreased its gross profit to 10.4% in fiscal 1999
compared to 35.7% in fiscal 1998. This decrease in fiscal 1999 is primarily a
result of additional amortization expense associated with the recent general
release of phase two of the Company's IMS product, revisions in estimated
recoverability of certain contract costs and in estimated future contract costs.
Selling, General and Administrative (S,G&A)
S,G&A expenses for the three months ended December 31, 1998 increased by
$837,000 to $5,151,000 compared to $4,314,000 in the corresponding period a year
ago. S,G&A expense as a percentage of total revenue decreased to 28.0% in
fiscal 1999 compared to 28.9% in fiscal 1998.
The EM business unit increased its S,G&A expenses by $507,000 in fiscal
1999 resulting in expenses of 29.0% of EM revenue in fiscal 1999 compared to
29.5% in fiscal 1998. This increase is related to additional marketing expenses
associated with continuing market expansion activities throughout fiscal year
1999, as well as increases in product management and international marketing
expenditures related to growth of new and existing customer sites.
The CCS business unit increased its S,G&A expenses by $270,000 to
$1,375,000 in fiscal 1999 compared to $1,105,000 in fiscal 1998, although it
decreased its S,G&A expenses as a percentage of CCS revenue to 25.6% in fiscal
1999 from 27.5% in fiscal 1998. The increase in expenses is related to
investments in infrastructure and staffing to support the growth of the business
unit.
The CIS business unit increased its S,G&A expenses by $60,000 to $344,000
or 29.3% of revenue in fiscal 1999 as compared to $284,000 or 27.8% of revenue
in fiscal 1999. These expenses are associated with infrastructure costs
necessary to manage deployment and implementation of existing contracts.
Provision for Doubtful Accounts
The provision for doubtful accounts was $498,000 or 2.7% of total revenue
in fiscal 1999 compared to $591,000 or 4.0% of total revenue in fiscal 1998. The
provision relates largely to the Company's CCS business unit. Probation service
revenue is 100% paid by the offender and carries an increased risk of default.
Day reporting revenue for fiscal 1999 was 23.7% paid by the offender and the
remaining paid by government agencies. The Company has initiated collection
activities that have improved its collection results. The Company accrued
approximately 8% of CCS revenue to allowance for doubtful accounts during 1999
compared to approximately 14% in fiscal 1998. The Company is implementing
additional collection procedures to reduce payment defaults within the CCS
business unit. The Company believes the industry average payment default
associated with similar for-profit companies is approximately 20%. The EM
business unit accrued approximately 1% of EM revenue to allowance for doubtful
accounts in both fiscal 1999 and 1998.
Amortization and Depreciation (A&D)
A&D expenses increased by $67,000 to $877,000 or 4.8% of revenue in fiscal
1999 from $810,000 or 5.4% of revenue in fiscal 1998. The increase was due to
additions to property, plant and equipment.
8
<PAGE>
Research and Development Expenses (R&D)
R&D expenses increased by $29,000 to $818,000 in fiscal 1999 from $789,000
in fiscal 1998. The Company's R&D expenditures were largely related to EM
business unit expenses associated with internal software development efforts for
improved automation to the Company's electronic monitoring centers, and the
evaluation and development of next generation electronic monitoring products.
The Company expects to continue expenditures for improvements to the monitoring
operations and development of future home arrest products throughout fiscal year
1999. As a percentage of EM revenue EM business unit R&D expense was 5.2% in
fiscal 1999 compared to 6.6% in fiscal 1998.
Net Income and Income Taxes
The Company recorded income tax expense of $734,000 and $395,000 for the
three months ended December 31, 1999 and 1998 respectively, which differs from
the statutory rate largely as a result of state income taxes and non-deductible
goodwill amortization expense.
For the three months ended December 31, 1999, the Company had net income
of $953,000 or $.12 diluted earnings per share compared to the same period a
year ago of $534,000 or $.07 diluted earnings per share. The changes in net
income relate primarily to the items discussed above.
THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1998 (FISCAL 1999), COMPARED TO THE SIX-
MONTH PERIOD ENDED DECEMBER 31, 1997 (FISCAL 1998):
Revenue
Total revenue for fiscal 1999 increased 17.1% to $34,913,000 compared to
$29,809,000 in fiscal 1998. 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 $26,899,000 or 77.0% of total revenue in fiscal 1999 from
$21,121,000 or 70.9% of total revenue in fiscal 1998. All three business units
reported revenue increases for fiscal 1999 as compared to fiscal 1998.
The EM business unit revenue increased 10.7% to $22,492,000 in fiscal 1999
compared to $20,325,000 in fiscal 1998. 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 24.2% to $16,321,000 in fiscal
1999 from $13,143,000 in fiscal 1998. This increase in recurring revenue relates
to the continuing trend of government agencies to contract for electronic
monitoring rather than purchasing equipment. Direct sales revenue decreased to
$6,103,000 in fiscal 1999 from $7,093,000 in fiscal 1998. This was due to an
unusually strong first quarter of fiscal 1998 as a result of a high backlog of
orders carried into the year.
The CCS business unit recurring revenue increased $2,540,000 or 32.2% to
$10,432,000 in fiscal 1999 compared to $7,892,000 in fiscal 1998. CCS provides
probation and day reporting services in 12 states through its 82 correctional
service centers. The Company currently provides services for approximately
39,000 offenders. The Company intends to continue to broaden the services
provided to the offender and anticipates continued revenue growth in this
business unit for fiscal year 1999.
9
<PAGE>
The CIS business unit increased revenue by 24.9% to $1,989,000 in fiscal
1999 compared to $1,592,000 in fiscal 1998. Direct sales revenue associated
with the Institutional Management System (IMS) applications software product
increased to $1,843,000 in fiscal 1999 from $1,506,000 in fiscal 1998. The CIS
business unit has contracts lasting from one month to approximately twenty four
months in duration. This increase in revenue is a direct result of the increase
in new contracts awarded which is reflected in the $6,116,000 of backlog as of
the end of the current period.
Gross Profit
Total gross profit as a percentage of total revenue remained consistent at
approximately 49% for fiscal 1999 and fiscal 1998. Gross profit for fiscal 1999
was $17,207,000 compared to $14,838,000 in the corresponding period a year ago.
The EM business unit increased its total gross profit to 57.4% or
$12,911,000 in fiscal 1999 compared to 55.8% or $11,344,000 in fiscal 1998.
This increase was due to a substantial improvement in gross profits on direct
sales revenue. Direct sales gross profit increased to 63.6% in fiscal 1999
compared to 55.1% in fiscal 1998 as a result of manufacturing cost improvements
and favorable production variances during fiscal 1999. EM recurring revenue
gross profit was comparable in both periods at approximately 55%.
The CCS business unit had a increase in its gross profit to 41.5% for
fiscal 1999 compared to 38.4% in fiscal 1998. The 1999 increase was due to cost
reductions and operating efficiency improvements throughout the 82 correctional
service centers. 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 decreased its gross profit (loss) to (1.9%) in fiscal
1999 compared to 29.1% in fiscal 1998. This decrease in fiscal 1999 is primarily
a result of additional amortization expense associated with the recent general
release of phase two of the Company's IMS product, revisions in estimated
recoverability of certain contract costs and in estimated future contract costs.
Selling, General and Administrative (S,G&A)
S,G&A expenses for the fiscal year 1999 increased by $1,320,000 to
$10,142,000 compared to $8,822,000 in the corresponding period a year ago.
S,G&A expense as a percentage of total revenue decreased to 29.0% in fiscal 1999
compared to 29.6% in fiscal 1998. The Company expects S,G&A expenses for fiscal
1999 to decrease slightly as a percentage of total revenue as compared to fiscal
1998.
The EM business unit increased its S,G&A expenses by $825,000 in fiscal
1999, resulting in expenses of 30.0% of EM revenue in fiscal 1999 compared to
29.1% in fiscal 1998. This increase is related to market expansion and
diversification, as well as increases in product management and international
marketing related to growth of new and existing customer sites. The Company
expects to increase marketing expenses associated with continuing market
expansion activities throughout fiscal year 1999.
The CCS business unit increased its S,G&A expenses by $407,000 in fiscal
1999 as a result investments in infrastructure and staffing to support the
growth of the business unit. As a result of a significant increase in revenue
CCS decreased SG&A expenses as a percentage of revenue, resulting in expenses of
25.8% of revenue in fiscal 1999 compared to 29.0% in fiscal 1998.
The CIS business unit increased its S,G&A expenses by $88,000 in fiscal
1999 to $698,000 or 35.1% of CIS revenue in fiscal 1999 compared to $610,000 or
38.3% in fiscal 1998. This increase was associated with
10
<PAGE>
infrastructure costs necessary to manage deployment and implementation of
existing contracts.
Provision for Doubtful Accounts
The provision for doubtful accounts was $908,000 or 2.6% of total revenue
in fiscal 1999 compared to $1,186,000 or 4.0% of total revenue in fiscal 1998.
The provision relates largely to the Company's CCS business unit. Probation
service revenue is 100% paid by the offender and carries an increased risk of
default. Day reporting revenue for fiscal 1999 was 23.7% paid by the offender
and the remaining paid by government agencies. The Company has initiated
collection activities that have improved its collection results. The Company
accrued approximately 7% of CCS revenue to allowance for doubtful accounts
during 1999 compared to approximately 14% in 1998. The Company is implementing
additional collection procedures to reduce payment defaults within the CCS
business unit. The Company believes the industry average payment default
associated with similar for-profit companies is approximately 20%. The EM
business unit accrued approximately 1% of EM revenue to allowance for doubtful
accounts in fiscal 1999 which was consistent with fiscal 1998.
Amortization and Depreciation (A&D)
A&D expenses increased by $105,000 to $1,716,000 or 4.9% of revenue in
fiscal 1999 from $1,611,000 or 5.4% of revenue, in fiscal 1998. The increase was
due primarily to additions to property, plant and equipment during fiscal 1999.
Research and Development Expenses (R&D)
R&D expenses increased $274,000 to $1,818,000 in fiscal 1999 from
$1,544,000 in fiscal 1998. The Company's R&D expenditures were largely related
to EM business unit expenses associated with software development efforts for
improved automation to the Company's electronic monitoring centers, and the
evaluation and development of next generation electronic monitoring products.
The Company expects to continue expenditures for improvements to the monitoring
operations and development of future home arrest products throughout fiscal
year 1999. As a percentage of EM revenue EM business unit R&D expense was 6.2%
in fiscal 1999 compared to 6.4% in fiscal 1998.
Net Income and Income Taxes
The Company recorded income tax expense of $1,141,000 and $712,000 for the
six months ended December 31, 1999 and 1998 respectively, which differs from the
statutory rate largely as a result of state income taxes and non-deductible
goodwill amortization expense.
For the six months ended December 31, 1999 the Company had net income of
$1,482,000 or $.19 diluted earnings per share compared to the same period a year
ago of $963,000 or $.13 diluted earnings per share. The changes in net income
relate primarily to the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended December 31, 1998, the Company generated
$3,958,000 of cash from operating activities, expended $2,107,000 for capital
equipment and leasehold improvements, expended $1,898,000 for
11
<PAGE>
equipment associated with rental and monitoring contracts, expended $300,000 for
capitalized software and expended $297,000 for license fees and other
intangibles. The total of all cash flow activities resulted in a decrease in the
balance of cash and cash equivalents of $335,000 for the six months ended
December 31, 1998.
The Company's working capital increased $713,000 to $15,538,000 at
December 31, 1998. This increase was primarily the result of increases in
accounts receivable as a result of increased sales volume in CCS as well as
increases in CIS receivables associated with extended term IMS contracts for
application software products and investment in sales-type leases. The Company
is emphasizing improved collections and procedures across all business units and
expects to reduce its past due receivables throughout fiscal year 1999 as
compared to fiscal year 1998. Direct sales customers have increasingly requested
and obtained financing through the Company in the form of sales-type leases.
Such lease financing carries a low risk of default and is at favorable interest
rates to the Company.
The Company has an available $5,000,000 line of credit with Bank One,
Boulder, Colorado which expires in October 1999. No amounts were drawn against
this line at December 31, 1998. Subsequent to the quarter end transaction timing
has resulted in a temporary need for external financing and the Company has
drawn $600,000 on the line of credit to cover short-term operating needs.
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, 1998, the Company had unfunded leases in the amount
of $7,611,000 which could be used as collateral for future borrowing
arrangements.
The Company believes it will have adequate sources of cash and available
bank line of credit to fund anticipated working capital needs for its existing
business through fiscal year 1999.
IMPACT OF YEAR 2000 ISSUES
The Year 2000 issue is related to computer software utilizing two digits
rather than four to define the appropriate year. As a result, any of the
Company's computer programs or any of the Company's suppliers or vendors that
have date sensitive software may incur system failures or generate incorrect
data if "00" is recognized as 1900 rather than 2000.
The Company has been addressing Year 2000 issues throughout fiscal year
1998 and the first and second quarters of fiscal 1999 and has modified or is in
the process of modifying any products or services that are affected by Year 2000
issues. Some older products or services have "end of life" programs in place.
The Company has a formal comprehensive Year 2000 readiness plan in place and
under the oversight of its executive management. The Company estimates that
approximately $200,000 of costs have been incurred and expensed during the
twelve months of fiscal year 1998 and the six months of fiscal 1999 related to
addressing Year 2000 events. It is estimated that another $400,000 to $500,000
of costs will be incurred prior to calendar year end 1999. The Company
continually reviews this estimate and will adjust its expected costs as new
information is obtained. Approximately two-thirds of this amount will be related
to fixed asset additions for new computer related equipment. The remaining one-
third will be expensed as incurred.
The Company's greatest risk for a material disruption in services lies in a
potential disruption of telecommunication services due to an external
telecommunication service provider's failure to be Year 2000 compliant and the
resulting impact upon the Company's monitoring services. The Company has
contacted and is in the process of obtaining assurances from its
telecommunications providers, including MCI, AT&T, WorldCom, Sprint, US West and
Ameritech that their networks are or will be Year 2000 compliant. The Company
expects to complete this process by mid year 1999. BI has a redundant monitoring
system that would allow the eastern monitoring center to process alerts if for
any reason the western monitoring center was to go down, or vice versa. In
addition, the Company has backup telecommunication provider connectivity if for
any reason the primary carrier has a disruption in service.
12
<PAGE>
The Company has been in the process throughout the twelve months of fiscal
year 1998 and the six months of fiscal 1999 of evaluating and replacing, where
needed, its internal business and business unit operating computer systems.
These replacements were required to meet current and future needs of the
business as well as to reduce various administrative and operating functions.
The new systems are expected to be Year 2000 capable and are scheduled for
deployment in fiscal year 1999. The systems have been or will be externally
verified and tested to be Year 2000 compliant. During January 1999 the Company
successfully deployed and implemented a new company wide Enterprise Resource
Planning (ERP) system that is Year 2000 capable.
The Company believes that based upon changes and modifications already made
and those that are currently planned for implementation throughout calendar year
1999 the impact of Year 2000 issues are not expected be material. However, to
the extent the Company or third parties on which it relies do not timely achieve
Year 2000 readiness, the Company's results of operations may be adversely
affected.
13
<PAGE>
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 January 27, 1999 By /s/ David J. Hunter
--------------------- ------------------------------
David J. Hunter
President and Chief Executive Officer
/s/ Jacqueline A. Chamberlin
---------------------------------
Jacqueline A. Chamberlin
Chief Financial Officer
14
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