<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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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
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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 May 10, 1999 was 7,775,900.
<PAGE>
BI INCORPORATED
Index
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Part I - Financial Information: Page No.
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet 2
at March 31, 1999 and June 30, 1998
Consolidated Statement of Operations
for the three and nine month periods ended March 31, 1999 and 1998 3
Consolidated Statement of Cash Flows
for the nine months ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5-6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 7 through 16
Signatures 17
Part II - Other Information:
Item 1 - Legal Proceedings: Incorporated by reference to Note 4 to Consolidated
Financial Statements in Part I.
<PAGE>
BI INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands, unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
----------------------- -----------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $0 $1,146
Receivables, net 13,223 10,603
Costs and estimated earnings in excess
of billings on uncompleted contracts 0 1,585
Investment in sales-type leases, net 4,309 4,337
Inventories, net 3,925 3,393
Deferred income taxes 1,818 751
Prepaid expenses 1,158 866
Assets held for sale, net 1,707 0
----------------------- -----------------------
Total current assets 26,140 22,681
Investment in sales-type leases, net 3,434 3,529
Rental and monitoring equipment, net 5,861 4,872
Property and equipment, net 14,138 13,250
Software, net 776 2,282
Intangibles, net 12,286 12,213
Other assets 3,260 3,162
----------------------- -----------------------
$65,895 $61,989
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $3,774 $3,163
Accrued compensation and benefits 2,812 1,940
Deferred revenue 1,587 1,647
Notes payable 2,311 0
Other liabilities 940 1,106
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Total current liabilities 11,424 7,856
----------------------- -----------------------
Capital lease obligation 6,764 6,897
Deferred revenue 2,256 2,329
Stockholders' equity
Common stock, no par value, 75,000 shares authorized;
7,774 shares issued and outstanding March 31, 1999 and
7,640 shares issued and outstanding June 30, 1998 34,813 34,076
Retained earnings 10,638 10,831
----------------------- -----------------------
Total stockholders' equity 45,451 44,907
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$65,895 $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 nine months
ended March 31, ended March 31,
----------------------------------------------------------------------------
1999 1998 1999 1998
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue
Service and monitoring income $14,515 $10,992 $41,145 $31,724
Rental income 250 207 518 596
Direct sales 3,768 3,887 11,715 12,486
Other income 15 39 83 128
---------------- --------------- --------------- ---------------
Total revenue 18,548 15,125 53,461 44,934
---------------- --------------- --------------- ---------------
Costs and expenses
Cost of service and monitoring income 7,498 5,736 20,939 16,347
Cost of rental income 203 53 379 160
Cost of direct sales 2,304 1,648 6,399 5,901
Selling, general and administrative expenses 5,003 4,462 15,139 13,131
Provision for doubtful accounts 429 324 1,337 1,510
Amortization and depreciation 1,034 885 2,750 2,496
Research and development expenses 954 700 2,772 2,398
Asset Imparement Charge 4,125 0 4,125 0
---------------- --------------- --------------- ---------------
Total costs and expenses 21,550 13,808 53,840 41,943
---------------- --------------- --------------- ---------------
Income before income taxes (3,002) 1,317 (379) 2,991
Income tax provision (benefit) 1,327 (586) 186 (1,297)
================ =============== =============== ===============
Net income (loss) ($1,675) $731 ($193) $1,694
================ =============== =============== ===============
Basic earnings (loss) per share ($0.22) $0.10 ($0.03) $0.23
================ =============== =============== ===============
Weighted average number of common shares outstanding 7,740 7,541 7,687 7,468
================ =============== =============== ===============
Diluted earnings (loss) per share ($0.22) $0.09 ($0.03) $0.22
================ =============== =============== ==============
Weighted average number of common and common equivelent
shares outstanding 7,740 8,034 7,687 7,761
================ =============== =============== ==============
</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 nine months
ended March 31,
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1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income ($193) $1,694
Adjustments to reconcile net income
to net cash from operating activities:
Amortization and depreciation 5,344 4,954
Provision for doubtful accounts 1,337 1,510
Asset impairment charge 4,125 0
Changes in assets and liabilities:
Receivables (4,541) (2,294)
Costs and estimated earnings in excess
of billings on uncompleted contracts (1,585) (869)
Investment in STLs 123 (1,259)
Inventories, net (532) 410
Prepaids and other assets (1,757) (567)
Accounts payable 611 87
Accrued expenses 794 741
Deferred revenue 371 368
Other liabilities (203) 167
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Net cash from operating activities 3,894 4,942
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Cash flows from investing activities:
Capital expenditures (3,597) (3,575)
Increase in rental and monitoring equipment (3,302) (2,282)
Increase in capitalized software (544) (625)
Investment in Intangibles (438) 450
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Net cash used in investing activities (7,881) (6,032)
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Cash flows from financing activities:
Payments on capital lease obligation (96) (56)
Proceeds from issuance of common stock 737 1,153
Bank Line of Credit 2,200 0
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Net cash from financing activities 2,841 1,097
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Net change in cash and cash equivalents (1,146) 7
Cash and cash equivalents at beginning of period 1,146 1,694
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Cash and cash equivalents at end of period $0 $1,701
========================= =========================
</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. Common
equivalent shares are excluded from the EPS calculation when the inclusion of
common equivalent shares is anti-dilutive. 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 with one of the Company's vendors
alleging wrongful termination of a contract. The vendor is seeking approximately
$600,000 in damages. The Company and the vendor are currently in arbitration to
settle this action.
The Company is also involved in four additional legal proceedings; one
alleging malfunction in equipment, another alleging negligence and
misrepresentation resulting in a wrongful death, the third alleging negligence
under product liability, and the last suit alleges wrongful death from general
negligence. One of the claimants seeks damages of $3,000,000, another seeks
damages of $3,977,500, the third seeks $250 million in damages, and the last
seeks damages in excess of $100,000.
During the quarter ending March 31, 1999 the Company successfully settled a
legal proceeding that had alleged nonperformance on a Jail Management System
contract. Also, during the quarter the case alleging negligence in
manufacturing and general negligence was dismissed without costs.
<PAGE>
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
consolidated 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 consolidated results of
operations in a particular quarter.
Note 5 - Asset Impairment
- -------------------------
During March 1999, the Company entered into a letter of intent to sell the
assets of its CIS business unit. Based on management's assessment of the net
realizable value of the CIS business unit assets, with consideration of the
terms of the proposed sale included in the letter of intent, the Company
recorded an asset impairment charge of $4,125,000 in the quarter ended March 31,
1999. The disposal of the CIS business unit assets is expected to occur in May
1999. The $1,707,000 carrying value of the CIS business unit assets reflected in
the accompanying consolidated balance sheet as assets held for resale, reflects
the adjustment for the impairment charge which includes estimated costs of
disposal, consist of accounts receivable, costs and estimated earnings in excess
of billings on uncompleted contracts, prepaid expenses, property and equipment,
and software.
<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 the "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
March 31, 1999 March 31, 1998
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EM CCS CIS Total EM CCS CIS Total
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue (unaudited, in thousands) (unaudited, in thousands)
Recurring Revenue
Service & Monitoring 8,513 5,930 72 14,515 6,837 4,109 46 10,992
Rental 250 250 207 207
Direct Sales 2,834 934 3,768 3,096 791 3,887
Other Income 15 15 39 39
--------------------------------------------------------------------------------------
Total Revenue 11,612 5,930 1,006 18,548 10,179 4,109 837 15,125
Gross Profit (Loss) 6,304 2,475 (236) 8,543 5,892 1,480 316 7,688
Gross Profit (Loss) % 54.3% 41.7% (23.5%) 46.1% 57.9% 36.0% 37.8% 50.8%
Selling, General & Administrative 3,187 1,361 455 5,003 3,040 1,091 331 4,462
Provision For Doubtful Accounts 70 359 0 429 (19) 343 0 324
Amortization & Depreciation 753 253 28 1,034 640 210 35 885
Research & Development 583 0 371 954 575 0 125 700
Asset Impairment Charge 0 0 4,125 4,125 0 0 0 0
Income (Loss) Before Income Taxes 1,711 502 (5,215) (3,002) 1,656 (164) (175) 1,317
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
March 31, 1999 March 31, 1998
--------------------------------------------------------------------------------------
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 24,566 16,361 218 41,145 19,590 12,002 132 31,724
Rental 518 518 596 596
Direct Sales 8,937 2,778 11,715 10,189 2,297 12,486
Other Income 83 83 128 128
--------------------------------------------------------------------------------------
Total Revenue 34,104 16,361 2,996 53,461 30,503 12,002 2,429 44,934
Gross Profit (Loss) 19,215 6,803 (274) 25,744 17,235 4,512 779 22,526
Gross Profit (Loss) % 56.3% 41.6% (9.1%) 48.2% 56.5% 37.6% 32.1% 50.1%
Selling, General & Administrative 9,937 4,050 1,152 15,139 8,854 3,381 896 13,131
Provision For Doubtful Accounts 209 1,128 0 1,337 103 1,407 0 1,510
Amortization & Depreciation 1,958 702 90 2,750 1,777 609 110 2,496
Research & Development 1,977 0 795 2,772 1,988 0 410 2,398
Asset Impairment Charge 0 0 4,125 4,125 0 0 0 0
Income (Loss) Before Income Taxes 5,134 923 (6,436) (379) 4,513 (885) (637) 2,991
</TABLE>
The three-month period ended March 31, 1999 (fiscal 1999), compared to the
three-month period ended March 31, 1998 (fiscal 1998):
Revenue
Total revenue for the three months ended March 31, 1999, increased 22.6% to
$18,548,000, compared to $15,125,000 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 31.8% in fiscal
1999 compared to fiscal 1998. Recurring revenue increased to $14,765,000 or
79.6% of total revenue, in fiscal 1999 from $11,199,000, or 74.0% 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 14.1% to $11,612,000 for the three
months ended March 31, 1999 compared to $10,179,000 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
<PAGE>
income, increased 24.4% to $8,763,000 in fiscal 1999 from $7,044,000 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 $2,834,000 in fiscal 1999 from
$3,096,000 in fiscal 1998.
The CCS business unit recurring revenue increased 44.3% to $5,930,000 in
fiscal 1999, compared to $4,109,000 in fiscal 1998. CCS provides community
correctional supervision and services in 13 states through its 82 correctional
service centers. The Company currently provides services for approximately
40,000 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 revenue increased 20.2% to $1,006,000 in fiscal 1999,
compared to $837,000 in fiscal 1998. Direct sales revenue associated with the
Institutional Management System (IMS) applications software product increased to
$934,000 in fiscal 1999 from $791,000 in fiscal 1998. The CIS business unit has
contracts lasting from one month to approximately twenty four months in
duration. During March 1999, the Company entered into a letter of intent to sell
the assets of its CIS business unit. See note 5 of Notes To Consolidated
Financial Statements.
Gross Profit
Total Gross profit for the three months ended March 31, 1999 increased to
$8,543,000, compared to $7,688,000 in the corresponding period a year ago. Total
gross profit as a percentage of total revenue, declined to 46.1% as compared to
50.8% for fiscal 1998
Gross profit for the EM business unit increased to $6,304,000, in fiscal
1999 compared to $5,892,000, in fiscal 1998. Gross profit as a percentage of
revenue, decreased to 54.3% as compared to 57.9% in the corresponding period a
year ago. This percentage decrease was due to a current period decline in gross
profit in both recurring and direct sales revenue as compared to the same period
a year ago. Temporary additional start up costs associated with the deployment
of the Company's next generation monitoring software (Guard Ware) along with
increased installation labor costs decreased recurring revenue gross profits to
53% in fiscal 1999 from 56% in fiscal 1998. The Company's expectations are that
full deployment of Guard Ware will reduce monitoring operating costs over time.
Direct sales gross profit for fiscal 1999 was 58% compared to 62% in fiscal
1998. The fiscal 1998 margins were unusually high due to positive manufacturing
variances and relatively favorable pricing on some specific contracts.
Gross profit for the CCS business unit increased to $2,475,000, in fiscal
1999 compared to $1,480,000, in fiscal 1998. Gross profit as a percentage of
revenue, increased to 41.7% as compared to 36.0% in the corresponding period a
year ago. The 1999 percentage 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.
Gross profit for the CIS business unit decreased to a loss of ($236,000),
in fiscal 1999 compared to profit of 316,000, in fiscal 1998. Gross profit as a
percentage of revenue, decreased to a loss of (23.5%) as compared to a profit of
37.8% in the corresponding period a year ago. 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)
<PAGE>
S,G&A expenses for the three months ended March 31, 1999 increased by
$541,000 to $5,003,000 compared to $4,462,000 in the corresponding period a year
ago. S,G&A expense as a percentage of total revenue decreased to 27.0% in
fiscal 1999 compared to 29.5% in fiscal 1998.
S,G&A expenses for the EM business unit increased to $3,187,000 in fiscal
1999 compared to $3,040,000 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. As a percentage of revenue S,G&A expenses decreased to
27.4% in fiscal 1999 compared to 29.9% in fiscal 1998.
S,G&A expenses for the CCS business unit increased to $1,361,000 in fiscal
1999 compared to $1,091,000 in fiscal 1998. The increase in expenses is related
to investments in infrastructure and staffing to support the growth of the
business unit. As a percentage of revenue S,G&A expenses decreased to 23.0% in
fiscal 1999 from 26.6% in fiscal 1998.
S,G&A expenses for the CIS business unit increased to $455,000 in fiscal
1999 compared to $331,000 in fiscal 1998. The increase in expenses are
associated with infrastructure costs necessary to manage deployment and
implementation of existing contracts. As a percentage of revenue S,G&A expenses
increased to 45.2% in fiscal 1999 as compared to 39.5% of revenue, in fiscal
1998.
Provision for Doubtful Accounts
The provision for doubtful accounts was $429,000, or 2.3% of total revenue,
in fiscal 1999 compared to $324,000, or 2.1% 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 16.7% 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
recorded an allowance of 6% of CCS revenue for doubtful accounts during 1999
compared to approximately 8% in 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 expenses increased by $149,000 to $1,034,000, or 5.6% of revenue, in
fiscal 1999 from $885,000, or 5.9% of revenue, in fiscal 1998. The increase was
due to additions to property, plant and equipment.
Research and Development Expenses (R&D)
R&D expenses increased by $254,000 to $954,000 in fiscal 1999 from $700,000
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
<PAGE>
year 1999. As a percentage of EM revenue, EM business unit R&D expense was 5.0%
in fiscal 1999 compared to 5.6% in fiscal 1998.
Asset Impairment Charge
During March 1999, the Company entered into a letter of intent to sell the
assets of its CIS business unit. Based on management's assessment of the net
realizable value of the CIS business unit assets, with consideration of the
terms of the proposed sale included in the letter of intent, the Company
recorded an asset impairment charge of $4,125,000 in the quarter ended March 31,
1999. The disposal of the CIS business unit assets is expected to occur in May
1999. The $1,707,000 carrying value of the CIS business unit assets reflected in
the accompanying consolidated balance sheet as assets held for resale, reflects
the adjustment for the impairment charge which includes estimated costs of
disposal, consist of accounts receivable, costs and estimated earnings in excess
of billings on uncompleted contracts, prepaid expenses, property and equipment,
and software.
Net Income (Loss) and Income Taxes
The Company recorded income tax expense (benefit) of $(1,327,000) and
$586,000 for the three months ended March 31, 1999 and 1998 respectively. The
tax benefit for fiscal 1999 was the result of $(1,568,000) of tax benefit
derived from the loss related to the CIS Asset Impairment Charge. In addition,
the Company's income tax expense differs from the statutory rate largely as a
result of state income taxes and non-deductible goodwill amortization expense.
For the three months ended March 31, 1999 , the Company had a net loss of
$(1,675,000), or $(.22) diluted earnings per share compared to net income of
$731,000, or $.09 diluted earnings per share for the same period a year ago. The
changes in net income relate primarily to the items discussed above.
The nine-month period ended March 31, 1999 (fiscal 1999), compared to the nine-
month period ended March 31, 1998 (fiscal 1998):
Revenue
Total revenue for fiscal 1999 increased 19.0% to $53,461,000 compared to
$44,934,000 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 $41,663,000, or 77.9% of total revenue, in fiscal 1999 from
$32,320,000, or 71.9% 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 11.8% to $34,104,000 in fiscal 1999
compared to $30,503,000 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 24.3% to $25,084,000 in
fiscal 1999 from $20,186,000 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
<PAGE>
decreased to $8,937,000 in fiscal 1999 from $10,189,000 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 $4,359,000, or 36.3%, to
$16,361,000 in fiscal 1999 compared to $12,002,000 in fiscal 1998. CCS provides
probation and day reporting services in 13 states through its 82 correctional
service centers. The Company currently provides services for approximately
40,000 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 23.3% to $2,996,000 in fiscal
1999 compared to $2,429,000 in fiscal 1998. Direct sales revenue associated
with the Institutional Management System (IMS) applications software product
increased by $481,000 in fiscal 1999 from $2,297,000 in fiscal 1998. The CIS
business unit has contracts lasting from one month to approximately twenty four
months in duration.
Gross Profit
Total gross profit for the nine months ended March 31, 1999 increased to
$25,744,000 compared to $22,526,000 in the corresponding period a year ago.
Total gross profit as a percentage of total revenue decreased to 48.2% in fiscal
1999 compared to 50.1% for fiscal 1998.
The EM business unit maintained its gross profit percentage at
approximately 56% for fiscal 1999 and fiscal 1998. Gross profit for fiscal 1999
was $19,215,000 compared to $17,235,000 in fiscal 1998. Gross profit on
recurring revenue decreased to 54% in fiscal 1999 compared to 56% in fiscal
1998. This decline is associated with additional implementation costs in fiscal
1999 on the next generation (Guard Ware) monitoring software and increased
installation labor costs as compared to the previous period a year ago. The
Company's expectations are that full deployment of Guard Ware will reduce
monitoring operating costs over time. Gross profit on direct sales revenue
increased in fiscal 1999 to 62% as compared to 57% in fiscal 1998. This increase
was due to manufacturing cost improvements and favorable production variances
during fiscal 1999.
The CCS business unit had a increase in its gross profit percentage to
41.6% for fiscal 1999 compared to 37.6% 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. 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 percentage to (9.1%) in
fiscal 1999 compared to 32.1% 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 $2,008,000 to
$15,139,000 compared to $13,131,000 in the corresponding period a year ago.
S,G&A expense as a percentage of total revenue decreased to 28.3% in fiscal 1999
compared to 29.2% 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.
<PAGE>
The EM business unit increased its S,G&A expenses by $1,083,000 in fiscal
1999, resulting in expenses of 29.1% of EM revenue in fiscal 1999 compared to
29.0% 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 $669,000 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
24.8% of revenue in fiscal 1999 compared to 28.2% in fiscal 1998.
The CIS business unit increased its S,G&A expenses by $256,000 in fiscal
1999 to $1,152,000, or 38.5% of CIS revenue, in fiscal 1999 compared to
$896,000, or 36.9%, in fiscal 1998. 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 was $1,337,000, or 2.5% of total
revenue, in fiscal 1999 compared to $1,510,000, or 3.4% 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 21.2% 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 recorded an allowance of 7% of CCS revenue for doubtful accounts during
1999 compared to approximately 12% in 1998. The Company is implementing
additional collection procedures to reduce payment defaults within the CCS
business unit.
Amortization and Depreciation (A&D)
A&D expenses increased by $254,000 to $2,750,000, or 5.1% of revenue, in
fiscal 1999 from $2,496,000, or 5.6% 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 $374,000 to $2,772,000 in fiscal 1999 from
$2,398,000 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 5.8% in
fiscal 1999 compared to 6.5% in fiscal 1998.
Asset Impairment Charge
<PAGE>
During March 1999, the Company entered into a letter of intent to sell the
assets of its CIS business unit. Based on management's assessment of the net
realizable value of the CIS business unit assets, with consideration of the
terms of the proposed sale included in the letter of intent, the Company
recorded an asset impairment charge of $4,125,000 in the quarter ended March 31,
1999. The disposal of the CIS business unit assets is expected to occur in May
1999. The $1,707,000 carrying value of the CIS business unit assets reflected in
the accompanying consolidated balance sheet as assets held for resale, reflects
the adjustment for the impairment charge which includes estimated costs of
disposal, consist of accounts receivable, costs and estimated earnings in excess
of billings on uncompleted contracts, prepaid expenses, property and equipment,
and software.
Net Income (Loss) and Income Taxes
The Company recorded income tax expense (benefit) of $(186,000) and
$1,297,000 for the nine months ended March 31, 1999 and 1998 respectively. The
tax benefit for fiscal 1999 was the result of $(1,568,000) of tax benefit
derived from the loss related to the CIS Asset Impairment Charge. In addition,
the Companies income tax expense differs from the statutory rate largely as a
result of state income taxes and non-deductible goodwill amortization expense.
For the nine months ended March 31, 1999 the Company had a net loss of
$(193,000), or $(.03) diluted earnings per share, compared to net income of
$1,694,000, or $.22 diluted earnings per share for the same period a year ago.
The changes in net income relate primarily to the items discussed above.
Liquidity and Capital Resources
For the nine months ended March 31, 1999, the Company generated $3,894,000
of cash from operating activities, expended $3,597,000 for capital equipment and
leasehold improvements, expended $3,302,000 for equipment associated with rental
and monitoring contracts and expended $438,000 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 $1,146,000 for the nine months ended
March 31, 1999. The reduction in net cash generated from operating activities
during fiscal 1999 versus 1998 was primarily a result of the current period loss
stemming from the $4,125,000 charge for asset impairment.
The Company's working capital remained constant at approximately $14.7
million for fiscal 1999 and 1998. The Company increased its 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.
The Company has an available $5,000,000 line of credit with Bank One,
Boulder, Colorado which expires in October 1999. As of March 31, 1999
$2,200,000 was drawn against this line 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
<PAGE>
leased equipment. At March 31, 1999, the Company had unfunded leases in the
amount of $7,743,000 which could be used as collateral for future borrowing
arrangements. Such lease financing carries a low risk of default and is at
favorable interest rates to the Company.
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 nine months 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 $340,000 of costs have been incurred during the twelve months of
fiscal year 1998 and the nine months of fiscal 1999 related to addressing Year
2000 events. It is estimated that another $900,000 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. Two-thirds of
this amount will be related to fixed asset additions for new computer related
equipment and software upgrades. The remaining one-third will be expensed as
incurred. BI does not include the costs of internal employee time in the above
cost calculations, since these costs are not separately tracked. The above
costs, however, do include costs of third party contractors and consultants.
BI is contacting each of its material vendors and suppliers to determine
their Year 2000 readiness. 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 be taken out of service, or vice
versa. In addition, the Company has backup telecommunication provider
connectivity if for any reason the primary carrier has a disruption in service.
The Company has been in the process throughout the twelve months of fiscal
year 1998 and the nine 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 cost reduce various administrative and operating
functions. Some replacement and system upgrades may be accelerated from when
they might have been implemented in the absence of the Year 2000 issues, and
some other systems related projects may be deferred as a result of such
acceleration. However, the Company does not believe either acceleration or
deferral of projects, as a result of Year 2000 issues, should have a material
adverse effect on the Company. 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.
<PAGE>
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 to 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.
<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 May 12, 1999 By /s/ David J. Hunter
------------- -------------------------------------
David J. Hunter
President and Chief Executive Officer
/s/ Jacqueline A. Chamberlin
-------------------------------------
Jacqueline A. Chamberlin
Chief Financial Officer
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