<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, 2000
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) 218-1000
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of no par
value common stock outstanding at April 25, 2000 was 7,948,562.
<PAGE>
BI INCORPORATED
Index
--------
Part I - Financial Information: Page No.
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets 2
at March 31, 2000 and June 30, 1999
Consolidated Statements of Operations
for the nine month periods ended March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows
for the nine months ended March 31, 2000 and 1999 4
Consolidated Notes to Financial Statements 5-6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 7 through 15
Signatures 16
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 SHEETS
(in thousands, unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
--------------- ---------------
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 412 $ -
Receivables, net 13,045 14,521
Inventories, net 6,020 4,100
Investment in sales-type leases 3,634 3,662
Deferred income taxes 933 933
Prepaid expenses 1,483 825
--------------- ---------------
Total current assets 25,527 24,041
Investment in sales-type leases 4,315 3,368
Rental and monitoring equipment, net 5,690 5,861
Property and equipment, net 8,660 13,833
Intangibles, net 11,693 11,998
Long term deferred tax asset 1,990 2,011
Investments in common stock 1,321 1,321
Software, net 5,985 2,946
Other assets 1,828 2,872
--------------- ---------------
$ 67,009 $ 68,251
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,743 $ 2,516
Outstanding liabilities in excess of cash - 971
Accrued compensation and benefits 2,799 2,673
Deferred revenue 1,787 1,535
Income taxes payable 463 215
Current portion of long-term debt (Note 8) 176 4,052
Other liabilities 758 1,419
--------------- ---------------
Total current liabilities 8,726 13,381
--------------- ---------------
Capital lease obligations (Note 6) 472 6,714
Deferred revenue 2,088 2,275
Long-term debt (Note 8) 7,571 -
--------------- ---------------
Stockholders' equity
Common stock, no par value, 75,000 shares
authorized; 7,949 shares issued and outstanding
March 31, 2000, and 7,791 shares issued and
outstanding June 30, 1999 35,910 34,996
Retained earnings 12,242 10,885
--------------- ---------------
48,152 45,881
--------------- ---------------
$ 67,009 $ 68,251
=============== ===============
</TABLE>
The accompanying notes are an integral
part of these consolidated balance sheets.
2
<PAGE>
BI INCORPORATED
CONSOLIDATED STATEMENTS 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,
------------------------ -------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues
Service and monitoring income $ 15,173 $ 14,443 $ 45,292 $ 40,927
Rental income 304 250 880 518
Direct sales 2,663 2,834 7,961 8,937
Other income 160 15 160 83
----------- ----------- ------------ -----------
Total revenues 18,300 17,542 54,293 50,465
----------- ----------- ------------ -----------
Costs and expenses
Cost of service and monitoring income 8,998 7,379 26,024 20,653
Cost of rental income 152 204 394 379
Cost of direct sales 1,650 1,180 4,499 3,408
Selling, general and administrative expenses 5,585 4,761 16,481 14,584
Provision for doubtful accounts (45) 429 1,014 1,337
Amortization and depreciation 837 921 2,424 2,442
Research and development expenses 227 583 1,095 1,978
----------- ----------- ------------ -----------
Total costs and expenses 17,404 15,457 51,931 44,781
----------- ----------- ------------ -----------
Income from continuing operations before income taxes 896 2,085 2,362 5,684
Income tax provision (390) (874) (1,005) (2,407)
----------- ----------- ------------ -----------
Net income from continuing operations 506 1,211 1,357 3,277
Loss from discontinued operations (Note 5) - (2,886) - (3,470)
----------- ----------- ------------ -----------
Net income $ 506 $ (1,675) $ 1,357 $ (193)
=========== =========== ============ ===========
Basic earnings per share from continuing operations $ 0.06 $ 0.16 $ 0.17 $ 0.43
=========== =========== ============ ===========
Basic (loss) per share from discontinued operations - ($0.37) - ($0.45)
=========== =========== ============ ===========
Basic earnings (loss) per share $ 0.06 ($0.22) $ 0.17 ($0.03)
=========== =========== ============ ===========
Weighted average number of common shares outstanding 7,937 7,740 7,908 7,687
=========== =========== ============ ===========
Diluted earnings per share from continuing operations $ 0.06 $ 0.16 $ 0.17 $ 0.43
=========== =========== ============ ===========
Diluted (loss) per share from discontinued operations - ($0.37) - ($0.45)
=========== =========== ============ ===========
Diluted earnings (loss) per share $ 0.06 ($0.22) $ 0.17 ($0.03)
=========== =========== ============ ===========
Weighted average number of common and
common equivalent shares outstanding (Note 3) 8,046 7,740 8,047 7,687
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
3
<PAGE>
BI INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
For the nine months
ended March 31,
-------------------------
2000 1999
-------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,357 $ (193)
Adjustments to reconcile net income to net cash from
operating activities:
Amortization and depreciation 5,860 5,344
Provision for doubtful accounts 1,014 1,337
Changes in assets and liabilities:
Receivables 585 (6,126)
Investment in sales type leases (919) 123
Inventories, net (1,920) (532)
Prepaid and other assets (1,061) (1,757)
Accounts payable (751) 611
Accrued and other expenses (535) 794
Deferred revenue 16 371
Income taxes payable 269 (203)
Decrease in net assets of discontinued operations - 4,125
----------- -----------
Net cash from operating activities 3,915 3,894
----------- -----------
Cash flows from investing activities:
Capital expenditures (Notes 6, 7) (2,358) (3,128)
Increase in rental and monitoring equipment (2,462) (3,302)
Increase in capitalized software (3,268) (1,013)
Expenditures for intangibles 46 (438)
Cash paid for acquisitions net of cash acquired (481) -
Proceeds from sale of investment (Note 6) 475 -
----------- -----------
Net cash used in investing activities (8,048) (7,881)
----------- -----------
Cash flows from financing activities:
Payments on capital lease obligation - (96)
Proceeds from issuance of common stock 914 737
Proceeds from borrowings (Note 8) 3,631 2,200
----------- -----------
Net cash from financing activities 4,545 2,841
----------- -----------
Net change in cash 412 (1,146)
Cash at beginning of period - 1,146
----------- -----------
Cash at end of period $ 412 $ -
=========== ===========
</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 1999 amounts have been reclassified to be comparable with
the fiscal 2000 presentation.
Note 3 - Net Income per Common and Equivalent Share
- ---------------------------------------------------
Basic Earnings Per Share (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.
Note 4 - Legal Proceedings
- --------------------------
The Court Of Common Pleas for the County of Philadelphia, Pennsylvania on
March 15, 2000 granted a motion to compel. Plaintiff has until May 9, 2000 to
answer interrogatories or produce expert report. Suit alleges product liability
and negligence seeking damages of $100,000.
The Company is also involved in three additional legal proceedings; one
alleging negligence and misrepresentation resulting in a wrongful death; the
second alleges wrongful death, survivorship action and civil rights violation;
the third alleges malfunction in equipment. The first claimant seeks damages of
$17,000,000; the second seeks damages of $10,500,000; the third seeks damages of
$3,000,000.
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
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 - Discontinued Operations
- ----------------------------------
In March 1999, the Company entered into a letter of intent to sell the assets of
its Corrections Information Services (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. Subsequently the
Company decided to discontinue its CIS business unit and sold the net assets on
April 30, 1999. The CIS business unit's losses from its results of operations
and its disposal are presented in the Company's financial statements of
operations as discontinued operations, net of related income taxes.
5
<PAGE>
Note 6 - Sale of Investment
- ---------------------------
In the first quarter, the Company sold its equity investment interest in the
building it leases. As a result of this transaction, the Company changed the
accounting for its building lease from a capital lease to an operating lease.
The net effect of the change was a non-cash reduction in the capitalized leased
asset of $5,780,000; a non-cash reduction in the capitalized lease obligation of
$6,714,000 and a non-cash reduction in other assets of $1,047,000.
Note 7 - Capital Lease Obligations
- ----------------------------------
During the second quarter, the Company entered into two leasing arrangements
that are accounted for as capital leases. The leases are for telecommunications
and facilities equipment, totaling $585,000. Accordingly, non-cash additions
to property and equipment and non-cash additions to capital lease obligations
were recorded in this amount.
Note 8 -Loans Payable
- ---------------------
Late in the second quarter, the Company entered into a new loan agreement with
its primary bank, that replaced the existing bank line of credit. Accordingly,
the outstanding balance on the line of credit of $7,500,000 was rolled into the
new loan. The new loan bears interest at the published Prime rate, and is due
in January, 2002. Interest is due each month. The loan is secured by accounts
receivable, inventory, and equipment, and sets forth certain financial and other
covenants, including prior consent to the payment of any dividends, that must be
met by the Company.
Late in the second quarter, the Company entered into a new installment term loan
agreement with its primary bank, in the amount of $600,000. The new loan bears
interest at the published Prime rate, with interest due each month. Monthly
principal payments are $8,351 for the first year, and accelerate to $11,787 for
the last year of the loan term, ending in December, 2004. The loan is secured
by accounts receivable, inventory, and equipment, and sets forth certain
financial and other covenants, including prior consent to the payment of any
dividends, that must be met by the Company.
Note 9 -Recently Issued Accounting Pronouncements
- -------------------------------------------------
During June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), and in June 1999, the FASB issued FAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB 133" ("SFAS No. 137"). SFAS No. 137 requires the Company to adopt SFAS
No. 133 for all quarters in the fiscal year ending June 30, 2002, SFAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. To date, the Company has not entered into any derivative financial
instruments or hedging activities.
During December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), to establish
guidelines for revenue recognition and enhance revenue recognition disclosure
requirements. SAB 101 clarifies basic criteria for when revenues are taken into
account for purposes of a company's financial statements. SAB 101 is effective
for the quarter ended June 30, 2000. The Company is currently assessing the
implications of adopting SAB 101. In the period of adoption, the cumulative
impact will be reported as a change in accounting principle as dictated by SAB
101.
6
<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 loss of a material contract
through lack of appropriation or otherwise or the inability of the Company or
others upon which it depends to adequately address and correct problems
resulting from the "Year 2000" issue. There was no disruption of any operations
for the Company due to the date changeover from December 31, 1999 to January 1,
2000. Although there has been no significant Year 2000 problems to date, the
Company will continue to monitor the situation closely.
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) and Community
Correctional Services (CCS). The Company separates costs by Business Unit
through gross profits. Operating expenses below gross profit are not allocated
by Business Unit.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
EM CCS Total EM CCS Total
(unaudited, in thousands) (unaudited, in thousands)
<S> <C> <C>
Recurring Revenue
Service & Monitoring 8,439 6,734 15,173 8,513 5,930 14,443
Rental 304 304 250 250
Total Recurring Rev 8,743 6,734 15,477 8,763 5,930 14,693
Direct Sales 2,663 2,663 2,834 2,834
Other Income 160 160 15 15
------------------------------------- -------------------------------------
Total Revenue 11,566 6,734 18,300 11,612 5,930 17,542
Gross Profit
Recurring Revenue
Service & Monitoring 4,013 2,162 6,175 4,589 2,475 7,064
Rental 152 152 46 46
Total Recurring Rev 4,165 2,162 6,327 4,635 2,475 7,110
Direct Sales 1,013 1,013 1,654 1,654
Other Income 160 160 15 15
------------------------------------- -------------------------------------
Total Gross Profit 5,338 2,162 7,500 6,304 2,475 8,779
Gross Profit % 46.2% 32.1% 41.0% 54.3% 41.7% 50.0%
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
EM CCS Total EM CCS Total
(unaudited, in thousands) (unaudited, in thousands)
<S> <C> <C>
Recurring Revenue
Service & Monitoring 25,180 20,112 45,292 24,566 16,361 40,927
Rental 880 880 518 518
Total Recurring Rev 26,060 20,112 46,172 25,084 16,361 41,445
Direct Sales 7,961 7,961 8,937 8,937
Other Income 160 160 83 83
------------------------------------- -------------------------------------
Total Revenue 34,181 20,112 54,293 34,104 16,361 50,465
Gross Profit
Recurring Revenue
Service & Monitoring 12,055 7,213 19,268 13,464 6,810 20,274
Rental 486 486 139 139
Total Recurring Rev 12,541 7,213 19,754 13,603 6,810 20,413
Direct Sales 3,462 3,462 5,529 5,529
Other Income 160 160 83 83
Total Gross Profit 16,163 7,213 23,376 19,215 6,810 26,025
------------------------------------- -------------------------------------
Gross Profit % 47.3% 35.9% 43.1% 56.3% 41.6% 51.6%
</TABLE>
The three-month period ended March 31, 2000 (fiscal 2000), compared to the
three-month period ended March 31, 1999 (fiscal 1999):
Revenue
Total revenue for the three months ended March 31, 2000, increased 4.3% to
$18,300,000, compared to $17,542,000 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 both business units, increased 5.3% in fiscal 2000
compared to fiscal 1999. Recurring revenue increased to $15,477,000, or 84.6% of
total revenue, in fiscal 2000 from $14,693,000, or 83.8% of total revenue, in
fiscal 1999. This increase was due to a 13.6% growth in CCS recurring revenue
while the EM business unit maintained recurring revenue at the same level for
fiscal 2000 as compared to fiscal 1999.
The EM business unit total revenue decreased slightly to $11,566,000 for
the three months ended March 31, 2000, compared to $11,612,000 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, remained consistent at $8,743,000 in fiscal 2000
compared to $8,763,000 in fiscal 1999. Direct sales revenue decreased to
$2,663,000 in fiscal 2000 from $2,834,000 in fiscal 1999. The timing of new
direct sales awards continue to be volatile, hence affecting quarter to quarter
revenue comparisons.
The CCS business unit recurring revenue increased 13.6% to $6,734,000 in
fiscal 2000, compared to $5,930,000 in fiscal 1999. CCS provides community
correctional supervision services, rehabilitation and treatment services, as
well as court ordered fee collections. CCS operates in 13 states through its 87
correctional service
8
<PAGE>
centers providing services to more than 45,000 offenders. During the current
period the Company was awarded a substantial contract from Tulare County, CA
representing $2.2 million in annual recurring revenue. Client count is expected
to increase to approximately 2,000 over the next six months. In the first
quarter of fiscal 2000 the Company was awarded a significant contract from
Fulton County, GA representing approximately $8 million in revenue over four
years. During the current period CCS continued to increase revenue associated
with the implementation of this contract. The Company intends to continue to
broaden the services provided to the offender and anticipates additional revenue
growth in this business unit for fiscal year 2000.
Gross Profit
Total Gross profit as a percentage of total revenue for the three months
ended March 31, 2000 was 41.0% compared to 50.0% in the corresponding period a
year ago. Total gross profit for fiscal 2000 was $7,500,000 compared to
$8,779,000 for fiscal 1999.
The EM business unit gross profit as a percentage of EM revenue decreased
to 46.2% in fiscal 2000 compared to 54.3% in fiscal 1999. 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 (GuardWare) along with unabsorbed fixed costs
related to fewer than anticipated offenders being assigned monitoring
supervision decreased recurring revenue gross profit to 48% in fiscal 2000 from
53% in fiscal 1999. The Company's expectations are that full deployment of
GuardWare will reduce monitoring operating costs over time. Direct sales gross
profit for fiscal 2000 was 38% compared to 58% in fiscal 1999. The fiscal 2000
gross profit was negatively affected by product upgrades previously made to
insure Y2K compliance for approximately $250,000. The fiscal 1999 margins were
unusually high due to positive manufacturing variances and relatively favorable
pricing on some specific contracts.
The CCS business unit gross profit as a percentage of CCS revenue decreased
to 32.1% for fiscal 2000 compared to 41.7% in fiscal 1999. Over five points of
this decrease was due to a temporary decline in day reporting revenue and gross
profits in one of the Company's large correctional service centers. In addition,
the CCS business unit incurred start-up costs associated with the Fulton County
contract, as well as additional infrastructure expenses required to support the
expanding business unit. On new correctional service centers such as the Fulton
center, the Company expects to generate profits within six months from start of
operations. The Company will continue to make additional investments in new
services and community correctional centers throughout fiscal 2000. On existing
centers, the Company expects additional cost reductions and improved
efficiencies to increase the CCS gross profit percentage over time.
Selling, General and Administrative (S,G&A)
S,G&A expenses as a percentage of total revenue increased to 30.5% for
fiscal 2000 compared to 27.1% in fiscal 1999. Total S,G&A expense for the three
months ended March 31, 2000, was $5,585,000 compared to $4,761,000 in the
corresponding period a year ago. The increase in expenditures is related to
additional business development expenses associated with acquisition activities,
increased interest expense on the expanded line of credit, as well as increases
in sales and marketing expenditures related to growth of new and existing
customer sites. The Company has recently centralized its S,G&A support functions
and no longer provides these services based upon business units.
9
<PAGE>
Provision for Doubtful Accounts
The provision for doubtful accounts as a percentage of total revenue
decreased for fiscal 2000 as compared to fiscal 1999. Total doubtful accounts
expense for the three months ended March 31, 2000, was a negative $45,000
compared to $429,000 in the corresponding period a year ago. This decrease was
largely the result of a current period analysis and reduction of the required
provision for doubtful accounts. The provision relates largely to the Company's
probation and day reporting services. Probation service revenue is 100% paid by
the offender and carries an increased risk of default. Day reporting revenue for
fiscal 2000 was 25.4% 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 will continue to emphasize additional collection
procedures to further reduce payment defaults.
Amortization and Depreciation (A&D)
A&D expenses decreased to $837,000 or 4.6% of total revenue in fiscal 2000
from $921,000 or 5.3% of total revenue in fiscal 1999. This decrease was due to
fewer additions to property, plant and equipment as a result of the completion
of the development and related capitalization of numerous new product
introductions.
Research and Development Expenses (R&D)
R&D expenses decreased to $227,000 in fiscal 2000 from $583,000 in fiscal
1999. 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 numerous next generation electronic monitoring products. One
of these products was introduced in the fourth quarter of fiscal 1999. Two
additional products were released in the second quarter of fiscal 2000. The
Company expects to continue expenditures for improvements to the monitoring
operations and development of future home arrest products throughout fiscal year
2000.
The nine-month period ended March 31, 2000 (fiscal 2000), compared to the nine-
month period ended March 31, 1999 (fiscal 1999):
Revenue
Total revenue for the nine months ended March 31, 2000, increased 7.6% to
$54,293,000, compared to $50,465,000 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 both business units, increased 11.4% in fiscal 2000
compared to fiscal 1999. Recurring revenue increased to $46,172,000, or 85.0% of
total revenue, in fiscal 2000 from $41,445,000, or 82.1% of total revenue, in
fiscal 1999. Both business units reported recurring revenue increases for
fiscal 2000 as compared to fiscal 1999.
The EM business unit revenue increased 0.2% to $34,181,000 for the nine
months ended March 31, 2000, compared to $34,104,000 in the corresponding period
a year ago. Some government agencies purchase equipment
10
<PAGE>
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 3.9% to $26,060,000 in fiscal 2000 from
$25,084,000 in fiscal 1999. This increase in recurring revenue relates to the
continuing trend of government agencies to contract for electronic monitoring
rather than purchase equipment. Direct sales revenue decreased to $7,961,000 in
fiscal 2000 from $8,937,000 in fiscal 1999. The timing of new direct sales
awards continue to be volatile hence affecting quarter to quarter revenue
comparisons.
The CCS business unit recurring revenue increased 22.9% to $20,112,000 in
fiscal 2000, compared to $16,361,000 in fiscal 1999. CCS provides community
correctional supervision services, rehabilitation and treatment services, as
well as court ordered fee collections. CCS operates in 13 states through its 87
correctional service centers providing services to more than 45,000 offenders.
In the first quarter of fiscal 2000 the Company was awarded a significant
contract from Fulton County, GA representing approximately $8 million in revenue
over four years. Throughout the second and third quarters of fiscal 2000 CCS
continued to increase revenue associated with the implementation of this
contract. During the second quarter of fiscal 2000 the Company acquired two
correctional service centers in New Mexico specializing in treatment and Drug
Court services. During the current period the Company was awarded a substantial
contract from Tulare County, CA representing $2.2 million in annual recurring
revenue. The Tulare client count is expected to ramp to approximately 2,000 over
the next six months. 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 2000.
Gross Profit
Total Gross profit as a percentage of total revenue for the nine months
ended March 31, 2000 was 43.1% compared to 51.6% in the corresponding period a
year ago. Total gross profit for fiscal 2000 was $23,376,000 compared to
$26,025,000 for fiscal 1999.
The EM business unit gross profit decreased to 47.3% as a percentage of EM
revenue for fiscal 2000 compared to 56.3% in fiscal 1999. 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 (GuardWare) along with unabsorbed fixed costs
related to fewer than anticipated offenders being assigned monitoring
supervision decreased recurring revenue gross profits to 48% in fiscal 2000 from
54% in fiscal 1999. The Company's expectations are that full deployment of
GuardWare will reduce monitoring operating costs over time. Direct sales gross
profit for fiscal 2000 was 44% compared to 62% in fiscal 1999. The fiscal 2000
gross profit was negatively affected by approximately $600,000 of Y2K expenses.
The fiscal 1999 margins were unusually high due to positive manufacturing
variances and relatively favorable pricing on some specific contracts.
The CCS business unit gross profit decreased to 35.9% as a percentage of
CCS revenue for fiscal 2000 compared to 41.6% in fiscal 1999. This decrease was
partially due to a temporary decline in day reporting revenue and gross profits
in one of the Company's large correctional service centers. In addition, the
decreased gross profit was the result of start-up costs associated with the
Fulton County contract, as well as additional infrastructure expenses required
to support the expanding business unit. On new correctional service centers such
as the Fulton center, the Company expects to generate profits within six months
from start of operations. The Company will continue to make additional
investments in new services and community correctional centers throughout fiscal
2000. On existing centers, the Company expects additional cost reductions and
improved efficiencies to increase the CCS gross profit percentage over time.
11
<PAGE>
Selling, General and Administrative (S,G&A)
S,G&A expenses as a percentage of total revenue increased to 30.4% for
fiscal 2000 compared to 28.9% in fiscal 1999. Total S,G&A expense for the nine
months ended March 31, 2000, was $16,481,000 compared to $14,584,000 in the
corresponding period a year ago. The increase in expenditures is related to
additional business development expenses associated with acquisition activities,
increased interest expense on the expanded line of credit, as well as increases
in sales and marketing expenditures related to growth of new and existing
customer sites. The Company has recently centralized its S,G&A support functions
and no longer provides these services based upon business units.
Provision for Doubtful Accounts
The provision for doubtful accounts as a percentage of total revenue
decreased to 1.9% of total revenue for fiscal 2000 compared to 2.6% in fiscal
1999. Total doubtful accounts expense for the nine months ended March 31, 2000,
was $1,014,000 compared to $1,337,000 in the corresponding period a year ago.
This decrease was partially the result of a current period analysis and
adjustment of the required provision for doubtful accounts. The provision
relates largely to the Company's probation and day reporting services. Probation
service revenue is 100% paid by the offender and carries an increased risk of
default. Day reporting revenue for fiscal 2000 was 22.9% 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
will continue to emphasize additional collection procedures to further reduce
payment defaults.
Amortization and Depreciation (A&D)
A&D expenses remained flat at 5% of total revenue for fiscal 2000 and
fiscal 1999. Total A&D expense for the nine months ended March 31, 2000, was
$2,424,000 compared to $2,442,000 in the corresponding period a year ago. This
decrease was due to a current period reduction in additions to property, plant
and equipment as a result of the completion of the development and related
capitalization of numerous new product introductions.
Research and Development Expenses (R&D)
R&D expenses decreased to $1,095,000 in fiscal 2000 from $1,978,000 in
fiscal 1999. 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 numerous next generation electronic monitoring products. One
of these products was introduced in the fourth quarter of fiscal 1999. Two
additional products were released during the second quarter of fiscal 2000. The
Company expects to continue expenditures for improvements to the monitoring
operations and development of future home arrest products throughout fiscal year
2000.
Discontinued Operations
12
<PAGE>
In 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. Subsequently the Company decided to
discontinue its CIS business unit and sold the net assets on April 30, 1999.
The CIS business unit's losses from its results of operations and its disposal
are presented in the Company's financial statements of operations as
discontinued operations, net of related income taxes.
Net Income and Income Taxes
The Company recorded income tax expense from continuing operations of
$1,005,000 and $2,407,000 for the nine months ended March 31, 2000 and 1999
respectively. 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 nine months ended March 31, 2000, the Company had net income of
$1,357,000, or $.17 diluted earnings per share, compared to a net loss of
$(193,000) or $(.03) diluted earnings per share, for the same period a year ago.
The changes in net income relate primarily to the items discussed above.
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 date if "00"
is recognized as 1900 rather than 2000.
The Company has been addressing Year 2000 issues throughout fiscal years
1998, 1999 and 2000 and has modified 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 had a formal comprehensive Year 2000 readiness plan in
place under the oversight of its executive management. The Company estimates
that approximately $1,393,000 has been incurred during fiscal years 1998, 1999
and 2000 to the end of calendar year 1999 related to addressing Year 2000
events. Approximately 40% of this amount was related to fixed asset additions
for new computer related equipment and software upgrades which will be amortized
over a three year period. The remaining amount was expensed as incurred. The
Company 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.
13
<PAGE>
The Company believes that based upon changes and modifications already
made, the impact of Year 2000 issues have not been, and are not expected to be,
material. However, failure to identify and correct any mission-critical internal
or third party Year 2000 processing problem could have a material adverse
operational or financial consequence to the Company. There was no disruption of
any operations for the Company due to the date changeover from December 31, 1999
to January 1, 2000. Although there has been no significant Year 2000 problems to
date, the Company will continue to monitor the situation closely.
Liquidity and Capital Resources
For the nine months ended March 31, 2000, the Company generated $3,915,000
of cash from operating activities, received $914,000 from the issuance of common
stock associated with the exercise of stock options, received $475,000 in
proceeds from the sale of an investment, received $3,631,000 through increased
borrowings, expended $2,358,000 for capital equipment and leasehold
improvements, expended $2,462,000 for equipment associated with rental and
monitoring contracts, expended $3,268,000 for capitalized internally developed
software and expended $481,000 for an acquisition net of cash acquired. The
total of all cash flow activities resulted in the balance of cash and cash
equivalents of $412,000 for nine months ended March 31, 2000.
The Company's working capital increased $6,141,000 to $16,801,000 at March
31, 2000. This increase was the result of restructuring the Company's bank
financing to long term from short term and increased inventory levels of
$1,920,000 due to new product introductions which will be reduced in future
months. Accounts receivable decreased $1,476,000 in fiscal 2000 primarily as a
result of the Company emphasizing collection activities. The Company will
continue to emphasize improved accounts receivable collections across both
business units and expects to reduce its past due receivables throughout fiscal
year 2000 as compared to fiscal year 1999.
The Company has available a $7,500,000 line of credit with Bank One,
Boulder, Colorado which expires in January 2002 (see Note 8 to the Consolidated
Financial Statements). This financing will fund anticipated fiscal year 2000
working capital requirements. As of March 31, 2000, $7,100,000 had been drawn
against this line. Subsequent to this date the Company paid down the line to
$6,900,000. The Company expects to generate cash from operations during the
fourth quarter of fiscal year 2000 which will be used to further pay down a
portion of the working capital line of credit. The Company has an additional
line of credit available with Bank One to finance current and future
acquisitions (see Note 8 to the Consolidated Financial Statements). During
December 1999 the Company borrowed $600,000 against this line to finance an
acquisition within the CCS business unit. This financing will be repaid through
monthly payments over five years.
Working capital may be obtained by financing certain operating and sales-
type leases under recourse and non-recourse borrowing arrangements. These
borrowings would be collateralized with a security interest in the leased
equipment. At March 31, 2000, the Company had unfunded leases in the amount of
$7,949,000 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 the next twelve months.
The table below provides information about the Company's financial
instruments as of March 31, 2000 that are sensitive to changes in interest
rates. The instrument's cash flows are denominated in U.S. dollars. The Bank One
working capital line of credit and the acquisition funding line represents the
majority of these financial instruments.
Market Risk
Recorded Value Fair Value Maturity Date
-------------- ----------- --------------
14
<PAGE>
Short - term borrowings $ 93,000 $ 93,000 February 2002
Interest rate 7.50% 7.50%
Long - term borrowings:
Working Capital Line of Credit $7,100,000 $7,100,000 January 2002
Prime Interest rate 8.75% 8.75%
Acquisition Loan $ 600,000 $ 600,000 January 2005
Prime Interest rate 8.75% 8.75%
15
<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 April 28, 2000 By
--------------------- ---------------------------
David J. Hunter
President and Chief Executive Officer
Jacqueline A. Chamberlin
Chief Financial Officer
16
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<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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