<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, 1999
-----------------
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 (I.R.S. Employer
of 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 January 24, 2000 was 7,934,762.
<PAGE>
BI INCORPORATED
Index
-----
Part I - Financial Information: Page No.
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets 2
at December 31, 1999 and June 30, 1999
Consolidated Statements of Operations
for the six month periods ended December 31, 1999 and 1998 3
Consolidated Statements of Cash Flows
for the six months ended December 31, 1999 and 1998 4
Consolidated Notes to Financial Statements 5-6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 7 through 14
Signatures 15
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 1999 Annual Meeting of Stockholders was held on November
16, 1999.
b) The ratification of the Company's 1999 Stock Option Plan was as follows: For
= 2,601,763; Against = 752,902; Abstained = 28,672: Broker Non Vote = 2,987,075
c) At the annual meeting the following persons were elected to the Board of
Directors as follows:
For Withheld
William E. Coleman 6,318,548 51,864
Mckinley C. Edwards, Jr. 6,321,648 48,764
Beverly J. Haddon 6,321,648 48,764
David J. Hunter 6,321,523 48,889
Perry M. Johnson 6,318,548 51,864
Jeremy N. Kendall 6,318,648 51,764
Barry J. Nidorf 6,321,648 48,764
Byam K. Stevens, Jr. 6,318,448 51,964
d) The ratification of Arthur Andersen LLP, as the Company's independent
auditor, was also approved at the annual meeting as follows: For = 6,348,442;
Against = 10,570; Abstained = 11,400.
<PAGE>
BI INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
--------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets
Cash $ - $ -
Receivables, net 13,179 14,521
Inventories, net 6,304 4,100
Investment in sales-type leases 3,760 3,662
Deferred income taxes 933 933
Prepaid expenses 1,543 825
--------------------- ---------------------
Total current assets 25,719 24,041
Investment in sales-type leases 4,144 3,368
Rental and monitoring equipment, net 5,978 5,861
Property and equipment, net (Note 6) 8,965 13,833
Intangibles, net 11,998 11,998
Long term deferred tax asset 1,990 2,011
Investments in common stock 1,321 1,321
Software, net 5,261 2,946
Other assets (Note 6) 1,770 2,872
--------------------- ---------------------
$ 67,146 $ 68,251
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,399 $ 2,516
Outstanding liabilities in excess of cash 931 971
Accrued compensation and benefits 2,951 2,673
Deferred revenue 1,689 1,535
Income taxes payable 110 215
Current portion of long-term debt 185 4,052
Other liabilities 805 1,419
--------------------- ---------------------
Total current liabilities 9,070 13,381
--------------------- ---------------------
Capital lease obligations (Notes 6,8) 472 6,714
Deferred revenue 2,128 2,275
Long-term debt (Note 9) 7,996 0
Stockholders' equity
Common stock, no par value, 75,000 shares
authorized; 7,922 shares issued and outstanding
December 31, 1999, and 7,791 shares issued and
outstanding June 30, 1999 35,744 34,996
Retained earnings 11,736 10,885
--------------------- ---------------------
47,480 45,881
--------------------- ---------------------
$ 67,146 $ 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 six months
ended December 31, ended December 31,
------------------------------- -----------------------------
1999 1998 1999 1998
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues
Service and monitoring income $ 15,423 $ 13,764 $ 30,119 $ 26,483
Rental income 266 161 576 269
Direct sales 2,597 3,239 5,297 6,103
Other income 14 38 23 68
------------ ----------- ------------- -------------
Total revenues 18,300 17,202 36,015 32,923
------------ ----------- ------------- -------------
Costs and expenses
Cost of service and monitoring income 8,933 6,793 17,026 13,284
Cost of rental income 134 96 242 176
Cost of direct sales 1,444 1,404 2,847 2,217
Selling, general and administrative expenses 5,454 4,936 10,662 9,675
Provision for doubtful accounts 612 498 1,059 907
Amortization and depreciation 922 848 1,845 1,655
Research and development expenses 392 614 868 1,395
------------ ----------- ------------- -------------
Total costs and expenses 17,891 15,189 34,549 29,309
------------ ----------- ------------- -------------
Income from continuing operations before income taxes 409 2,013 1,466 3,614
Income tax provision (174) (858) (615) (1,548)
------------ ----------- ------------- -------------
Net income from continuing operations 235 1,155 851 2,066
Loss from discontinued operations (Note 5) - (202) - (584)
------------ ----------- ------------- -------------
Net income $ 235 $ 953 $ 851 $ 1,482
============ =========== ============= =============
Basic earnings per share from continuing operations $ 0.03 $ 0.15 $ 0.11 $ 0.27
============ =========== ============= =============
Basic (loss) per share from disontinuing operations - $ (0.03) - $ (0.08)
============ =========== ============= =============
Basic earnings per share $ 0.03 $ 0.12 $ 0.11 $ 0.19
============ =========== ============= =============
Weighted average number of common shares outstanding 7,917 7,682 7,894 7,661
============ =========== ============= =============
Diluted earnings per share from continuing operations $ 0.03 $ 0.15 $ 0.11 $ 0.26
============ =========== ============= =============
Diluted (loss) per share from discontinued operations - $ (0.03) - $ (0.07)
============ =========== ============= =============
Diluted earnings per share $ 0.03 $ 0.12 $ 0.11 $ 0.19
============ =========== ============= =============
Weighted average number of common and
common equivalent shares outstanding 8,044 7,891 8,047 7,900
============ =========== ============= =============
</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 six months
ended December 31,
-------------------------------------
1999 1998
-------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 851 $ 1,482
Adjustments to reconcile net income to net cash from
operating activities:
Amortization and depreciation 3,890 3,480
Provision for doubtful accounts 1,059 908
Changes in assets and liabilities:
Receivables 460 (2,030)
Investment in sales type leases (928) 255
Inventories, net (2,204) 507
Prepaid and other assets (1,063) (224)
Accounts payable (164) (936)
Accrued and other expenses (337) 822
Deferred revenue (41) (127)
Income taxes payable (84) 3
Decrease/(increase) in net assets of discontinued operations - 163
---------- ----------
Net cash from operating activities 1,439 4,303
---------- ----------
Cash flows from investing activities:
Capital expenditures (Notes 6,8) (1,838) (1,685)
Increase in rental and monitoring equipment (1,915) (1,898)
Increase in capitalized software (2,450) (1,067)
Expenditures for intangibles (43) (297)
Cash paid for acquisitions net of cash acquired (Note 7) (481) -
Proceeds from sale of investment (Note 6) 475 -
Other - -
---------- ----------
Net cash used in investing activities (6,252) (4,947)
---------- ----------
Cash flows from financing activities:
Payments on capital lease obligation - (59)
Proceeds from issuance of common stock 748 368
Proceeds from borrowings (Note 9) 4,065 -
---------- ----------
Net cash from (used in) financing activities 4,813 309
---------- ----------
Net change in cash - (335)
Cash at beginning of period - 1,146
---------- ----------
Cash at end of period $ - $ 811
========== ==========
</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 Circuit Court of New Madrid County, Missouri on August 2, 1999 entered a
judgment made on behalf of BI. Plaintiff is appealing judgment. Suit alleged
malfunction in equipment seeking damages of $3,000,000.
The District Court 94th Judicial District, Nueces County Texas on December
21, 1999 dismissed with prejudice the civil suit filed by Arturo Marines
alleging negligence under product liability. The plaintiff was seeking damages
of $250 million.
The Company is also involved in three additional legal proceedings; one
alleging negligence and misrepresentation resulting in a wrongful death; the
second alleges a survival action and a wrongful death action; and the last suit
alleges wrongful death, survivorship action and civil rights violation. One of
the claimants seeks damages of $17,000,000; the second seeks damages in excess
of $100,000; and the last seeks $10,500,000 in damages.
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 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.
Note 6 - Sale of Investment
- ---------------------------
5
<PAGE>
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 - Acquisition of Behavioral Care Options, Inc.
- ----------------------------------------------------
On October 1, 1999, in a transaction accounted for as a purchase, the Company
acquired the net assets of Behavioral Care Options, Inc. Cash paid for the net
assets was $481,000, as follows:
Cash paid $481,000
Liabilities assumed 120,000
--------
601,000
--------
Allocated to:
Accounts Receivable $123,000
Prepaid Expenses and Other Assets 10,000
Goodwill 468,000
--------
601,000
Note 8 - 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 9 -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 LIBOR rate plus 1.95%,
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 LIBOR rate plus 1.95%, 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.
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. However there was no disruption of any
operations for the Company due to the date changeover from December 31, 1999 to
January 1, 2000.
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
December 31, 1999 December 31, 1999
-------------------------------------- ----------------------------------------
EM CCS Total EM CCS Total
-------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue (unaudited, in thousands) (unaudited, in thousands)
Recurring Revenue
Service & Monitoring 8,463 6,960 15,423 8,399 5,365 13,764
Rental 266 266 161 161
Total Recurring Revenue 8,729 6,960 15,689 8,560 5,365 13,925
Direct Sales 2,597 2,597 3,239 3,239
Other Income 14 14 38 38
-------------------------------------- ----------------------------------------
Total Revenue 11,340 6,960 18,300 11,837 5,365 17,202
Gross Profit
Recurring Revenue
Service & Monitoring 3,940 2,550 6,490 4,713 2,258 6,971
Rental 132 132 65 65
Total Recurring Revenue 4,072 2,550 6,622 4,778 2,258 7,036
Direct Sales 1,153 1,153 1,835 1,835
Other Income 14 14 38 38
-------------------------------------- ----------------------------------------
Total Gross Profit 5,239 2,550 7,789 6,651 2,258 8,909
Gross Profit% 46.2% 36.6% 42.6% 56.2% 42.1% 51.8%
Six Months Ended Six Months Ended
December 31, 1999 December 31, 1999
-------------------------------------- ----------------------------------------
EM CCS Total EM CCS Total
-------------------------------------- ----------------------------------------
Revenue (unaudited, in thousands) (unaudited, in thousands)
Recurring Revenue
Service & Monitoring 16,741 13,378 30,119 16,052 10,431 26,483
Rental 576 576 269 269
Total Recurring Revenue 17,317 13,378 30,695 16,321 10,431 26,752
Direct Sales 5,297 5,297 6,103 6,103
Other Income 23 23 68 68
-------------------------------------- ----------------------------------------
Total Revenue 22,637 13,378 36,015 22,492 10,431 32,923
Gross Profit
Recurring Revenue
Service & Monitoring 8,043 5,050 13,093 8,865 4,334 13,199
Rental 334 334 93 93
Total Recurring Revenue 8,377 5,050 13,427 8,958 4,334 13,292
Direct Sales 2,450 2,450 3,886 3,886
Other Income 23 23 68 68
-------------------------------------- ----------------------------------------
Total Gross Profit 10,850 5,050 15,900 12,912 4,334 17,246
Gross Profit% 47.9% 37.7% 44.1% 57.4% 41.5% 52.4%
</TABLE>
7
<PAGE>
The three-month period ended December 31, 1999 (fiscal 2000), compared to the
three-month period ended December 31, 1998 (fiscal 1999):
Revenue
Total revenue for the three months ended December 31, 1999, increased 6.4%
to $18,300,000, compared to $17,202,000 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 12.7% in fiscal 2000
compared to fiscal 1999. Recurring revenue increased to $15,689,000, or 85.7% of
total revenue, in fiscal 2000 from $13,925,000, or 80.9% 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 decreased 4.2% to $11,340,000 for the three
months ended December 31, 1999, compared to $11,837,000 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 2.0% to $8,729,000 in fiscal 2000 from $8,560,000 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 $2,597,000 in fiscal 2000
from $3,239,000 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 29.7% to $6,960,000 in
fiscal 2000, compared to $5,365,000 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.
During the current period the Company acquired two correctional service centers
in New Mexico specializing in treatment and Drug Court services ( see Note 7 to
the Consolidated Financial Statements ). 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 December 31, 1999 was 42.6% compared to 51.8% in the corresponding period
a year ago. Total gross profit for fiscal 2000 was $7,789,000 compared to
$8,909,000 for fiscal 1999.
The EM business unit gross profit decreased to 46.2% as a percentage of EM
revenue for fiscal 2000 compared to 56.2% 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 47% in fiscal 2000 from
56% in fiscal 1999. The Company's
8
<PAGE>
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 57% in fiscal 1999. The fiscal 2000 gross profit was negatively
affected by approximately $150,000 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 36.6% as a percentage of
CCS revenue for fiscal 2000 compared to 42.1% in fiscal 1999. This decrease was
due to 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 29.8% for
fiscal 2000 compared to 29.3% in fiscal 1999. Total S,G&A expense for the three
months ended December 31, 1999, was $5,454,000 compared to $4,936,000 in the
corresponding period a year ago. The Company has recently centralized its S,G&A
support functions and no longer provides these services based upon business
units. 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 product
management and international marketing expenditures related to growth of new and
existing customer sites.
Provision for Doubtful Accounts
The provision for doubtful accounts as a percentage of total revenue
remained consistent at 3% for fiscal 2000 and fiscal 1999. Total doubtful
accounts expense for the three months ended December 31, 1999, was $612,000
compared to $498,000 in the corresponding period a year ago. 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 21.7% 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
will continue to emphasize additional collection procedures to further reduce
payment defaults.
Amortization and Depreciation (A&D)
A&D expenses remained consistent at 5% of total revenue for fiscal 2000 and
fiscal 1999. Total A&D expense for the three months ended December 31, 1999, was
$922,000 compared to $848,000 in the corresponding period a year ago. The
increase was due to additions to property, plant and equipment.
Research and Development Expenses (R&D)
9
<PAGE>
R&D expenses decreased to $392,000 in fiscal 2000 from $614,000 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 six-month period ended December 31, 1999 (fiscal 2000), compared to the six-
month period ended December 31, 1998 (fiscal 1999):
Revenue
Total revenue for the six months ended December 31, 1999, increased 9.4% to
$36,015,000, compared to $32,923,000 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 14.7% in fiscal 2000
compared to fiscal 1999. Recurring revenue increased to $30,695,000, or 85.2% of
total revenue, in fiscal 2000 from $26,752,000, or 81.3% 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 0.6% to $22,637,000 for the six
months ended December 31, 1999, compared to $22,492,000 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 6.1% to $17,317,000 in fiscal 2000 from $16,321,000 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 $5,297,000 in fiscal 2000
from $6,103,000 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 28.3% to $13,378,000 in
fiscal 2000, compared to $10,431,000 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.
During the second quarter of fiscal 2000 the Company acquired two correctional
service centers in New Mexico specializing in treatment and Drug Court services
( see Note 7 to the Consolidated Financial Statements ). 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
second quarter of fiscal 2000 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 continued revenue growth
in this business unit for fiscal year 2000.
Gross Profit
10
<PAGE>
Total Gross profit as a percentage of total revenue for the six months
ended December 31, 1999 was 44.1% compared to 52.4% in the corresponding period
a year ago. Total gross profit for fiscal 2000 was $15,900,000 compared to
$17,246,000 for fiscal 1999.
The EM business unit gross profit decreased to 47.9% as a percentage of EM
revenue for fiscal 2000 compared to 57.4% 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
55% 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 46% compared to 64% in fiscal 1999. The fiscal 2000
gross profit was negatively affected by approximately $350,000 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 37.7% as a percentage of
CCS revenue for fiscal 2000 compared to 41.5% in fiscal 1999. This decrease was
due to 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 decreased to 29.6% for
fiscal 2000 compared to 29.7% in fiscal 1999. Total S,G&A expense for the six
months ended December 31, 1999, was $10,662,000 compared to $9,675,000 in the
corresponding period a year ago. The Company has recently centralized its S,G&A
support functions and no longer provides these services based upon business
units. 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 product
management and international marketing expenditures related to growth of new and
existing customer sites.
Provision for Doubtful Accounts
The provision for doubtful accounts as a percentage of total revenue
remained constant at 3% for fiscal 2000 as well as fiscal 1999. Total doubtful
accounts expense for the six months ended December 31, 1999, was $1,059,000
compared to $907,000 in the corresponding period a year ago. 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 21.8% 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)
11
<PAGE>
A&D expenses remained flat at 5% of total revenue for fiscal 2000 and
fiscal 1999. Total A&D expense for the six months ended December 31, 1999, was
$1,845,000 compared to $1,655,000 in the corresponding period a year ago. The
increase was due to additions to property, plant and equipment.
Research and Development Expenses (R&D)
R&D expenses decreased to $868,000 in fiscal 2000 from $1,395,000 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
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
$615,000 and $1,548,000 for the six months ended December 31, 1999 and 1998
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 six months ended December 31, 1999, the Company had net income of
$851,000, or $.11 diluted earnings per share, compared to net income of
$1,482,000, or $.19 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 incorrect
data 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 a formal comprehensive Year 2000 readiness
plan in place under the
12
<PAGE>
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. 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.
The Company has contacted 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 capable and the resulting impact upon the Company's monitoring
services. The Company has contacted and has obtained assurances from its
telecommunications providers (e.g., MCI WorldCom, AT&T, Sprint, US West,
Ameritech, and other regional providers) that their networks are or will be Year
2000 capable The Company has a redundant monitoring system as well as backup
telecommunication provider connectivity if for any reason the primary carrier
has a disruption in service.
The Company has been in the process throughout fiscal years 1998, 1999 and
2000 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 have be accelerated from when they might have been implemented in the
absence of the Year 2000 issues, and some other systems related projects may
have 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, resulted in a material adverse effect on the Company. All new
systems have been designed to be Year 2000 capable. These new systems have been
deployed or are scheduled for deployment in fiscal year 2000. Any new systems to
be deployed in the second half of fiscal year 2000 have Year 2000 remediated
systems currently in operation. The systems currently being used have been
externally verified and tested to be Year 2000 compliant.
The Company believes that based upon changes and modifications already made
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. However there was no disruption of any operations for the Company due
to the date changeover from December 31, 1999 to January 1, 2000.
Liquidity and Capital Resources
For the six months ended December 31, 1999, the Company generated
$1,439,000 of cash from operating activities, received $748,000 from the
issuance of common stock associated with the exercise of stock options, received
$475,000 proceeds from the sale of an investment, received $4,065,000 through
increased borrowings, expended $1,838,000 for capital equipment and leasehold
improvements, expended $1,915,000 for equipment associated with rental and
monitoring contracts, expended $2,450,000 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 remaining constant for six months ended December 31, 1999.
The Company's working capital increased $5,989,000 to $16,649,000 at
December 31, 1999. This increase was the result of restructuring the Company's
bank financing to long term from short term and increased inventory levels of
$2,204,000 due to new product introductions which will be reduced in future
months. Accounts receivable decreased 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.
13
<PAGE>
The Company has an available $7,500,000 line of credit with Bank One,
Boulder, Colorado which expires in January 2002 ( see Note 9 to the Consolidated
Financial Statements ). This financing will fund anticipated fiscal year 2000
working capital requirements. As of December 31, 1999, $7,500,000 had been
drawn against this line. The Company expects to generate cash from operations
during the second half of fiscal year 2000 which will be used to 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 9 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 December 31, 1999, the Company had unfunded leases in the amount
of $7,904,000 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 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
-------------- ---------- -------------
Short - term borrowings $93,000 $93,000 February 2002
Interest rate 7.50% 7.50%
Long - term borrowings:
Working Capital Line of Credit $7,500,000 $7,500,000 January 2002
Interest rate Libor plus 1.95% 8.00% 8.00%
Acquisition Loan $600,000 $600,000 January 2005
Interest rate Libor plus 1.95% 8.00% 8.00%
14
<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 28, 2000 By /s/ David J. Hunter
----------------------- -----------------------------------
David J. Hunter
President and Chief Executive Officer
/s/ Jacqueline A. Chamberlin
-------------------------------------
Jacqueline A. Chamberlin
Chief Financial Officer
15
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<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
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