SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)OF
the Securities Exchange Act of 1934
For the fiscal year ended: JUNE 30, 1997
Commission File Number: 0-12410
BI INCORPORATED
---------------
(Exact name of registrant as specified in its charter)
Colorado
--------
(State or other jurisdiction
of incorporation or organization)
84-0769926
----------
(I.R.S. Employer Identification No.)
6400 Lookout Road, Boulder, Colorado 80301
------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (303) 530-2911
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
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
---- ----
At September 15, 1997, there were 7,422,241 shares of Common Stock outstanding
and the aggregate market value of Common Stock held by non-affiliates was
$54,749,429.
DOCUMENTS INCORPORATED BY REFERENCE
Part III, Items 10, 11, 12 and 13 are incorporated by reference from the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
November 13, 1997.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. []
PART I
ITEM 1. BUSINESS.
GENERAL
BI Incorporated (the "Company") is the leading manufacturer and
provider of electronic monitoring equipment and services, institutional
management software systems, and community correctional services to the criminal
justice market worldwide.
BI's electronic monitoring business unit ("EM") has developed four
generations of home arrest products, since entering the market in 1984. Three
companies, acquired from 1990-1992, were combined to form BI's monitoring
service centers, allowing the Company to provide additional services to
corrections agencies. In December 1995, the Company acquired the assets of
JurisMonitor, Inc. to address the needs of programs designed to reduce risk in
domestic violence cases.
In December 1993, the Company acquired an exclusive license for its
Institutional Management System ("IMS") software from SCC Communications Corp.
of Boulder, Colorado, upon which BI's PREMIER IMS product and correctional
information systems business unit ("CIS") is based.
Recognizing yet another need within corrections, BI purchased the
product rights to an automated case load management service in December 1990.
BI's PROFILE(TM) and PROFILE Plus(TM) products generate revenue in the Company's
community correctional services business unit ("CCS") . The Company expanded
this business unit through the acquisition of four additional companies in
fiscal 1997. On October 10, 1996, the Company completed the merger with
Community Corrections Corporation, Justice Alternatives Inc. and Tennessee
Probation Services, Inc., collectively referred to as "CCC." CCC provides
probation services to misdemeanant probationers in Georgia, Tennessee and South
Carolina. On January 31, 1997, the Company acquired Peregrine Corrections, Inc.
("PCI") of Denver, Colorado. PCI is an industry leader in day-reporting, a non-
residential criminal sentencing alternative for felony probationers.
INDUSTRY AND MARKET BACKGROUND
According to the U.S. Bureau of Justice Statistics latest report, 5.5
million adults were under some form of correctional supervision at December 31,
1996. The number of prisoners under the jurisdiction of federal or state
correctional authorities on that date reached a record high of 1.5 million.
Moreover, 3.8 million adults were under parole or probation sanction. The total
adult correctional population has nearly tripled over the last 15 years. There
are approximately 3,000 jails in the United States who could be users of the
Company's integrated system for management of inmate data. These are the
targeted populations for the Company's products and services.
At June 30, 1997 the Company was monitoring approximately 14,300
offenders daily on home arrest; approximately 30,000 misdemeanant probationers
were being supervised by CCC; approximately 1,500 adult offenders were attending
the Company's day reporting programs at PCI; eight jails were using BI's IMS
software; and approximately 18,000 offenders were using BI's automated PROFILE
service.
1
The Company believes that its comprehensive product lines provide
viable, cost-effective solutions to the problem of prison overcrowding, as well
as providing additional innovative tools for corrections agencies and jails to
more efficiently manage the vast amount of information required. Monitoring,
supervision and day reporting services provided by BI enable corrections
agencies to effectively manage probation and parole populations for less than
traditional institutional incarceration. This alternative provides a lower cost
solution to agencies because home arrest and supervision programs are structured
in a way that allows the offender to pay for these services.
PRODUCTS
ELECTRONIC MONITORING EQUIPMENT AND SERVICES
- --------------------------------------------
BI Home Escort(TM) System 9000 Series: The Company's premier product
line, the BI Home Escort System, consists of a radio frequency transmitter, worn
on an offender's ankle, a receiver unit called a field monitoring device
("FMD"), the model 9000, installed in the offender's home. The transmitter
produces uniquely encoded signals which are received by the FMD. Using standard
telephone lines, the FMD relays the information to the agency's host computer or
monitoring service of choice. The host computer can communicate with several
hundred FMDs at one time. If the offender moves beyond a certain distance from
the FMD, the radio signal is broken and an indication of the break in
transmission is relayed by the FMD to the host computer. Monitoring center
personnel enter predetermined curfews into the host computer using BI's
proprietary software. If an offender fails to comply with these terms or
tampers with the transmitter, the host computer signals a violation and the
officer in charge is alerted according to predetermined agency criteria.
The BI Home Escort System is equipped with proprietary security
features which include patented electronic tamper detection devices that cause a
tamper signal to be transmitted to the host computer if the individual tampers
with either the ankle bracelet or the FMD. The call back characteristic of the
series confirms the location of the FMD at specified intervals. These tamper
detection devices, the system's ability to crosscheck breaks in the transmission
with pre-programmed curfew terms and the host computer's operating system
effectively differentiate the BI Home Escort System from its competitors'
products.
The Home Escort Series features small and lightweight equipment and
has established unprecedented industry standards for security, performance,
sophisticated encoding and encryption of messages. Additional features include
patented voice verification technology and the host computer's capability to
automatically fax reports to agencies.
Part of the BI 9000 Home Escort series is the BI 9200 REACT(TM), a
remote, in-home alcohol testing device which can be used stand-alone or in
conjunction with electronic home arrest. It combines voice verification, triple
tamper protection and fuel cell technology to provide corrections officials with
an increased level of security and actual analyses of offenders' blood alcohol
levels. The unit is ergonomically designed, lightweight and easy to install.
Also integral to the BI 9000 Home Escort Series is the BI 9020 Drive-
BI(TM) Monitor. The Drive-BI is a hand-held, portable unit used to receive
encoded transmissions from the BI 9010 ankle bracelet transmitters worn by
offenders. The Drive-BI does not require installation of an FMD in the
offender's home. Rather, a compliance officer has the capability to drive by
the individual's residence or work place and uses the portable receiving unit to
verify compliance with the terms of the program.
BI JurisMonitor(TM) The BI JurisMonitor System is a cost effective
approach to domestic violence intervention and compliance with court orders,
combining electronic monitoring technology with a coordinated
2
community response. In the JurisMonitor system, the offender wears an ankle
bracelet that emits a continuous signal. The victim is provided with an FMD base
unit which sets off an alarm when the transmitter comes within the proximity of
the base unit. In addition, the monitoring unit in the offender's home verifies
curfew compliance and detects tampering or attempts to shield the bracelet. When
the FMD detects the presence of the offender, four events are set into motion:
an audible alarm sounds within the home; the monitoring center is alerted; the
unit begins an audio recording and police are dispatched based on the protocols
established by the jurisdiction.
The BI K2 Home Escort(TM) System uses time-tested software to manage
and monitor subjects from the agency's site without relying on services of a
third-party vendor. The system allows agencies to customize the database to
accommodate specific conditions for individual subjects, such as defining
records and schedules, adding comments and determining alert-handling
procedures. Based on a standard DOS/Novell operating system, K2 provides top
security and reliability, disk mirroring, redundancy and a fault-resistant
design for a variety of electronic and alcohol field monitors.
BI Monitoring Services: BI Incorporated uses its electronic
monitoring products to provide corrections agencies with comprehensive
electronic home arrest monitoring services. Monitoring services include
entering data, monitoring the status of individuals as displayed by the host
computer and communicating any violations and other information according to
predetermined agency criteria. Corrections officials use BI's equipment without
having to provide agency staff to monitor individuals or obtain capital to
purchase host system computer equipment. This allows flexibility, control,
security and dramatic savings over the costs of incarceration. BI certifies its
monitoring center personnel, who monitor subjects from monitoring centers in
Boulder, Colorado and Anderson, Indiana, 24 hours a day, seven days a week. The
two monitoring centers are fully redundant and feature unprecedented system
uptime and accurate data entry and reporting.
CORRECTIONS INFORMATION SYSTEMS
- -------------------------------
The BI PREMIER(TM) Institutional Management System is an applications
software product that offers centralized, integrated management of jail
information. It provides jails and prisons of all sizes with comprehensive
inmate tracking from entry through release while supporting a broad range of
additional jail and prison operations. IMS generates a full range of management
information reports and enables authorized users to query the jail database and
create specialized reports from industry-standard personal computer database
packages.
COMMUNITY CORRECTIONAL SERVICES
- -------------------------------
With offices located in six states, BI's Community Correctional
Services (CCS) division provides corrections agencies with community supervision
services. BI's services help agencies with their caseloads by providing
enrollment services, maintaining frequent face-to-face contact, collecting fees
and following up when probationers do not report as scheduled. By working
directly with corrections professionals, BI can provide direct supervision,
education and treatment from day reporting centers.
Automated Reporting and Collections ("ARC") programs and services
allow corrections professionals to automate the management of their overburdened
caseloads. Using a 900# telephone service, BI PROFILE(TM) manages
administrative and low-risk caseloads. The offender must answer a series of
questions asked by a computer, such as change of address, telephone number or
employment, compliance with court orders and restitution payments. Information
collected by the computer is recorded and archived. Through BI's monitoring
center, BI PROFILE reports the exceptions or missed calls to officials. This
enables officers to supervise offenders who need more intensive supervision.
PROFILE PLUS(TM) combines the efficiency of automated caseload
management with the collection of fixed fees. Offenders have historically been
reluctant to voluntarily submit such fees; BI's technology has dramatically
increased the collection rate. When an offender makes a monthly call to PROFILE
PLUS, the
3
supervision fees are charged to the offender's home telephone bill. BI collects
the fees and passes them along to the agency.
The Company recognized revenue of $12,322,000, $14,678,000, and
$11,608,000 in 1997, 1996, and 1995 respectively, from the sale of electronic
monitoring products representing 25.5%, 37.4% and 38.9% of total revenue during
the respective years. Service, monitoring and rental income was $34,169,000 or
70.6% in 1997, $22,189,000 or 56.6% in 1996 and $17,544,000 or 58.7% in 1995.
Revenue from the sale and service of its IMS software was $1,211,000, $1,522,000
and $5,000 in 1997, 1996 and 1995. These sources of revenue reflect the
continuing expanding acceptance of corrections agencies to use the Company's
products and services.
PRODUCT DEVELOPMENT
The Company designs and engineers the primary hardware and software
elements of its product lines, other than the host computer systems. The Company
solicits customer input to enhance its current products and to develop and
design new products. During the 1997 fiscal year, the Company continued with the
second phase of the development of its base open system architecture platform
for its IMS product. The second phase is scheduled for completion midyear fiscal
1998. In addition, the Company completed the development of a new host system
released in fiscal 1997. This new host system is capable of monitoring up to
1,500 clients and includes improved user interface, additional automatic
functions and advanced alert processing. For the years ended June 30, 1997,
1996, and 1995, the Company had research and development expenses of
approximately $3,000,000, $2,700,000, and $2,100,000, respectively.
MANUFACTURING
The Company performs final assembly, testing, and quality control of
its products at its facility in Boulder, Colorado. The Company generally uses
standard parts and components obtained from a variety of vendors. The Company
has not experienced and does not anticipate any difficulty in obtaining the
necessary manufacturing assemblies, parts and components.
SALES, DISTRIBUTION AND MARKETING
The Company markets and sells its products and services to Federal,
state and local government agencies throughout the United States directly
through its sales personnel. The Company's IMS product is increasingly offered
through marketing relationships by large system integrators. The Company sold
its electronic monitoring products to distributors in The Netherlands, South
Africa, Singapore and five provinces in Canada. The Company believes the
success of these programs will open up other international opportunities.
Customers may acquire the Company's products and services by purchase,
rental or lease-purchase. Certain purchase contracts have terms up to 18 months
contingent upon delivery schedules of the Company's products and services.
Under a typical rental arrangement, the term is for a period of up to one year,
payments are due monthly and the Company retains title to the equipment. Under
the typical lease-purchase agreement, the lease is for a term of 24 to 36
months, payments are due monthly and generally the customer has the option to
acquire the equipment at a nominal cost at the end of the lease term. Payments
by governmental entities under rental and lease-purchase arrangements are
contingent upon annual appropriations. Certain
4
government agency contracts are paid directly by the offender using the
Company's products and services. Although there can be no assurance, the Company
believes that the likelihood of nonpayment due to lack of appropriations is
remote. See Notes 1 and 3 to the Financial Statements.
SIGNIFICANT CUSTOMERS
In fiscal 1997, the Administrative Office of the U.S. Courts accounted
for 12% of the Company's total revenue. This customer accounted for 12% and 14%
of total revenue in fiscal 1996 and 1995 respectively. A loss of this customer
could have a material, adverse effect on the Company.
CUSTOMER SERVICE, SUPPORT AND WARRANTIES
The Company believes that extensive customer service and support are
critical to maintaining a leading position in the criminal justice market. The
Company provides extensive support services to its electronic monitoring
customers including complete installation, training and ongoing technical
assistance. The Company operates a toll-free hot-line, which customers with
products under warranty or covered by extended service contracts may use to
request assistance on the operation of the Company's monitoring systems. The
Company can perform many remote diagnostic procedures using telephones and
modems, and historically, using these procedures, has been able to correct
difficulties experienced by its customers. The Company provides customers any
updates of its monitoring system software during the warranty period and to
customers on extended service contracts.
The Company arranges for 24-hour hardware service on computer
equipment and peripherals, and directly provides 24-hour software support.
Products manufactured by the Company are serviced at its Boulder, Colorado
facility. The Company provides a full warranty on all its hardware products for
one year from the date of delivery or for the term of a lease. The Company also
offers, for a fee, annual extended service contracts which provide the same
coverage. Certain of the warranties provided by the Company's suppliers are for
a period less than the period provided by the Company to its customers.
The Company also arranges for 24 hour customer support for its
Institutional Management System and provides full warranty support after system
acceptance per the terms of the individual contracts. The Company also offers,
for a fee, annual extended service contracts which provide the same coverage.
The two companies comprising the CCS business unit, CCC and PCI, are
both service companies that contract directly with correctional jurisdictions or
judicial entities. Both companies have built their reputations on providing
excellent customer and client service and each offers the standard company
warranties when providing electronic monitoring or REACT equipment as part of
its service offerings.
BACKLOG AND RECURRING REVENUE
The Company includes only firm purchase orders in its backlog, which
can vary significantly from month to month. The Company believes that its
backlog at any particular time is generally not indicative of the level of
future sales. The CIS business unit which has contracts lasting from one month
to approximately 18 months carried a backlog of $3,524,000 into fiscal year
1998. The Company had approximately $3,400,000 of
5
monthly recurring monitoring, service and rental revenue during June 1997,
compared to approximately $1,900,000 during June 1996.
COMPETITION
The Company believes there are eight competitors in the manufacturing
of EM equipment and 15 competitors in the monitoring of this equipment. It is
anticipated that competition will increase as additional companies and
corrections agencies recognize the benefits of EM programs. The principal
methods of competition are price, quality of products and service, experience
and proven product performance. While the Company believes that its products
and services are currently superior to those of its competitors, there can be no
assurance that this competitive advantage will be maintained.
During 1997, two companies began marketing products which track the
movement of offenders outside their homes. These products rely on Global
Positioning Satellite and cellular phone technologies. Due to current
technology limitations, the Company has chosen not to introduce a tracking
product at this time. Tracking products have not had a significant impact upon
the Company's 1997 revenue and they are not expected to have a significant
impact in fiscal 1998.
Because of the relatively immature state of the corrections
information management systems market, the current competition to BI's
PREMIER(TM) Institutional Management System is extremely fragmented. It consists
of approximately five applications companies who provide Institutional
Management Systems with widely varying degrees of functionality.
With the acquisition of CCC and PCI, BI entered into new areas within
the corrections market. CCC provides misdemeanant probation services to over
180 jurisdictions in Georgia, Tennessee and South Carolina. Currently, there
are approximately 27 smaller competitors providing similar services in these
states. PCI is the only national for-profit company providing day reporting
services to the corrections industry. There are less than 50 private providers
that operate day reporting centers on a local or regional basis. It is expected
that as the market expands, other for-profit competitors will enter this market.
REGULATION
Since the Company's products emit radio frequency energy, they are
subject to government regulations as to power levels and frequency. The Company
has received approvals from the Federal Communications Commission and waivers or
approvals from certain foreign countries for its current products. It will be
necessary to obtain waivers or approvals for these products in other countries
in order to export these products and to obtain waivers or approvals in the
United States and foreign countries with respect to future products.
INSURANCE
The Company maintains general and professional liability insurance
coverage at $5,000,000 and $3,000,000, respectively. Management of the Company
believes such insurance is adequate for its existing operations.
6
PATENTS AND PROPRIETARY TECHNOLOGY
The Company has 26 United States and 15 foreign patents granted or
acquired as well as one United States patent and five foreign patents pending.
These patents expire between 2001 and 2011. The Company licenses proprietary
voice verification technology exclusively for its home arrest product. This
license is in effect through December 1997 and may be extended. In December
1993, the Company acquired an exclusive license for its Institutional Management
System software. There can be no assurance that the protection afforded by
these patents and licenses will provide the Company with a competitive
advantage, or that the Company will be able to successfully assert its
intellectual property rights in infringement actions. In addition, there can be
no assurance that the Company's current products or products under development
will not infringe other patents or proprietary rights of others.
EMPLOYEES
At June 30, 1997, the Company had 605 full-time employees and 137
part-time or temporary employees, none of whom were represented by a union. Of
these 742 employees, 301 were electronic monitoring staff, 11 automated
reporting and collections personnel, 370 community correctional services
employees, 22 corrections information services personnel and 38 corporate staff.
Management believes that its relations with its employees are good.
EXECUTIVE OFFICERS OF THE COMPANY
At June 30, 1996 the executive officers of the Company were as follows:
=======================================================================================================
Name Age Position
- ------------------------------------ ----------- ----------------------------------------------------
David J. Hunter 52 President and Chief Executive Officer
- -------------------------------------------------------------------------------------------------------
Mckinley C. Edwards, Jr. 55 Executive Vice President and Chief Operating
Officer, Secretary and Treasurer
- -------------------------------------------------------------------------------------------------------
Jacqueline A. Chamberlin 42 Vice President of Finance and Chief Financial
Officer
=======================================================================================================
All executive officers serve at the discretion of the Board of Directors.
David J. Hunter joined the Company in June 1981 and served as
Operations Manager and Vice President of Operations from January 1982, Vice
President and Chief Operating Officer since July 1982, and was elected to the
Board of Directors in December 1982. In April 1985, he was elected President
and Chief Executive Officer.
Mckinley C. Edwards, Jr. has been Executive Vice President and Chief
Operating Officer since November 1996. He joined the Company in November 1983
as Manufacturing Manager, was elected Vice President of Manufacturing in
November 1984, promoted to Executive Vice President of Operations in April 1985
and was elected as Treasurer and Secretary in June 1986.
7
Jacqueline A. Chamberlin has been Vice President of Finance and Chief
Financial Officer since November 1993. She joined the Company in January 1983
and served as Accounting Manager through November 1985, Controller until May
1992 and Vice President of Accounting up to November 1993.
ITEM 2. PROPERTIES.
The Company currently leases approximately 75,000 square feet at its
two facilities located in Boulder, Colorado. The leases for these facilities
expire in September 2010. Under certain conditions both leases provide BI with
an option to terminate, with a one-year notice, beginning in September 2000.
The Company also leases approximately 10,400 square feet for its
eastern monitoring office in Anderson, Indiana. The lease, dated November 24,
1995, expires in September 2005 with an option to terminate after four years and
a second option to terminate after seven years.
In addition, the Company leases facilities at 55 other locations for a
total of approximately 112,000 square feet. These facilities are associated
with its day reporting and probation services and are located in Georgia,
Tennessee, Colorado, New Mexico, South Carolina and Oregon.
Many of the Company's leases contain renewal rights and cancellation
rights. At the present time, such facilities are adequate for the Company's
purposes.
ITEM 3. LEGAL PROCEEDINGS.
On April 10, 1996, Jane Doe filed a complaint naming BI Monitoring
Corporation, David M. Hartley, and Oriana House, Inc. as defendants in the Court
of Common Please, Summit County, Ohio, alleging negligence in monitoring and
detention causing physical and emotional distress. The Plaintiff alleged
damages in the amount of $3,000,000. The action is in discovery. The Company
believes its equipment worked appropriately and intends to defend against this
action and any potential liability is covered by the Company's insurance
coverage.
On October 10, 1996, Melitta Beeson filed a complaint naming the State
of California, California Youth Authority, Craig Brown, Director California
Youth Authority, Greyland Winbush and BI Incorporated as defendants in the
Superior Court of California County of Alameda alleging wrongful death resulting
from general negligence. The Plaintiff is seeking unspecified damages. This
action is in the early stages of discovery. The Company believes it monitored
appropriately and intends to defend against this action and any potential
liability is covered by the Company's insurance coverage.
On October 29, 1996, Jeremy Cohlhepp filed a complaint naming
Allegheny County, Allegheny County Electronic Monitoring Program, Everett F.
McElfresh, Michelle Batch, and BI Incorporated as defendants in the United
States District Court for the Western District of Pennsylvania. The Plaintiff
alleges a malfunction of the equipment which caused him to be held in a
detention center for a period of time. The Plaintiff alleges damages in the
amount of $150,000 against BI Incorporated. This action is in discovery. The
Company believes its equipment worked appropriately and intends to defend
against this action and any potential liability is covered by the Company's
insurance coverage.
On May 6, 1997, Melody Trout filed a complaint naming State Farm
Mutual Automobile Insurance Co., General Securities Services Corporation, Billy
Wyatt, and BI Incorporated as defendants in the
8
Circuit Court of Stoddard County, Missouri, alleging negligence in manufacturing
by BI Incorporated, negligence in monitoring by General Securities Services
Corporation and reckless and wanton behavior by Billy Wyatt resulting in a
wrongful death. The Plaintiff seeks damages in the amount of $3,000,000. This
action is in the early stages of discovery. The Company believes its equipment
was manufactured correctly and intends to defend against this action and any
potential liability is covered by the Company's insurance coverage.
On August 27, 1997, CB Partners, Michael Connor and Michael Connor,
IRA, filed a Class Action Complaint in District Court, County of Boulder, State
of Colorado, against the Company and certain of its officers and directors,
being David J. Hunter, Mckinley C. Edwards, Jr., Richard Willmarth, Jacqueline
A. Chamberlin, Frank N. Randall, Jr., and Jeremy N. Kendall. The complaint
includes various claims under the Colorado Securities Act as well as for common
law fraud. The complaint alleges, among other things, that various public
filings and press releases made by the Company in 1996 contained material
misstatements and omissions, including that the Company's revenues and earnings
were inflated as a result of shipping products to customers with the
understanding that the customer had no obligation to pay for the products and
could return them at any time. The Complaint also alleges that the Company
failed to disclose (a) the nature of the competition in its monitoring services
line of business and (b) that one of the Company's products in the in-home
alcohol testing area did not work properly. The complaint seeks rescission,
damages in an unspecified amount and attorneys' 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
9
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the Nasdaq Stock Market under the symbol
"BIAC."
The following table sets forth for the periods indicated the range of
high and low bid prices for the Common Stock as reported by Nasdaq. The bid
quotations represent inter-dealer quotations, without retail mark-ups, mark-
downs or commissions and may not necessarily represent actual transactions.
=======================================================================================
Fiscal Year Ended June 30,
1997
--------------------------------------------------------------------------------------
High Low
- ----------------------------- ------------------------------ -------------------------
First Quarter $14.00 $6.00
- ---------------------------------------------------------------------------------------
Second Quarter 8.25 6.13
- ---------------------------------------------------------------------------------------
Third Quarter 7.88 6.50
- ---------------------------------------------------------------------------------------
Fourth Quarter 8.00 5.88
- ---------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
1996
- ---------------------------------------------------------------------------------------
First Quarter $ 7.63 $6.25
- ---------------------------------------------------------------------------------------
Second Quarter 9.38 6.75
- ---------------------------------------------------------------------------------------
Third Quarter 9.63 7.50
- ---------------------------------------------------------------------------------------
Fourth Quarter 16.25 8.25
=======================================================================================
As of June 30, 1997, there were approximately 5,000 holders of record
of the Common Stock.
The Company has never paid cash dividends. It is the Company's
intention to retain earnings to finance the expansion of its business, and
therefore it does not anticipate paying cash dividends in the foreseeable
future. Payment of dividends, if any, will be at the discretion of the Board of
Directors after taking into account various factors, including the Company's
financial condition, results of operations, current and anticipated cash needs,
plans for expansion and restrictions, if any, under its debt obligations. The
Company's current line of credit requires the Company to obtain the lender's
prior written consent to the payment of any dividends. Currently, however, the
Company does not owe any amounts on the line of credit, and therefore is not
subject to these dividend restrictions.
10
ITEM 6. SELECTED FINANCIAL DATA.
The following selected Balance Sheet data and Statement of Operations
data have been derived from the Financial Statements of the Company. The
financial data set forth below should be read in conjunction with the Financial
Statements and notes thereto and Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Year Ended June 30,
---------------------------------------------------
1997(3) 1996 1995 1994 1993
------- ---- ---- ---- ----
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Total revenue $48,401 $39,212 $29,874 $22,701 $24,634
Cost of operations 23,461 19,200 13,788 10,645 11,179
------- ------- ------- ------- -------
Gross profit 24,940 20,012 16,086 12,056 13,455
Selling, general and
administrative expenses 14,672 10,916 8,873 8,494 7,888
Provision for doubtful accounts 1,732 228 374 60 60
Depreciation and amortization 2,241 1,395 1,250 1,233 1,422
Research and development expenses 3,002 2,661 2,117 1,553 1,651
------- ------- ------- ------- -------
Income before income
taxes and extraordinary item 3,293 4,812 3,472 716 2,434
Income tax provision (1,460) (1,949) (1,150) (2) (352) (848)
------- ------- ------- ------- -------
Income before extra-
ordinary item 1,833 2,863 2,322 364 1,586
Cumulative effect on prior years of change
in method of accounting for income taxes 75
Extraordinary item - tax
benefit resulting from
utilization of operating
loss carryforwards 248
------- ------- ------- ------- -------
Net income $ 1,833 $ 2,863 $ 2,322 $ 439 $ 1,834
======= ======= ======= ======= =======
Net income per share (1) $ .25 $ .40 $ .34 $ .06 $ .25
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding 7,451 7,160 6,883 7,227 7,257
======= ======= ======= ======= =======
BALANCE SHEET DATA:
Working capital 14,541 $18,172 $12,938 $11,709 $13,825
Total assets 55,421 42,820 36,881 36,871 35,354
Long-term debt, net of current
maturities (excludes Capital Lease) 0 0 146 209 582
Total stockholders' equity 40,620 37,206 32,332 32,186 31,085
(1) Income per share before extraordinary item was $.22 for the fiscal year
ended June 30, 1993.
(2) Tax expense was reduced by $225,000 ($.03 per share) by the release of a
deferred tax asset valuation allowance.
(3) During fiscal 1997 the Company acquired CCC which provides probation
services and PCI which provides day reporting services. See Note six of
the consolidated financial statements.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain information in "Management's Discussion and Analysis" and other
statements periodically reported by the Company contain forward-looking
statements that involve risks and uncertainties. Management believes that its
expectations are based on reasonable assumptions. However, no assurances can be
given that its goals will be achieved. It should be noted that the earnings
history of the Company has not been consistent year to year. Factors that could
cause actual results to differ materially include, but are not limited to:
fluctuations due to timing of award of government contracts; pricing pressures;
liability in excess of insurance coverage; changes in federal, state and local
regulations; new product introductions by competitors or unexpected delays of
new product introductions by the Company; raw material availability; changes in
telecommunications regulations or technologies; or the loss of a material
contract through lack of appropriations or otherwise.
Results of Operations:
The following table sets forth, for the periods indicated, the percentage
of revenue of selected amounts from the Company's Consolidated Statement of
Operations:
Year Ended June 30,
------------------------------------------------------
1997 1996 1995
------------------------------------------------------
Revenue
Service, monitoring & rental income 70.6% 56.6% 58.7%
Net sales 28.8 42.4 40.2
Interest and other income 0.6 1.0 1.1
----- ----- -----
Total revenue 100.0 100.0 100.0
----- ----- -----
Gross profit
Service, monitoring & rental income 52.8 52.1 55.4
Net sales 47.6 48.4 50.5
Total gross profit 51.5 51.0 53.8
Expenses
Selling, general & administrative 30.3 27.8 29.7
Provision for doubtful accounts 3.6 0.6 1.2
Depreciation & amortization 4.6 3.6 4.2
Research & development 6.2 6.8 7.1
----- ----- -----
Total expenses 44.7 38.8 42.2
Income before taxes 6.8 12.3 11.6
Net income 3.8% 7.3% 7.8%
12
Revenue
Total revenue increased 23.4% to $48,401,000 in 1997 from $39,212,000 in
1996. 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 still other agencies purchase equipment from the Company
and then contract with the Company for the service portion of monitoring. The
Company is continuing to expand recurring revenue which includes service,
monitoring and rental income. These revenue sources increased to $34,169,000 or
70.6% of total revenue in fiscal 1997 from $22,189,000 or 56.6% of total revenue
in fiscal 1996. The 1997 growth was due to a continuing trend by government
agencies to contract electronic monitoring services and a focusing of the
Companies sales efforts on this revenue stream. In addition, service income for
fiscal 1997 includes nine months of probation services income and five months of
day reporting income totaling approximately $9,000,000 from the acquisitions
discussed in Note six to the consolidated financial statements. At June 30,
1997, the Company had approximately $3,400,000 in monthly recurring revenue, a
79% increase from June 30, 1996. Net sales revenue decreased 16.0% to
$13,961,000 in fiscal 1997 from $16,616,000 in fiscal 1996. This decrease was
due to a change in market strategy emphasizing recurring revenue. In addition,
during the fiscal year, the Company terminated certain contracts with service
provider companies and distributors who buy the Company's electronic monitoring
equipment and provide monitoring services to government agencies. Net sales
revenue with these companies decreased $755,000 in fiscal 1997 compared to
fiscal 1996. The Company expects fiscal 1998 electronic monitoring net sales
revenue to decline significantly as a result of this strategic change. Net
sales included $1,211,000 for software and hardware sales of its Institutional
Management System (IMS) product in fiscal 1997 compared to $1,522,000 in fiscal
1996. The Company anticipates an increase in IMS revenue in 1998, see backlog
discussion on page 5.
Total revenue increased 31.3% to $39,212,000 in 1996 from $29,874,000 in
1995. Net sales increased $4,594,000 or 38.2% to $16,616,000 in 1996 compared
to $12,022,000 in 1995. Service, monitoring and rental income increased to
$22,189,000 in 1996 or 26.5% over the $17,544,000 in 1995. These increases
related to growing acceptance of the Company's products by government agencies
and a strong service provider customer base.
The Company continued to manufacture and sell agriculture products to its
existing customers. Net sales revenue was $427,000, $407,000 and $364,000 in
fiscal 1997, 1996 and 1995, respectively.
Gross Profit
Total gross profit as a percentage of total revenue increased to 51.5% in
1997 compared to 51.0% in 1996. Gross profit on recurring revenue which
consists of service, monitoring and rental gross profit increased to 52.8% in
1997 compared to 52.1% in 1996. Electronic monitoring gross profit improved in
1997 as a result of increased equipment utilization as well as labor and
telephone efficiencies gained from improvements to the monitoring software and
an emphasis on cost containment. The Company expects continued monitoring gross
profit improvements in 1998. Due to the high labor costs associated with
providing probation and day reporting services the gross profit on service
income was approximately five percent less than electronic monitoring gross
profit. Net sales gross profit was 47.6% in 1997 compared to 48.4% in 1996.
The IMS product line included in net sales continued to incur a negative gross
profit, although cost reductions during 1997 have reduced its losses. The
Company anticipates continued cost improvements and profitability for this
product line in 1998.
Total gross profit as a percentage of total revenue decreased to 51.0% in
1996 compared to 53.8% in 1995. Gross profit on net sales decreased to 48.4% in
1996 from 50.5% in 1995. This gross profit decrease was due largely to start up
expenses, amortization of purchased software, and cost of goods sold of
$1,774,000 on the IMS product line. Service, monitoring and rental gross profit
decreased to 52.1% in 1996 compared to 55.4% in 1995. Lower service usage
rates, and increased costs related to monitoring labor and telephone expenses
resulted in lower margins for 1996.
13
Selling, General and Administrative Expenses (S,G&A)
S,G&A expenses increased $3,756,000 to $14,672,000 or 30.3% of revenue in
1997 from $10,916,000 or 27.8% of revenue in 1996. The increase is largely
related to 1997 increases in marketing expenses associated with market expansion
and diversification as well as planned for increases in account management and
technical services related to increasing customer satisfaction and growth of
existing customer sites. At June 30, 1997, the Company had 605 full time
employees compared to 283 employees at June 30, 1996. This increase is largely
explained by the addition of 297 full time employees associated with probation
and day reporting acquisitions discussed in Note six of the consolidated
financial statements. In fiscal 1998, the Company expects to increase marketing
expenses associated with continuing market expansion opportunities. The Company
also expects to increase expenses associated with account management and
information systems infrastructure requirements in the services product area as
well as other areas throughout the Company to increase customer satisfaction and
growth of existing customer sites. In fiscal 1998 the Company expects S,G&A
expenses to decrease as a percentage of total revenue as compared to fiscal
1997.
S,G&A expenses increased to $10,916,000 in 1996 from $8,873,000 in 1995,
but decreased to 27.8% of revenue in 1996 compared to 29.7% in 1995. The
increase of $2,043,000 was largely related to expenses associated with selling,
marketing, account management and commission expense on increased revenue. At
June 30, 1996, the Company had 283 full-time employees, compared to 234
employees at June 30, 1995.
Provision for Doubtful Accounts
The provision for doubtful accounts increased $1,504,000 to $1,732,000 in
fiscal 1997 from $228,000 in fiscal 1996. This relates largely to the Company's
new probation service income. In 1996, revenue was generated by either
government agencies or qualified service providers, both of which carried an
extremely low risk of payment default. Probation service income is 100% paid by
the offender and carries a higher risk of default. In response to this, the
Company accrued approximately 17% of probation service income to allowance for
doubtful accounts. The Company is implementing additional collection procedures
to reduce payment defaults in fiscal 1998.
The provision for doubtful accounts decreased $146,000 to $228,000 in
fiscal 1996 from $374,000 in fiscal 1995. The fiscal 1995 provision was
impacted by $172,000 for an early termination of a lease purchase agreement with
a single customer.
Amortization and Depreciation (A&D)
A&D expenses increased $846,000 to $2,241,000 or 4.6% of revenue in fiscal
1997 from $1,395,000 or 3.6% of revenue in fiscal 1996. Approximately $300,000
was due to the amortization of acquisition goodwill discussed in Note six of the
consolidated financial statements. The remaining increase was due primarily to
additions to property, plant and equipment during 1997.
A&D expenses increased $145,000 to $1,395,000 in 1996 from $1,250,000 in
1995. The increase was due primarily to additions to property, plant and
equipment during 1996.
14
Research and Development Expenses (R&D)
R&D expenses increased $341,000 to $3,002,000 in 1997 from $2,661,000 in
1996. The increase was largely related to expenses associated with software
development efforts for improved automation to the Company's electronic
monitoring center, and the evaluation and enhancement of existing electronic
monitoring products. The Company expects to continue expenditures for
improvements to the monitoring operations and development of future home arrest
products in fiscal 1998.
R&D expenses increased to $2,661,000 in 1996 from $2,117,000 in 1995. The
increase was related to software development for automation improvements to the
Company's monitoring center as well as development of future home arrest
products.
Net Income and Income Taxes
The Company recorded income tax expense of $1,460,000 and $1,949,000 for
1997 and 1996 respectively, which differs from the statutory rate largely as a
result of non-deductible goodwill amortization expense.
For fiscal 1997, the Company had net income of $1,833,000 or $.25 per share
compared to fiscal 1996 net income of $2,863,000 or $.40 per share. The changes
in net income relate primarily to the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997, the Company generated $9,052,000 of cash from operating
activities, received $1,276,000 from the issuance of common stock associated
with the exercise of stock options and the employee stock purchase plan,
repurchased $2,559,000 of its common stock, expended $2,522,000 for capital
equipment and leasehold improvements, expended $2,905,000 for equipment
associated with rental and monitoring contracts, expended $837,000 for
capitalized internally developed software, and paid $4,234,000 of cash
associated with acquisitions. The total of all cash flow activities resulted in
a decrease in the balance of cash and cash equivalents of $2,569,000 for fiscal
1997.
The Company's working capital decreased $3,631,000 to $14,541,000 at June
30, 1997. The decrease in working capital was primarily the result of decreases
in cash associated with the Company's stock repurchase plan and cash required
for acquisitions.
In October 1996, the Company signed a 14-year capital lease. The present
value of the aggregate future minimum lease payments of $7,140,000 net of
accumulated amortization of $340,000 at June 30, 1997 is included in property
and equipment. Under the terms of the Company's building lease, the Company
acquired a 25% equity interest in one of the buildings that the Company leases.
See Note five of the consolidated financial statements.
The Company has an available $5,000,000 line of credit with Bank One,
Boulder, Colorado which expires in October 1999. No amounts were drawn against
this line at June 30, 1997.
Working capital may be obtained by financing certain operating and sales-
type leases under recourse and non-recourse borrowing arrangements. These
borrowings would be collateralized with a security interest in the leased
equipment. At June 30, 1997, the Company had unfunded leases in the amount of
$6,757,000 which could be used as collateral for future borrowing arrangements.
The Company believes it will have adequate sources of cash and available
bank line of credit to fund anticipated working capital needs for its existing
business through fiscal 1998.
15
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of Independent Accountants and the Consolidated Financial
Statements are set forth on pages F-1 to F-19 of this report.
Schedule II is provided in the Financial Statement Schedule Section. All
other financial statement schedules are omitted because they are not applicable
or the required information is shown in the Consolidated Financial Statements or
notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in accountants and no significant disagreements with
accountants on accounting and financial disclosure.
16
PART III
Items 10 (except as to executive officers, see Part I), 11, 12 and 13 are
hereby incorporated by reference from the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on November 13, 1997.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
Report of Independent Accountants
Balance Sheet at June 30, 1997 and 1996
Statement of Operations for each of the three years in the
period ended June 30, 1997
Statement of Changes in Stockholders' Equity for each of the
three years in the period ended June 30, 1997
Statement of Cash Flows for each of the three years in the
period ended June 30, 1997
Notes to Financial Statements
2. Financial Statement Schedules:
Schedule II - Valuation and qualifying accounts
All other financial statement schedules are omitted because
they are not applicable or the required information is shown in
the consolidated financial statements or notes thereto.
(b) The Company did not file any reports on Form 8-K during the last
quarter of the period covered by this report.
(c) Exhibits:
3.1 Articles of Incorporation, as amended, of the Registrant (1)
3.2 Bylaws, as amended, of the Registrant (2)
4.1 Form of Common Stock Certificate (3)
4.2 Warrant dated November 3, 1993 for 4,500 shares, previously filed
with the Commission as an exhibit to 1994 Form 10-K and incorporated
by reference.
4.3 Warrant dated November 18, 1992 for 4,500 shares. Previously filed
with the Commission as an exhibit to 1993 Form 10-K, and incorporated
by reference.
4.4 BI Incorporated Employee Non-Qualified Stock Option Plan. Filed as
an exhibit to Form S-8, March 24, 1988 (Registration No. 33-20843),
and incorporated by reference, and modified by exhibit to Form S-8,
filed with the Commission on December 28, 1990, and incorporated by
reference.
17
4.5 BI Incorporated Director and Key Employee Non-Qualified Stock Option
Plan. Filed with the Commission on May 29, 1990, as an exhibit to
Form S-8, and incorporated by reference, and modified by exhibit to
Form S-8, filed with the Commission on April 28, 1993, and
incorporated by reference.
4.6 BI Incorporated Incentive Stock Option Plan. Filed with the
Commission on March 24, 1988 as an exhibit to Form S-8, (Registration
No. 33-20843), and incorporated by reference, and modified by exhibit
to Form S-8, filed with the Commission on December 28, 1990, and
incorporated by reference.
4.7 1990 Director Non-Qualified Stock Option Plan. Previously filed with
the commission as an exhibit to 1990 Form 10-K, and incorporated by
reference.
4.8 BI Incorporated 1991 Employee Stock Purchase Plan. Filed with the
commission on December 28, 1990 as an exhibit to Form S-8,
Registration No 33-38428, and incorporated by reference.
4.9 BI Incorporated 1991 Stock Option Plan. Filed with the Commission on
December 20, 1991 as an exhibit to Form S-8, and modified by exhibit
to Form S-8, filed with the Commission on April 28, 1993, and
incorporated by reference, and modified by exhibit to Form S-8, filed
with the Commission on March 2, 1995, and incorporated by reference.
4.10 BI Incorporated 1996 Stock Option Plan. Incorporated by reference
from the Company's proxy statement for the annual meeting of
shareholders held November 7, 1996.
10.2 Form of Employment Agreement, previously filed with the Commission as
an exhibit to 1994 Form 10-K and incorporated by reference.
*23.1 Consent of Price Waterhouse LLP
* Filed herewith
(1) Incorporated by reference from the Company's Proxy Statement for the
Annual meeting of shareholders held November 7, 1991.
(2) Incorporated by reference from the Company's Registration Statement
on Form S-18 (Registration No. 2-82311-D) effective May 4, 1983.
(3) Incorporated by reference from the Company's Registration Statement
on Form S-1 (Registration No. 33-36683) filed September 4, 1990.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BI Incorporated
By:/s/ David J. Hunter
--------------------------------
David J. Hunter
President
Date: September 19, 1997
--------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ ------------------------------ -----------------
/s/ David J. Hunter
- ------------------------------
David J. Hunter President, Chief Executive
Officer and Director
(Principal Executive Officer) September 19, 1997
/s/ Jacqueline A. Chamberlin
- ------------------------------
Jacqueline A. Chamberlin Vice President of Finance
(Principal Financial and
Accounting Officer) September 19, 1997
/s/ Jeremy N. Kendall
- ------------------------------
Jeremy N. Kendall Chairman September 19, 1997
/s/ William E. Coleman
- ------------------------------
William E. Coleman Vice Chairman September 19, 1997
/s/ Mckinley C. Edwards, Jr.
- ------------------------------
Mckinley C. Edwards, Jr. Director September 19, 1997
/s/ Beverly J. Haddon
- ------------------------------
Beverly J. Haddon Director September 19, 1997
/s/ Perry M. Johnson
- ------------------------------
Perry M. Johnson Director September 19, 1997
/s/ Frank L. Randall, Jr.
- ------------------------------
Frank L. Randall, Jr. Director September 19, 1997
/s/ Byam K. Stevens, Jr.
- ------------------------
Byam K. Stevens, Jr. Director September 19, 1997
19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of BI Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a) 1 and 2 present fairly, in all material respects, the
financial position of BI Incorporated and its subsidiaries at June 30, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boulder, Colorado
August 19, 1997, except for the first paragraph of Note 10,
as to which the date is September 11, 1997.
F-1
BI INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands)
June 30, June 30,
1997 1996
------------------- -------------------
ASSETS
Current assets
Cash and cash equivalents $ 1,694 $ 4,263
Short-term investments 450 1,099
Receivables, net 8,647 9,043
Investment in sales-type leases, net 3,993 4,345
Inventories 3,861 3,020
Deferred income taxes 779 302
Prepaid expenses 665 893
------------------- -------------------
Total current assets 20,089 22,965
Investment in sales-type leases, net 2,764 3,446
Rental and monitoring equipment, net 4,366 4,088
Property and equipment, net 10,667 2,564
Software, net 1,987 1,906
Intangibles, net 12,908 7,232
Other assets 2,640 619
------------------- -------------------
$ 55,421 $ 42,820
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,836 $ 1,486
Accrued compensation and benefits 1,409 1,581
Capital lease obligation 82 0
Accrued product warranty 151 193
Deferred revenue 1,362 1,086
Income taxes payable 404 0
Other liabilities 304 447
------------------- -------------------
Total current liabilities 5,548 4,793
------------------- -------------------
Capital lease obligation 7,030 0
Deferred revenue 2,223 821
Commitments (Notes 7 and 10)
Stockholders' equity
Common stock, no par value, 75,000 shares
authorized; 7,417 shares issued June 30, 1997
and 7,004 shares issued June 30, 1996 32,460 30,879
Retained earnings 8,160 6,327
------------------- -------------------
40,620 37,206
------------------- -------------------
$ 55,421 $ 42,820
=================== ===================
The accompaying notes are an integral
part of these financial statements
F-2
BI INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
Year ended June 30,
---------------------------------
1997 1996 1995
---------------------------------
Revenues
Service and monitoring income $33,161 $21,357 $16,714
Net sales 13,961 16,616 12,022
Rental income 1,008 832 830
Other income 271 407 308
---------------------------------
48,401 39,212 29,874
Costs and expenses
Cost of service and monitoring income 15,859 10,338 7,457
Cost of net sales 7,320 8,570 5,956
Cost of rental income 282 292 375
Selling, general and administrative expenses 14,672 10,916 8,873
Provision for doubtful accounts 1,732 228 374
Depreciation and amortization 2,241 1,395 1,250
Research and development expenses 3,002 2,661 2,117
---------------------------------
45,108 34,400 26,402
Income before income taxes 3,293 4,812 3,472
Income tax provision (1,460) (1,949) (1,150)
---------------------------------
Net income $ 1,833 $ 2,863 $ 2,322
=================================
Net Income per common and common equivalent shares $0.25 $0.40 $0.34
=================================
Weighted average number of common and common equivalent
shares outstanding 7,451 7,160 6,883
=================================
The accompanying notes are an integral
part of the financial statements.
F-3
BI INCORPORATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Common Stock Treasury Stock
----------------------- -------------------- Retained
Shares Amount Shares Amount Earnings Total
----------------------- -------------------- --------- -------
Balance June 30, 1994 7,369 $31,159 (183) $ (115) $1,142 $32,186
Exercise of stock options and warrants 39 220 11 1 221
Stock repurchases and retirement (538) (2,500) (2,500)
Retirement of repurchased stock (556) (2,599) 556 2,599 0
Issuance of common stock pursuant to
stock purchase plan 13 51 51
Tax benefit from exercise of stock options 52 52
Net income 2,322 2,322
----------------------- -------------------- --------- -------
Balance June 30, 1995 6,865 28,883 (154) (15) 3,464 32,332
Exercise of stock options and warrants 405 2,045 2,045
Stock repurchases and retirement (290) (987) 154 15 (972)
Issuance of common stock pursuant to
stock purchase plan 24 151 151
Tax benefit from exercise of stock options 787 787
Net income 2,863 2,863
----------------------- -------------------- --------- -------
Balance June 30, 1996 7,004 30,879 0 0 6,327 37,206
Exercise of stock options and warrants 200 1,186 1,186
Stock repurchases and retirement (360) (2,559) (2,559)
Issuance of common stock pursuant to
stock purchase plan 15 90 90
Tax benefit from exercise of stock options 183 183
Stock issued as part of aquisition 558 2,681 2,681
Net income 1,833 1,833
----------------------- -------------------- --------- -------
Balance June 30, 1997 7,417 $32,460 0 $ 0 $8,160 $40,620
======================= ==================== ========= =======
The accompanying notes are an integral
part of these financial statements.
F-4
BI INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year ended June 30,
-------------------------------------------------
1997 1996 1995
-------------------------------------------------
Cash flows from operating activities:
Net income $ 1,833 $ 2,863 $ 2,322
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 6,668 5,716 4,921
Provision for losses on accounts receivable and STLs 1,732 228 374
Changes in assets and liabilities net of effects from aquisitions:
Receivables (830) (3,100) (1,319)
Investment in STLs 1,034 (1,795) (543)
Inventories, net (841) 425 (457)
Accounts payable (80) 1,079 (144)
Accrued expenses (762) 265 (399)
Deferred revenue (245) (3) 502
Current income taxes payable 404 657 (32)
Other 139 256 561
--------------------------------------------------
Net cash from operating activities 9,052 6,591 5,786
--------------------------------------------------
Cash flows from investing activities:
Capital expenditures (2,522) (1,695) (1,326)
Increase in rental and monitoring equipment (2,905) (2,761) (2,527)
Increase in capitalized software (837) (696) (235)
Investment in Patent (309) 0 0
Cash paid for acquisitions net of cash acquired (4,234) 0 0
Change in short-term investments 649 (723) (94)
Other (152) (35) (63)
--------------------------------------------------
Net cash used in investing activities (10,310) (5,910) (4,245)
--------------------------------------------------
Cash flows from financing activities:
Payments on capital lease obligation (28) 0 0
Proceeds from issuance of common stock 1,276 2,196 272
Purchase of treasury stock, net (2,559) (972) (2,500)
--------------------------------------------------
Net cash from (used in) financing activities (1,311) 1,224 (2,228)
--------------------------------------------------
Net change in cash and cash equivalents (2,569) 1,905 (687)
Cash and cash equivalents at beginning of year 4,263 2,358 3,045
--------------------------------------------------
Cash and cash equivalents at end of year, excluding short-term
investments of $450, $1,099, and $376 in 1997, 1996 and 1995,
respectively $ 1,694 $ 4,263 $2,358
======== ======== =========
The accompanying notes are an integral
part of the financial statements.
F-5
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BI Incorporated designs, manufactures, markets and supports electronic
monitoring systems and other automatic identification devices. The Company
provides 24-hour monitoring services using equipment it manufactures. The
Company also develops application software systems for jails. In addition, the
Company provides probation services to misdemeanant probationers and day
reporting services to felony probationers. These products and services are for
use by corrections agencies as an integral part of their community correction
programs. These consolidated financial statements include the accounts of BI
Incorporated and its majority owned subsidiaries (together the "Company"). All
intercompany transactions have been eliminated in consolidation.
Cash equivalents and short-term investments
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents. Investments
with original maturities greater than three months are recorded as short-term
investments at cost, which approximates market value.
Inventories
Inventories are stated at the lower-of-cost-or-market. Cost is determined
using the first-in, first-out ("FIFO") method.
Depreciation and Amortization
Property and equipment are stated at cost and depreciated on a straight-
line basis over their estimated useful lives of three to seven years. Rental
and monitoring equipment are stated at cost and depreciated on a straight-line
basis over two to three years. Repair and maintenance expenses which do not
extend the useful lives of the related assets are expensed as incurred.
Goodwill represents the excess of purchase price over fair value of net
assets acquired and is amortized on a straight-line basis over periods of 10-20
years. The recoverability of goodwill is assessed at least annually, based on
undiscounted projected related revenue less undiscounted related costs. Any
impairment loss will be recorded to the extent such profits do not exceed the
net carrying value of the goodwill. Patents are amortized on a straight-line
basis over 14 years. The manufacturing technology acquired from Cincinnati
Microwave, Inc. is amortized over the greater of the units of production method
or 5 years, on a straight-line basis. Amortization related to goodwill, patents
and the manufacturing technology was $1,364,000, $1,082,000, and $962,000 in
fiscal 1997, 1996, and 1995, respectively. Accumulated amortization of
goodwill, patents and the manufacturing technology was $5,400,000 and $4,086,000
at June 30, 1997 and 1996, respectively.
Research and Development and Capitalized Software
The Company capitalizes internally developed software costs in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or
F-6
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Otherwise Marketed." Capitalization of development costs of software products
begins once the technological feasibility of the product is established. Based
on the Company's product development process, technological feasibility is
established upon completion of a detailed program design. Capitalization ceases
when such software is ready for general release, at which time amortization of
the capitalized costs begins. Capitalized software costs are net of accumulated
amortization of $2,333,000 and $1,781,000 as of 1997 and 1996, respectively.
Amortization of capitalized internally developed software costs is computed
as the greater of: (a) the amount determined by ratio of the product's current
revenue to its total expected future revenue or (b) the straight-line method
over the product's estimated useful life of three years. During all periods
presented herein, the Company has used the straight-line method to amortize such
capitalized costs. Amortization of software costs was $756,000, $795,000 and
$811,000 in 1997, 1996 and 1995, respectively.
Research and development costs relating principally to the design and
development of products (exclusive of costs capitalized under SFAS No. 86) are
expensed as incurred. The cost of developing routine enhancements are expensed
as research and development costs as incurred because of the short time between
the determination of technological feasibility and the date of general release
of related products.
Supplemental disclosures of cash flow information:
1997 1996 1995
-------- ---------- ---------
Interest received $711,000 $ 718,000 $ 609,000
Interest paid 393,000 4,000 3,000
Income taxes paid 644,000 1,177,000 785,000
Interest received from STLs is presented on a constructive
receipt basis.
Supplemental schedule of noncash investing and financing activities:
1997 1996 1995
-------- ---------- ---------
Tax benefit for exercise
of stock options $ 183,000 $ 787,000 $ 22,000
Stock Issued for acquired
Companies 2,681,000 0 0
Obligation under capital
lease 7,140,000 0 0
Revenue recognition
Service and monitoring income is recorded monthly over the term of the
contract with any prepaid amounts being deferred. Product sales and sales-type
leases are generally recorded upon shipment. Rental income associated with
operating leases is recorded monthly over the rental period. Revenue from
software system sales is recognized using the percentage of completion method.
Probation and day reporting service income is recognized monthly as the
probation services are provided.
F-7
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company records the portion of future minimum sales-type lease payments
related to second and third year extended warranty services as deferred revenue.
This revenue is recognized monthly, beginning in month thirteen of the lease,
over the remaining term of the lease. The costs of product warranties are
accrued at the time of product sales and are recorded based upon estimates of
costs to be incurred to repair or replace items under warranty.
Net income per common and common equivalent share
Net income per common and common equivalent share is computed under the
treasury stock method using weighted average number of shares of common and
dilutive common equivalent shares outstanding during each fiscal year. Common
stock equivalent shares for 1997, 1996, and 1995 were 199,000, 379,000, and
92,000, respectively.
SFAS No. 128, "Earnings per Share," was issued in February, 1997. The
Company will be required to apply this statement in its consolidated financial
statements for fiscal 1998. 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 currently required primary and fully-diluted EPS. The basic EPS will be
computed by dividing net income by the weighted average number of shares
outstanding during the period. Diluted EPS will be computed in a manner similar
to the current method for calculating fully-diluted EPS. Prior period EPS will
be restated to conform with the new statement. The pro forma effect of applying
SFAS No. 128 on the Company's historical consolidated financial statements is as
follows (in thousands, except per share data):
06/30/97 06/30/96 06/30/95
--------- --------- ---------
EPS as reported
Primary EPS $ .25 $ .40 $ .34
Weighted average common shares outstanding 7,451 7,160 6,883
Proforma EPS
Basic EPS Computation:
Basic EPS $ .25 $ .42 $ .34
Weighted average common shares 7,252 6,781 6,791
outstanding
Diluted EPS Computation:
Diluted EPS $ .25 $ .40 $ .34
Weighted average common shares 7,451 7,160 6,883
outstanding
assuming dilution
Use of Estimates
The Company has prepared these financial statements in conformity with
generally accepted accounting principles which require the use of management's
estimates. Actual results could differ from the estimates used.
F-8
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company sold products to JEMTEC, Inc. for $551,000, $435,000 and
$160,000 for 1997, 1996 and 1995, respectively. The Chairman of the Company is
Chairman of JEMTEC, Inc.
NOTE 3 - RECEIVABLES, NET INVESTMENT IN SALES-TYPE LEASES, AND OPERATING LEASES
- - AS LESSOR
A significant portion of the Company's receivables and net investment in
sales-type leases is due from governmental agencies or divisions thereof. One
of these customers accounted for 12% of total revenue in 1997, 12% of total
revenue in 1996 and 14% of total revenue in 1995.
Receivables
Receivables consist of the following (in thousands):
June 30,
1997 1996
-------------------
Trade, net of allowance for doubtful accounts of
$1,760 in 1997 and $266 in 1996 $ 8,624 $ 9,022
Due from officers and employees 23 21
-------------------
$ 8,647 $ 9,043
===================
Net investment in sales-type leases
The components of net investment in sales-type leases are as follows (in thousands):
June 30,
1997 1996
-------------------
Total minimum lease payments $ 7,335 $ 8,532
Less: Unearned income (577) (732)
Less: Allowance for doubtful accounts (1) (9)
-------------------
Net investment 6,757 7,791
Less: Current portion (3,993) (4,345)
-------------------
Long-term portion $ 2,764 $ 3,446
==================
F-9
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments to be received under sales-type leases at
June 30, 1997 are $4,361,000, $1,846,000, $889,000, and $239,000 in fiscal 1998,
1999, 2000, and 2001, respectively.
Operating leases - as lessor
The Company offers short-term leases to its customers as an alternative to
buying its products. The lease term for operating leases is generally up to one
year, with payments due monthly, and the Company retains title to the equipment.
NOTE 4 - INVENTORIES
Inventories consist of the following (in thousands):
June 30,
1997 1996
-----------------
Raw materials $1,682 $1,089
Work-in-process 1,363 1,033
Finished goods 1,058 1,064
-----------------
4,103 3,186
Less: allowance for obsolescence (242) (166)
-----------------
$3,861 $3,020
=================
NOTE 5 - EQUIPMENT AND INTANGIBLES
Rental and Monitoring Equipment
Rental and monitoring equipment consist of the following (in thousands):
June 30,
1997 1996
--------------------
Rental equipment $ 1,173 $ 932
Monitoring equipment 13,359 10,695
--------------------
14,532 11,627
Less: accumulated depreciation and amortization (10,166) (7,539)
--------------------
$ 4,366 $ 4,088
====================
F-10
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment consist of the following (in thousands):
June 30,
1997 1996
--------------------
Property and equipment $17,683 $ 7,659
Less: accumulated depreciation (7,016) (5,095)
--------------------
$10,667 $ 2,564
====================
In October 1996, the Company signed a 14-year capital lease. The present
value of the aggregate future minimum lease payments of $7,140,000 net of
accumulated amortization of $340,000 at June 30, 1997 is included in property
and equipment. Under the terms of the Company's building lease, the Company
acquired a 25% equity interest in one of the buildings that the Company leases.
Intangibles
Intangibles consist of the following (in thousands):
June 30,
1997 1996
--------------------
Goodwill $13,945 $ 7,215
Patents 1,363 1,103
Manufacturing technology 3,000 3,000
--------------------
18,308 11,318
Less: accumulated amortization (5,400) (4,086)
--------------------
$12,908 $ 7,232
===================
NOTE 6 - ACQUISITIONS
On October 10, 1996, the Company acquired, in a single transaction, 100% of
Community Corrections Corporation ("CCC"), Justice Alternatives Inc. ("JAI") and
Tennessee Probation Services Inc. ("TPS"). These companies, collectively
referred to as CCC, provide probation services to the corrections industry. The
F-11
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consideration given was 400,000 shares of common stock and $3,000,000 cash. The
fair value of assets acquired was $1,160,000 and liabilities assumed were
$828,000.
The acquisition was accounted for as a purchase and the assets acquired and
liabilities assumed were recorded at their estimated fair values at the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired was recorded as goodwill to be amortized on a straight-line basis over
its estimated useful life of 15 years. The operating results of the Company's
wholly-owned subsidiaries CCC, JAI and TPS have been included in the results of
operations since October 1, 1996.
On January 31, 1997, the Company acquired 100% of Peregrine Corrections
Incorporated ("PCI"). PCI provides day reporting services to the corrections
industry. The consideration given was 157,895 shares of common stock and
$1,251,000 cash. The fair value of assets acquired was $403,000 and
liabilities assumed were $330,000.
The acquisition was accounted for as a purchase and the assets acquired and
liabilities assumed were recorded at their estimated fair values at the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired was recorded as goodwill to be amortized on a straight-line basis over
its estimated useful life of 15 years. The operating results of the Company's
wholly-owned subsidiary, PCI, have been included in the results of operations
since February 1, 1997.
The following unaudited pro forma combined results of operations of the
Company and CCC have been prepared as if the transactions occurred as of the
beginning of the respective periods. PCI's operating results for the pro forma
periods below were insignificant; therefore, PCI's results have not been
included.
Year Ended
----------------------------
June 30, 1997 June 30, 1996
------------- -------------
Sales $50,624 $47,628
Net Income $ 1,953 $ 2,851
NOTE 7 - AVAILABLE FINANCING AND LEASE COMMITMENTS
The Company has an available bank line of credit for $5,000,000 bearing
interest at the bank's prime rate, (8.25% at June 30, 1997) expiring in October
1999. At June 30, 1997, no borrowings were outstanding against the line.
Borrowings under the line of credit are secured by inventory, equipment and
accounts receivable. The line of credit sets forth certain financial and other
covenants, including prior written consent to the payment of any dividends, that
must be met by the Company if indebted to the bank.
F-12
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company leases office space under a capital lease. The following is a
schedule by years of future minimum lease payments under this capital lease
together with the present value of the net minimum lease payments as of June 30,
1997:
Year ending June 30 (in thousands):
1998 $ 684
1999 726
2000 762
2001 800
2002 840
Thereafter 8,845
-------
Total minimum lease payments 12,657
Less amount representing interest (5,547)
-------
Present value of net minimum
lease payments $ 7,110
=======
The Company leases office space and certain equipment under operating
leases. Rental expense was $683,000, $476,000, and $502,000 for fiscal 1997,
1996 and 1995, respectively. Minimum rental payments required under operating
leases that have initial or remaining noncancelable lease terms in excess of one
year as of June 30, 1997 are as follows:
Year ending June 30 (in thousands):
1998 $ 764
1999 510
2000 268
2001 144
2002 25
------
Total minimum payments required $1,711
======
NOTE 8 - INCOME TAXES
The provision for income taxes is comprised of the following (in
thousands):
1997 1996 1995
------------------------------------------------
Current provision
Federal $1,574 $1,342 $ 872
F-13
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996 1995
---------------------------------------------
State 300 296 209
Deferred provision
Federal (349) 262 58
State (65) 49 11
---------------------------------------------
$1,460 $1,949 $1,150
=============================================
A reconciliation of the effective tax rate to the statutory rate is as
follows:
1997 1996 1995
--------------------------------------------------------------
Expected statutory rate 34% 34% 34%
State taxes 5% 5% 4%
Goodwill amortization 7% 3% 11%
Tax exempt interest - STL (4)% (2)% (6)%
Release of valuation allowance (7)%
Other 2% 1% (3)%
--------------------------------------------------------------
44% 41% 33%
==============================================================
The significant components of the Company's deferred income tax assets and
liabilities for fiscal 1997 and 1996 were as follows (in thousands):
1997 1996
------------------
Deferred tax assets:
Tax credit carryforwards $ 0 $ 18
Accrued liabilities 89 114
Depreciation 1,352 1,084
Bad debt 710 148
Other - miscellaneous 210 311
------------------
Gross deferred tax asset 2,361 1,675
Deferred tax liabilities:
Deferred revenue (119) (192)
Capitalized software (580) (477)
Other - miscellaneous (283) (333)
------------------
Gross deferred tax liabilities (982) (1,002)
------------------
Net deferred tax asset $1,379 $ 673
==================
NOTE 9 - EMPLOYEE BENEFIT PLANS, OPTIONS AND WARRANTS
F-14
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 1997, the Company has two stock-based compensation plans, which
are described below. The Company applies APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plan and its stock purchase
plans. Had compensation cost for the Company's two stock base compensation
plans been determined based on the fair value at the grant dates for award under
those plans consistent with the method of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
1997 1996 1995
-----------------------------------------
Net income :
As reported 1,833 2,863 2,322
Pro forma 1,099 2,646 2,231
Net income per share:
As reported .25 .40 .34
Pro forma .15 .36 .32
------------------------------------------
==========================================
Stock Option Plans
The Company has five stock option plans, the Director and Key Employee Non-
qualified Stock Option Plan ("Director and Key Employee Plan"), the Employee
Non-qualified Stock Option Plan (the "Employee Plan"), the Director Non-
qualified Stock Option Plan (the "Director Plan"), the 1991 Stock Option Plan
("1991 Plan") and the 1996 Stock Option Plan ("1996 Plan"). The Director and
Key Employee Plan, Employee Plan, Director Plan and 1991 Plan have expired.
Under the 1996 Plan, the Company may grant options to its employees and
directors for up to 1 million shares of common stock. Under the Plan, options
are granted at an exercise price equal to the fair market value of the Company's
common stock on the grant date. The options vest over periods not to exceed 48
months and expire in 10 years or less.
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in fiscal 1997, 1996 and 1995, respectively:
No estimated dividends for all three years; expected volatility of 57.5% for
1997, 46.4% for 1996, and 56.8% for 1995; risk-free interest rates between 6.20%
and 6.86% for 1997, 6.20% and 6.48% for 1996, 7.44% and 7.79% for 1995; and
expected option terms between 7 and 10 years for 1997, and 7 years for both 1996
and 1995.
F-15
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes option transactions under all five plans
during each of the three years in the period ended June 30, 1996 (in thousands):
Number of Shares Weighted Average
Exercise Price
------------------------------------------------------------------------
Outstanding, June 30, 1994 887 $5.12
Granted 138 4.33
Exercised (46) 4.43
Canceled (43) 5.07
------------------------------------------------------------------------
Outstanding, June 30, 1995 936 5.05
Granted 249 6.55
Exercised (379) 5.21
Canceled (21) 5.50
------------------------------------------------------------------------
Outstanding, June 30, 1996 785 5.50
Granted 813 6.98
Exercised (171) 5.56
Canceled (68) 6.15
------------------------------------------------------------------------
Outstanding, June 30, 1997 1,359 $6.34
========================================================================
Options exercisable and the weighted average exercise price of these
options as of the end of the year were 591,000 and $5.61, 465,000 and $5.05, and
705,000 and $5.12 in 1997, 1996 and 1995, respectively. The weighted average
fair value of options granted during 1997, 1996 and 1995 were $5.11, $3.77 and
$2.87, respectively.
The following table summarizes information about fixed stock options
outstanding at June 30, 1997 (in thousands):
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exerciseable Weighted-Average
Exercise Prices at 6/30/97 Contractual Life Excercise Price at 6/30/97 Exercise Price
- --------------- ------------- ------------------ ---------------- ------------- -----------------
$4.19-4.88 113 4.3 years $4.30 111 $4.29
$5.13 253 2.3 years $5.13 249 $5.13
$5.50-6.88 267 5.9 years $6.56 105 $6.49
$7.00-7.13 726 9.2 years $7.00 126 $7.00
--- ---
$4.19-7.13 1,359 591
F-16
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Purchase Plan
In July 1990, the Board of Directors adopted an Employee Stock Purchase
Plan ("Purchase Plan") offering employees the right to collectively purchase a
maximum of 200,000 shares of the Company's common stock through a minimum of
six-month offering periods of 50,000 shares each commencing January 1, 1991.
Eligible employees may contribute up to 10% of their base pay towards the
purchase of the Company's common stock at 85% of the lower of the average market
price on the first or the last day of the offering period. Proceeds received
from the issuance of shares under the Purchase Plan are credited to
stockholder's equity in the fiscal year shares are issued. Under the Purchase
Plan, the Company sold 15,000, 24,000 and 13,000 shares to employees in 1997,
1996 and 1995, respectively.
The fair value of each stock purchase grant is estimated on the date of
grant using the Black-Scholes model with the following assumptions for 1997,
1996 and 1995: no estimated dividends; expected volatility of 57.5%, 46.4% and
56.8%, respectively; risk free interest rates of 6.66% in 1997, 5.63% and 6.83%
in 1996 and 6.05% in 1995; and an expected life of .5 years for all three years.
Employee Savings Plan
The Company has a 401(k) savings plan whereby the Company matches, subject
to certain limits, $.15 for each $1.00 employees contribute. Total Company
contributions during fiscal 1997, 1996 and 1995 were $66,000, $79,000, and
$68,000, respectively.
NOTE 10 - 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.
F-17
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is involved in four additional legal proceedings; one alleging
negligence in monitoring and detention; one alleging wrongful death from general
negligence, one alleging malfunction in equipment, and the last alleging
negligence in manufacturing. Two of the claimants seek damages up to
$3,000,000, one seeks damages in the amount of $150,000 and the fourth seeks
unspecified damages. The company is also aware of certain unasserted potential
claims. Management believes the Company has adequate legal defenses and/or
insurance coverage against all claims and intends to defend them. There can be
no assurances however, that any individual case will result in an outcome
favorable to the Company. In the event of any adverse outcome, neither the
amount nor the likelihood of any potential liability which might result is
reasonably estimable. The Company currently believes that the amount of the
ultimate potential loss would not be material to the Company's financial
position or results of operations. However, an adverse future outcome in any
individual case, including legal defense costs, could have a material effect on
the Company's reported results of operations in a particular quarter.
NOTE 11 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following interim financial information presents the 1997 and 1996
results of operations on a quarterly basis (in thousands, except per share
amounts):
Fiscal quarters ended
9/30/96 12/31/96 3/31/97 6/30/97
-----------------------------------------
Total revenue $ 8,723 $ 11,782 $ 13,289 $ 14,607
-----------------------------------------
Gross profit 4,329 6,048 7,037 7,526
-----------------------------------------
Net income $ 157 $ 358 $ 569 $ 749
-----------------------------------------
Net income per common and
common equivalent share $ 0.02 $ 0.05 $ 0.08 $ 0.10
=========================================
Fiscal quarters ended
9/30/95 12/31/95 3/31/96 6/30/96
-----------------------------------------
Total revenue $ 8,387 $ 9,810 $ 9,488 $ 11,527
-----------------------------------------
Gross profit 4,494 4,877 4,954 5,687
-----------------------------------------
Net income $ 601 $ 647 $ 725 $ 890
-----------------------------------------
Net income per common and common
equivalent share $ 0.09 $ 0.09 $ 0.10 $ 0.12
=========================================
F-18
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II
Allowance for losses on Sales-Type Leases:
====================================================================================================================================
Balance beginning of Charged to cost and Charged to other Balance at end
period expenses accounts Write offs of period
- ------------------------------------------------------------------------------------------------------------------------------------
7-1-94 - 6-30-95 $60,000 $0 $0 $(51,000) $9,000
- ------------------------------------------------------------------------------------------------------------------------------------
7-1-95 - 6-30-96 $ 9,000 $0 $0 $ 0 $9,000
- ------------------------------------------------------------------------------------------------------------------------------------
7-1-96 - 6-30-97 $ 9,000 $0 $0 $ (8,000) $1,000
====================================================================================================================================
Allowance for losses on Accounts Receivable:
====================================================================================================================================
Balance beginning of Charged to cost and Charged to other Balance at end
of period expenses Acquisition Write offs period
- ------------------------------------------------------------------------------------------------------------------------------------
7-1-94 - 6-30-95 $243,000 $ 374,000 $ 0 $ (397,000) $ 220,000
- ------------------------------------------------------------------------------------------------------------------------------------
7-1-95 - 6-30-96 $220,000 $ 228,000 $ 0 $ (182,000) $ 266,000
- ------------------------------------------------------------------------------------------------------------------------------------
7-1-96 - 6-30-97 $266,000 $1,732,000 $1,418,000 $(1,656,000) $1,760,000
====================================================================================================================================
F-19