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, 1998
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) 218-1000
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, 1998, there were 7,641,685 shares of Common Stock outstanding
and the aggregate market value of Common Stock held by non-affiliates was
$62,105,233.
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 5, 1998.
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.
Since entering the market in 1984, BI's electronic monitoring business
unit ("EM") has developed four generations of home arrest products. 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 PROFILETM 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 through correctional service
centers in Georgia, Florida, 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. PCI provides services through
correctional service centers in Colorado, Illinois, New Mexico, Oregon and
Washington.
INDUSTRY AND MARKET BACKGROUND
According to the U.S. Bureau of Justice Statistics latest report, 5.7
million adults were under some form of correctional supervision at December 31,
1997. The number of prisoners under the jurisdiction of federal or state
correctional authorities on that date reached a record high of 1.7 million.
Moreover, 3.9 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, 1998 the Company was monitoring approximately 17,400
offenders daily on home arrest; approximately 40,000 misdemeanant and felon
probationers were being managed through the Company's CCS correctional service
centers; seven jails were using BI's IMS software; and approximately 20,000
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 and jail overcrowding,
as well as providing additional innovative tools for corrections agencies and
jails to manage the vast amount of information required more efficiently.
Monitoring, supervision and day reporting services provided by BI enable
corrections agencies to manage probation and parole populations effectively 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.
2
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 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 application
---------------------------------------------------
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 10 states, BI's CCS business unit 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
3
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
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 $13,559,000, $12,322,000 and
$14,678,000 in 1998, 1997, and 1996 respectively, from the sale of electronic
monitoring products representing 21.9%, 25.5% and 37.4% of total revenue during
the respective years. Service, monitoring and rental income was $44,458,000 or
71.7% of total revenue in 1998, $34,169,000 or 70.6% in 1997 and $22,189,000 or
56.6% in 1996. Revenue from the sale of its IMS software was $3,195,000,
$1,211,000 and $1,522,000 in 1998, 1997 and 1996. 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. The Company completed the second phase of the
development of its base open system architecture platform for its IMS product
mid-year fiscal 1998. In addition, the Company advanced the development of its
next generation monitoring software. It is anticipated that the Company will
begin to utilize this software during fiscal 1999 to enhance customer
satisfaction and improve efficiencies. For the years ended June 30, 1998, 1997,
and 1996, the Company had research and development expenses of approximately
$3,000,000, $3,000,000, and $2,700,000, 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 Consolidated Financial Statements.
SIGNIFICANT CUSTOMERS
In fiscal 1998, the Administrative Office of the U.S. Federal Courts
accounted for 10% of the Company's total revenue. This customer accounted for
12% of total revenue in both fiscal years 1997 and 1996. 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 subsidiaries 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 24 months carried a backlog of $5,300,000 into fiscal year 1999
of which $3,300,000 should represent fiscal year
5
1999 revenue. The Company had approximately $4,139,000 of monthly recurring
monitoring, service and rental revenue during June 1998, compared to
approximately $3,400,000 during June 1997.
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.
Because of the relatively immature state of the corrections
information management systems market, the current competition to BI's PREMIERTM
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, South Carolina and Florida. Currently,
there are more than 40 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
Some of the hardware products produced by the Company's Electronic
Monitoring Business Unit emit radio frequency energy and/or connect to the
telephone network. These products require approval by the Federal
Communications Commission (FCC) and safety approval by a nationally recognized
test laboratory (NRTL). The Company has received approvals by the FCC and an
NRTL for its products that are sold in the United States. It will be necessary
to obtain these approvals for future radio frequency and telecommunications
products. Approvals or waivers from certain foreign governments are also
required to export these products into those countries and the Company has
received these approvals or waivers. Approvals or waivers will be necessary for
future radio frequency and telecommunications products.
INSURANCE
The Company maintains general and professional liability insurance
coverage at $7,000,000 and $5,000,000, 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 seven foreign patents pending. These patents expire between
2001 and 2011. The Company licenses proprietary voice verification technology
exclusively for its home arrest product. All required licenses associated with
fiscal year 1998 usage were purchased in advance. The Company entered into two
license agreements during fiscal year 1998 involving exclusive rights to certain
tracking technologies related to the criminal justice market. 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, 1998, the Company had 613 full-time employees and 211
part-time or temporary employees, none of whom were represented by a union. Of
these 824 employees, 371 were electronic monitoring staff, 380 community
correctional services employees, 31 corrections information services personnel
and 42 corporate staff. Management believes that its relations with its
employees are good.
EXECUTIVE OFFICERS OF THE COMPANY
At June 30, 1998 the executive officers of the Company were as follows:
- ------------------------------------ ----------- ----------------------------------------------------
Name Age Position
- ------------------------------------ ----------- ----------------------------------------------------
David J. Hunter 53 President and Chief Executive Officer
- -------------------------------------------------------------------------------------------------------
Mckinley C. Edwards, Jr. 56 Executive Vice President and Chief Operating
Officer, Secretary and Treasurer
- -------------------------------------------------------------------------------------------------------
Jacqueline A. Chamberlin 43 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. In April 1985 he was promoted to Executive Vice President of
Operations was elected as Treasurer and Secretary in June 1986 and was elected
to the Board of Directors in 1990.
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 62 other locations for a
total of approximately 129,000 square feet. These facilities are associated
with its day reporting and probation services and are located in Georgia,
Tennessee, Colorado, New Mexico, South Carolina, Oregon, Florida, Illinois, New
Jersey and Washington.
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 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 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.
On January 29, 1998, a settlement was reached concerning a complaint
filed by Jeremy Cohlhepp on October 29, 1996. The settlement amount was
immaterial and within insurance coverage limits.
On February 6, 1998, Bill M. Kirby filed a complaint naming BI
Incorporated as the defendant. The suit alleges negligence and
misrepresentation resulting in a wrongful death. The plaintiff seeks damages of
$3,977,500.
On March 12, 1998, Arturo Marines filed a complaint naming the State
of Texas Board of Pardons and Paroles and BI Incorporated as defendants. The
civil suit was filed for product liability, and misrepresentation, breach of
warranty, and general negligence. The plaintiff seeks $250 million in damages.
On April 6, 1998, Joyce Cerda filed a complaint naming BI Incorporated
as the defendant in the Court of Cook County. The suit was filed for product
liability and negligence. The plaintiff seeks medical and funeral expenses in
excess of $150,000.
On July 20, 1998, Joseph Gill Sr. filed a complaint naming Rudolph
McGriff, City of Philadelphia and BI Incorporated as defendants in the Court of
Common Pleas in Philadelphia County,
8
Pennsylvania. The suit brings two counts, a survival action and a wrongful death
action, and asks for damages in excess of $100,000.
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 allegedly 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 and was therefore unmarketable. 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 and intends to defend against this action. The matter is presently in
discovery.
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.
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,
1998
- -------------------------------------------------------------------------------------------------
High Low
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
First Quarter $ 9.13 $ 6.38
- -------------------------------------------------------------------------------------------------
Second Quarter 9.25 6.75
- -------------------------------------------------------------------------------------------------
Third Quarter 12.75 8.75
- -------------------------------------------------------------------------------------------------
Fourth Quarter 11.88 9.00
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
1997
- -------------------------------------------------------------------------------------------------
First Quarter $14.00 $ 6.00
- -------------------------------------------------------------------------------------------------
Second Quarter 8.25 6.13
- -------------------------------------------------------------------------------------------------
Third Quarter 7.88 6.50
- -------------------------------------------------------------------------------------------------
Fourth Quarter 8.00 5.88
=================================================================================================
As of June 30, 1998, there were approximately 4,500 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 CONSOLIDATED FINANCIAL DATA.
The following selected Consolidated Statement of Operations data and
Consolidated Balance Sheet data have been derived from the Consolidated
Financial Statements of the Company. The financial data set forth below should
be read in conjunction with the Consolidated Financial Statements and notes
thereto and Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations and other financial information included elsewhere in
this Annual Report on Form 10-k. Historical results are not necessarily
indicative of results for any future period.
Year Ended June 30,
------------------------------------------------
1998 1997 (2) 1996 1995 1994
------------------------------------------------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Total revenue $62,001 $48,401 $39,212 $29,874 $22,701
Cost of operations 30,938 23,461 19,200 13,788 10,645
------- ------- ------- ------- -------
Gross profit 31,063 24,940 20,012 16,086 12,056
Selling, general and
administrative expenses 18,186 14,672 10,916 8,873 8,494
Provision for doubtful accounts 1,806 1,732 228 374 60
Depreciation and amortization 3,224 2,241 1,395 1,250 1,233
Research and development expenses 3,034 3,002 2,661 2,117 1,553
Income before income
taxes and extraordinary item 4,813 3,293 4,812 3,472 716
Income tax provision (2,142) (1,460) (1,949) (1,150)(1) (352)
------- ------- ------- ------- -------
Income before extra-
ordinary item 2,671 1,833 2,863 2,322 364
Cumulative effect on prior years of change
in method of accounting for income taxes 75
------- ------- ------- ------- -------
Net income $ 2,671 $ 1,833 $ 2,863 $ 2,322 $ 439
======= ======= ======= ======= =======
Diluted earnings per share $ .34 $ .25 $ .40 $ .34 $ .06
======= ======= ======= ======= =======
Weighted average number of outstanding
common shares - diluted 7,841 7,451 7,160 6,883 7,227
======= ======= ======= ======= =======
BALANCE SHEET DATA:
Working capital 14,825 14,541 $18,172 $12,938 $11,709
Total assets 61,989 55,421 42,820 36,881 36,871
Long-term debt, net of current
maturities (excludes Capital Lease) 0 0 0 146 209
Total stockholders' equity 44,907 40,620 37,206 32,332 32,186
(1) Fiscal year 1995 tax expense was reduced by $225,000 ($.03 per share) by
the release of a deferred tax asset valuation allowance.
(2) 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; the inability of the Company or
others upon which it depends to adequately address and correct problems
resulting from "Year 2000" issue; or the loss of a significant contract through
lack of appropriations or otherwise.
RESULTS OF OPERATIONS:
The following tables provide a breakdown of selected results by Business
Unit. The total amounts are audited and agree with the audited Consolidated
Statement of Operations. The Company's Business Units consist of Electronic
Monitoring (EM), Community Correctional Services (CCS) and Corrections
Information Systems (CIS).
Twelve Months Ended June 30, 1998
----------------------------------------------------------------------------------------
EM CCS CIS Total
----------------------------------------------------------------------------------------
Revenue (unaudited, in thousands)
Recurring Revenue
Service & Monitoring $26,848 $16,688 $ 180 $43,716
Rental 742 742
Direct Sales 13,822 3,195 17,017
Other Income 526 526
----------------------------------------------------------------------------------------
Total Revenue 41,938 16,688 3,375 62,001
Gross Profit 23,729 6,232 1,102 31,063
Gross Profit % 56.6% 37.3% 32.7% 50.1%
Twelve Months Ended June 30, 1997
----------------------------------------------------------------------------------------
EM CCS CIS Total
----------------------------------------------------------------------------------------
Revenue (unaudited, in thousands)
Recurring Revenue
Service & Monitoring $22,551 $10,413 $ 197 $33,161
Rental 1,008 1,008
Direct Sales 12,750 1,211 13,961
Other Income 271 271
----------------------------------------------------------------------------------------
Total Revenue 36,580 10,413 1,408 48,401
Gross Profit 19,975 4,972 (7) 24,940
Gross Profit % 54.6% 47.7% (0.5)% 51.5%
12
Twelve Months Ended June 30, 1996
--------------------------------------------------------------------------------------
EM CCS CIS Total
--------------------------------------------------------------------------------------
Revenue (unaudited, in thousands)
Recurring Revenue
Service & Monitoring $21,357 $21,357
Rental 832 832
Direct Sales 15,094 $ 1,522 16,616
Other Income 407 407
--------------------------------------------------------------------------------------
Total Revenue 37,690 1,522 39,212
Gross Profit 20,264 (252) 20,012
Gross Profit % 53.8% (16.6)% 51.0%
Revenue
Total revenue for fiscal year 1998 increased 28.1% to $62,001,000 compared
to $48,401,000 in fiscal year 1997. The Company is continuing to expand
recurring revenue which includes service, monitoring and rental income although
there can be no assurances that the Company will be successful in continuing
this expansion. These revenue sources, which are generated within all three
business units increased to $44,458,000 or 71.7% of total revenue in fiscal 1998
from $34,169,000 or 70.6% of total revenue in fiscal 1997. All three business
units reported revenue increases for fiscal 1998 as compared to fiscal 1997.
The EM business unit revenue increased 14.6% to $41,938,000 in fiscal 1998
compared to $36,580,000 in fiscal 1997. Some government agencies purchase
equipment and run their own monitoring programs, others elect to utilize both
monitoring equipment and services offered by the Company, while other agencies
purchase equipment from the Company and then contract with the Company for the
service portion of the monitoring. Recurring revenue which is comprised of
electronic monitoring and rental income increased 17.1% to $27,590,000 in fiscal
1998 from $23,559,000 in fiscal 1997. This increase in recurring revenue
relates to the continuing trend of government agencies to contract for
electronic monitoring rather than purchasing equipment. During the current year
the Company was awarded a renewal of a significant monitoring contract
representing 26% of fiscal 1998 monitoring revenue. Direct sales revenue
increased to $13,822,000 in fiscal 1998 from $12,750,000 in fiscal 1997.
The CCS business unit recurring revenue increased $6,275,000 or 60.3% to
$16,688,000 in fiscal 1998 compared to $10,413,000 in fiscal 1997. CCS provides
probation and day reporting services in 12 states through its 65 community
correctional service centers. During fiscal 1998 CCS opened 12 new centers and
increased the number of offenders receiving services from approximately 35,000
to approximately 40,000. During fiscal 1997 the Company acquired two companies
providing probation and day reporting services, discussed in Note six to the
consolidated financial statements. These acquisitions accounted for $15,167,000
of revenue in fiscal 1998. Fiscal 1997 acquisition revenue was generated
through nine months of revenue from probation services and five months of
revenue from day reporting services totaling $9,082,000. The Company
anticipates continued revenue growth in this business unit for fiscal year 1999.
The CIS business unit significantly increased revenue by 139.7% to
$3,375,000 in fiscal 1998 compared to $1,408,000 in fiscal 1997. Direct sales
revenue associated with the Institutional Management System (IMS) applications
software product increased to $3,195,000 in fiscal 1998 from $1,211,000 in
fiscal 1997. The CIS business unit has contracts lasting from one month to
approximately twenty four months in duration. This substantial increase in
revenue is a direct result of the significant increase in new contracts awarded
which is reflected in the $5,300,000 of backlog as of the end of fiscal year
1998.
13
Total revenue increased 23.4% to $48,401,000 in fiscal 1997 from
$39,212,000 in fiscal 1996. Direct sales decreased $2,655,000 or 16.0% to
$13,961,000 in fiscal 1997 compared to $16,616,000 in fiscal 1996. This decrease
was due to a change in market strategy emphasizing recurring revenue. Service,
monitoring and rental income increased to $34,169,000 in fiscal year 1997 or
54.0% over the $22,189,000 in fiscal 1996. This increase relates largely to two
acquisitions in the CCS business unit during fiscal 1997, discussed in Note six
to the consolidated financial statements.
Gross Profit
Total gross profit as a percentage of total revenue for fiscal year 1998
decreased to 50.1% or $31,063,000 compared to 51.5% or $24,940,000 in fiscal
year 1997. The decline in overall gross profit reflects the increasing
significance of the CCS business unit. Probation and day reporting services
offered through the CCS business unit require relatively high direct labor costs
which are recognized as direct costs of sales which reduce gross profit.
The EM business unit increased its total gross profit to 56.6% or
$23,729,000 in fiscal 1998 compared to 54.6% or $19,975,000 in fiscal 1997. This
increase was due to a substantial improvement in gross profits on direct sales
revenue. Direct sales gross profit increased to 56.9% in fiscal 1998 compared to
51.9% in fiscal 1997 as a result of manufacturing cost improvements and
favorable production variances during fiscal 1998. EM recurring revenue gross
profit was comparable in both periods at approximately 55%.
The CCS business unit had a decrease in its gross profit to 37.3% for
fiscal year 1998 compared to 47.7% in fiscal 1997. The 1998 decrease was due to
additional integration costs incurred in fiscal 1998 associated with the
probation and day reporting service acquisitions in fiscal 1997 discussed in
Note six to the consolidated financial statements, as well as start up expenses
associated with opening 12 new probation and day reporting service offices in
the southeast, central and northwest regions. In addition, the 1998 decrease was
partially due to the acquisition of the day reporting company in January 1997
which provides services in Colorado, New Mexico, Illinois and Oregon. This
acquisition affected gross profits for five months of fiscal 1997 and for twelve
months of fiscal 1998. Day reporting services require relatively high direct
labor costs which are recognized as direct costs of sales which reduce gross
profit. The Company expects cost reductions and improved operating efficiencies
to increase the CCS gross profit percentage over time.
The CIS business unit improved its gross profit substantially to 32.7% in
fiscal 1998 compared to (0.5)% in fiscal 1997. This improvement is a result of
continued cost reductions and increased order volume. Increased revenue along
with the completion of the open system architecture in fiscal 1998 is expected
to improve the CIS gross profit percentage over time.
Total gross profit as a percentage of total revenue increased to 51.5% in
fiscal 1997 compared to 51.0% in fiscal 1996. Gross profit on direct sales was
47.6% in fiscal 1997 compared to 48.4% in fiscal 1996. The IMS product line
included in direct sales, as a result of cost reductions, improved its gross
profit to a slightly profitable position in fiscal 1997 as compared to a
negative gross profit in fiscal 1996. Service, monitoring and rental gross
profit increased to 52.8% in fiscal 1997 compared to 52.1% in fiscal 1996.
Higher service usage rates, and lower costs related to monitoring labor and
telephone expenses resulted in improved margins for electronic monitoring in
fiscal 1997.
Selling, General and Administrative (S,G&A)
S,G&A expenses for the fiscal year 1998 increased $3,514,000 to $18,186,000
compared to $14,672,000 in the corresponding period a year ago. S,G&A expense as
a percentage of total revenue decreased to 29.3% in fiscal 1998 compared to
30.3% in fiscal 1997. The Company expects S,G&A expenses for fiscal year 1999 to
decrease slightly as a percentage of total revenue as compared to fiscal year
1998.
14
The EM business unit increased its S,G&A expenses $1,259,000 in fiscal 1998
resulting in expenses of 29.6% of EM revenue in fiscal 1998 compared to 30.5% in
fiscal 1997. This increase is related to market expansion and diversification as
well as increases in account management and technical services related to
increasing customer satisfaction and growth of existing customer sites. The
Company expects to increase marketing expenses associated with continuing market
expansion activities throughout fiscal year 1999.
The CCS business unit increased its S,G&A expenses $1,697,000 in fiscal
1998 as compared to fiscal 1997 resulting in expenses of 27.0% of CCS revenue in
fiscal 1998 compared to 26.9% in fiscal 1997 as a result investments in
infrastructure and staffing to support the growth of the business unit.
The CIS business unit increased its S,G&A expenses $558,000 in fiscal 1998
but as a result of a significant increase in revenue decreased expenses to 37.9%
of CIS revenue in fiscal 1998 compared to 51.2% in fiscal 1997. This increase
was associated with infrastructure costs necessary to manage deployment and
implementation of existing contracts.
S,G&A expenses increased to $14,672,000, or 30.3% of revenue in 1997 from
$10,916,000, or 27.8% of revenue in 1996. The increase of $3,756,000 was largely
related to expenses associated with selling, marketing, account management and
commission expense on increased revenue, as well as market expansion and
diversification expenses. 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 the
acquisitions discussed in Note six of the consolidated financial statements.
Provision for Doubtful Accounts
The provision for doubtful accounts was $1,806,000 or 2.9% of total revenue
in fiscal 1998 compared to $1,732,000 or 3.6% of total revenue in fiscal 1997.
The provision relates largely to the Company's CCS business unit. Probation
service revenue is 100% paid by the offender and carries an increased risk of
default. Day reporting revenue for fiscal 1998 was 24.5% paid by the offender
and the remaining paid by government agencies. The Company has initiated
collection activities that have improved its collection results. The Company
accrued approximately 10% of CCS revenue to allowance for doubtful accounts
during 1998 compared to approximately 13% in 1997. The Company is implementing
additional collection procedures to reduce payment defaults within the CCS
business unit. The Company believes the industry average payment default
associated with similar for-profit companies is approximately 20%. The EM
business unit decreased doubtful account expenses by $185,000 in fiscal 1998
compared to fiscal 1997 due to emphasizing collection improvements.
The provision for doubtful accounts increased $1,504,000 to $1,732,000 in
fiscal 1997 from $228,000 in fiscal 1996. This increase relates largely to the
Company's new probation service income during 1997. In 1996, revenue was
generated by either government agencies or qualified service providers, both of
which carried extremely low risk of payment default. Probation service income is
100% paid by offenders and carries a higher risk of default. In response to this
the Company accrued approximately 13% of CCS revenue to allowance for doubtful
accounts.
Amortization and Depreciation (A&D)
A&D expenses increased $983,000 to $3,224,000 or 5.2% of revenue in fiscal
1998 from $2,241,000 or 4.6% of revenue in fiscal 1997. Approximately $150,000
was due to a full year of amortization of acquisition goodwill in fiscal 1998
compared to a partial year of amortization in fiscal 1997, see Note six of the
consolidated financial statements. The remaining increase was due primarily to
additions to property, plant and equipment during 1998.
15
A&D expenses increased $846,000 to $2,241,000 in 1997 from $1,395,000 in
1996. The increase was due primarily to additions to property, plant and
equipment and the amortization of acquisition goodwill discussed in Note six of
the consolidated financial statements.
Research and Development Expenses (R&D)
R&D expenses increased $32,000 to $3,034,000 in 1998 from $3,002,000 in
1997. The Company's R&D expenditures were largely related to EM business unit
expenses associated with software development efforts for improved automation to
the Company's electronic monitoring centers, and the evaluation and 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 1999. As a percentage of EM revenue EM
business unit R&D expense was 5.8% in fiscal 1998 compared to 6.9% in fiscal
1997.
R&D expenses increased to $3,002,000 in 1997 from $2,661,000 in 1996. 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 $2,142,000 and $1,460,000 for
1998 and 1997 respectively, which differs from the statutory rate largely as a
result of state income taxes and non-deductible goodwill amortization expense.
For fiscal 1998, the Company had net income of $2,671,000 or $.34 diluted
earnings per share compared to fiscal 1997 net income of $1,833,000 or $.25
diluted earnings per share. The changes in net income relate primarily to the
items discussed above.
Impact of Year 2000 Issues
The Year 2000 issue is related to computer software utilizing two digits
rather than four to define the appropriate year. As a result, any of the
Company's computer programs or any of the Company's suppliers or vendors that
have date sensitive software may incur system failures or generate incorrect
data if "00" is recognized as 1900 rather than 2000.
The Company has been addressing Year 2000 issues throughout fiscal year
1998 and has modified or is in the process of modifying any products or services
that are affected by Year 2000 issues. The Company has a formal comprehensive
Year 2000 readiness plan in place and under the oversight of executive
management. The Company estimates that approximately $100,000 of costs have been
incurred and expensed in fiscal year 1998 related to addressing Year 2000
events. It is estimated that another $200,000 to $300,000 of costs will be
incurred during fiscal year 1999 related to completion of the Year 2000
readiness plan. Approximately two-thirds of this amount will be related to fixed
asset additions for new computer related equipment. The remaining one-third will
be expensed as incurred.
The Company's greatest risk for a material disruption in services lies in a
potential disruption of telecommunication services due to an external
telecommunication service provider's failure to be Year 2000 compliant and the
resulting impact upon the Company's monitoring services. The Company has
contacted and obtained assurances from some of its telecommunications providers,
MCI, AT&T and WorldCom that their
16
networks are Year 2000 compliant. The Company is currently seeking similar
assurances from Sprint, US West, Ameritech and a few smaller regional providers.
BI has a redundant monitoring system that would allow the eastern monitoring
center to process alerts if for any reason the western monitoring center was to
go down, or vice versa. In addition, the Company has backup telecommunication
provider connectivity if for any reason the primary carrier has a disruption in
service.
The Company has been in the process throughout fiscal year 1998 of
replacing its internal business and business unit operating computer systems.
These replacements were required to meet current and future needs of the
business as well as to reduce various administrative and operating functions.
These new systems are Year 2000 compliant and are scheduled for deployment in
fiscal year 1999. The systems have been independently verified and tested to be
Year 2000 compliant.
The Company believes that based upon changes and modifications already made
and those that are currently planned for implementation in fiscal year 1999 the
impact of Year 2000 issues will not be material. However, to the extent the
Company or third parties on which it relies do not timely achieve Year 2000
readiness, the Company's results of operations may be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, the Company generated $7,399,000 of cash from operating
activities, realized $450,000 through the liquidation of short-term investments,
received $1,343,000 from the issuance of common stock associated with the
exercise of stock options, expended $5,032,000 for capital equipment and
leasehold improvements, expended $3,176,000 for equipment associated with rental
and monitoring contracts, and expended $826,000 for capitalized internally
developed software. The total of all cash flow activities resulted in a decrease
in the balance of cash and cash equivalents of $548,000 for fiscal 1998.
The Company's working capital increased $284,000 to $14,825,000 at June 30,
1998. This increase was primarily the result of increases in accounts receivable
as a result of increased sales volume in fiscal 1998 and investment in sales-
type leases. The Company is emphasizing improved collections across all business
units and expects to reduce its past due receivables in fiscal year 1999 as
compared to fiscal 1998. During fiscal 1998 direct sales customers have
increasingly requested and obtained financing through the Company in the form of
sales-type leases. Investment in lease financing has increased $1,109,000 during
fiscal 1998. Such lease financing carries a low risk of default and is at
favorable interest rates to the Company.
The Company has an available $5,000,000 line of credit with Bank One,
Boulder, Colorado which expires in October 1999. No amounts were drawn against
this line at June 30, 1998.
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, 1998, the Company had unfunded leases in the amount of
$7,866,000 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 1999.
New Accounting Pronouncements
17
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 130 (SFAS 130), Reporting
Comprehensive Income. SFAS 130 establishes standards for the reporting and
presentation of comprehensive income and its components in a full set of general
purpose financial statements. SFAS 130 requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. The Company will adopt SFAS 130 in 1999 and
does not expect such adoption to have a material impact on the Company's results
of operations.
In June 1997, the FASB issued SFAS 131, Disclosure about Segments of an
Enterprise and Related Information. SFAS 131 revises the current requirements
for reporting business segments by redefining such segments according to
management's disaggregation of the business for purposes of making operating
decisions and allocating internal resources. SFAS 131 is effective for fiscal
years beginning after December 15, 1997, and the Company will adopt SFAS 131 in
1999.
In October 1997, the FASB approved AICPA Statement of Position (SOP) 97-2,
Software Revenue Recognition and the subsequent amendment thereto. SOP 97-2
supersedes SOP 91-1, Software Revenue Recognition and is effective for
transactions entered into in fiscal years beginning after December 15, 1997. The
Company will adopt SOP 97-2 in 1999 and does not expect such adoption to have a
material impact on its financial position or results of operations.
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-18 of this report.
Schedule II is included on page F-19. 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.
18
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 5, 1998.
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements
Report of Independent Accountants
Consolidated Balance Sheet at June 30, 1998 and 1997
Consolidated Statement of Operations for each of the three years
in the period ended June 30, 1998
Consolidated Statement of Changes in Stockholders' Equity for
each of the three years in the period ended June 30, 1998
Consolidated Statement of Cash Flows for each of the three years
in the period ended June 30, 1998
Notes to Consolidated Financial Statements
2. Consolidated 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 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.
4.3 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.
19
4.4 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.
4.5 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.
4.6 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.
*4.7 Property lease between the Company and Terrence J. O'Connor
(landlord) dated May 15, 1990 with Addendum's dated February 9, 1996
and October 10, 1996 concerning building located at 6400 Lookout
Road, Boulder, Colorado, 80301.
*4.8 Property leases between the Company and Point II, LLC (landlord)
concerning building located at 6325 Gunpark Drive, Boulder, Colorado,
80301 dated February 9, 1996 with Addendum's dated June 13, 1996 and
February 26, 1997 and lease dated February 21, 1997.
10.2 Form of Employment Agreement, previously filed with the Commission as
an exhibit to 1994 Form 10-K and incorporated by reference.
21.1 Subsidiaries of the Registrant
*23.1 Consent of PricewaterhouseCoopers LLP
*27.1 Financial Data Schedules
* Filed herewith
IN THE EVENT THAT YOU HAVE RECEIVED A COPY OF THIS ANNUAL REPORT ON FORM 10-K
WHICH DOES NOT CONTAIN EXHIBITS, THE COMPANY WILL, UPON WRITTEN REQUEST DIRECTED
TO JACKIE CHAMBERLIN AT THE COMPANY'S PRINCIPAL OFFICES REFERRED TO ON THE 10-K
COVER PAGE, PROVIDE A COPY OF ANY EXHIBIT FILED AS PART OF THIS REPORT UPON
PAYMENT OF A REASONABLE FEE.
(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.
20
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: ______________________
David J. Hunter
President
Date: , 1998
-----------------
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
- --------- ----- ----
- ------------------------
David J. Hunter President, Chief Executive
Officer and Director
(Principal Executive Officer) ___________, 1998
- ------------------------
Jacqueline A. Chamberlin Vice President of Finance
(Principal Financial and
Accounting Officer) ___________, 1998
- ------------------------
Jeremy N. Kendall Chairman ___________, 1998
- ------------------------
William E. Coleman Vice Chairman ___________, 1998
- ------------------------
Mckinley C. Edwards, Jr. Director ___________, 1998
- ------------------------
Beverly J. Haddon Director ___________, 1998
- ------------------------
Perry M. Johnson Director ___________, 1998
- ------------------------
Barry J. Nidorf Director ___________, 1998
- ------------------------
Byam K. Stevens, Jr. Director ___________, 1998
21
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. ON PAGE 19 PRESENT FAIRLY, IN ALL MATERIAL
RESPECTS, THE FINANCIAL POSITION OF BI INCORPORATED AND ITS SUBSIDIARIES AT JUNE
30, 1998 AND 1997, AND THE RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS FOR
EACH OF THE THREE YEARS IN THE PERIOD ENDED JUNE 30, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
BROOMFIELD, COLORADO
August 14, 1998
F-1
BI INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands)
June 30, June 30,
1998 1997
------------------------- -------------------------
ASSETS
Current assets
Cash and cash equivalents $ 1,146 $ 1,694
Short-term investments 0 450
Receivables, net 12,188 8,647
Investment in sales-type leases, net 4,337 3,993
Inventories, net 3,393 3,861
Deferred income taxes 751 779
Prepaid expenses 866 665
------- -------
Total current assets 22,681 20,089
Investment in sales-type leases, net 3,529 2,764
Rental and monitoring equipment, net 4,872 4,366
Property and equipment, net 13,250 10,667
Software, net 2,282 1,987
Intangibles, net 12,047 12,908
Other assets 3,328 2,640
------- -------
$61,989 $55,421
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,163 $ 1,836
Accrued compensation and benefits 1,940 1,409
Deferred revenue 1,647 1,362
Income taxes payable 347 404
Other liabilities 759 537
------- -------
Total current liabilities 7,856 5,548
Capital lease obligation 6,897 7,030
Deferred revenue and other 2,329 2,223
Commitments (Notes 7 and 10)
Stockholders' equity
Common stock, no par value, 75,000 shares authorized;
7,640 shares issued and outstanding June 30, 1998 and
7,417 shares issued and outstanding June 30, 1997 34,076 32,460
Retained earnings 10,831 8,160
------- -------
Total stockholders' equity 44,907 40,620
------- -------
$61,989 $55,421
======= =======
The accompanying notes are an integral
part of these consolidated financial statements.
F-2
BI INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
Year ended June 30,
-----------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------
Revenues
Service and monitoring income $43,716 $33,161 $21,357
Direct sales 17,017 13,961 16,616
Rental income 742 1,008 832
Other income 526 271 407
------- ------- -------
Total revenues 62,001 48,401 39,212
------- ------- -------
Costs and expenses
Cost of service and monitoring income 22,616 15,859 10,338
Cost of direct sales 8,101 7,320 8,570
Cost of rental income 221 282 292
Selling, general and administrative expenses 18,186 14,672 10,916
Provision for doubtful accounts 1,806 1,732 228
Amortization and depreciation 3,224 2,241 1,395
Research and development expenses 3,034 3,002 2,661
------- ------- -------
Total costs and expenses 57,188 45,108 34,400
------- ------- -------
Income before income taxes 4,813 3,293 4,812
Income tax provision (2,142) (1,460) (1,949)
------- ------- -------
Net income $ 2,671 $ 1,833 $ 2,863
======= ======= =======
Basic earnings per share $0.36 $0.25 $0.42
======= ======= =======
Weighted average number of outstanding common
shares - basic 7,506 7,252 6,781
======= ======= =======
Diluted earnings per share $0.34 $0.25 $0.40
======= ======= =======
Weighted average number of outstanding common
and common equivalent shares - diluted 7,841 7,451 7,160
======= ======= =======
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
BI INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Common Stock Treasury Stock Retained
-------------------------------------------------------
Shares Amount Shares Amount Earnings Total
----------------------------------------------------------------------------------
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
acquisition 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
Exercise of stock options 202 1,198 1,198
Issuance of common stock pursuant
to stock purchase plan 21 145 145
Tax benefit from exercise of
stock options 273 273
Net income 2,671 2,671
------ ------ ------ ------ ------- -------
Balance June 30, 1998 7,640 $34,076 0 $ 0 $10,831 $44,907
====== ====== ====== ====== ======= =======
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
BI INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
For the twelve months
ended June 30,
----------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,671 $ 1,833 $ 2,863
Adjustments to reconcile net income to net cash from
operating activities:
Amortization and depreciation 7,133 6,668 5,716
Provision for doubtful accounts 1,806 1,732 228
Provision for (benefit from) deferred income taxes (575) (414) 311
Changes in assets and liabilities:
Receivables (5,347) (830) (3,100)
Investment in STLs (1,109) 1,034 (1,795)
Inventories, net 468 (841) 425
Accounts payable 1,327 (80) 1,079
Accrued expenses 703 (762) 265
Deferred revenue 459 (245) (3)
Income taxes payable 217 587 657
Prepaids and other assets (354) 370 (55)
------- -------- -------
Net cash from operating activities 7,399 9,052 6,591
------- -------- -------
Cash flows from investing activities:
Capital expenditures (5,032) (2,522) (1,695)
Increase in rental and monitoring equipment (3,176) (2,905) (2,761)
Increase in capitalized software (826) (837) (696)
Investment in intangibles (623) (309) 0
Cash paid for acquisitions net of cash acquired 0 (4,234) 0
Change in short-term investments 450 649 (723)
Other 0 (152) (35)
------- -------- -------
Net cash used in investing activities (9,207) (10,310) (5,910)
------- -------- -------
Cash flows from financing activities:
Payments on capital lease obligation (83) (28) 0
Proceeds from issuance of common stock 1,343 1,276 2,196
Purchase of common stock 0 (2,559) (972)
------- -------- -------
Net cash from (used in) financing activities 1,260 (1,311) 1,224
------- -------- -------
Net change in cash and cash equivalents (548) (2,569) 1,905
Cash and cash equivalents at beginning of period 1,694 4,263 2,358
------- -------- -------
Cash and cash equivalents at end of period $ 1,146 $ 1,694 $ 4,263
======= ======== =======
The accompanying notes are an integral
part of these consolidated 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.
Intangibles, Property and Equipment
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. Acquired manufacturing technology is amortized over the
greater of the units of production method or five years, on a straight-line
basis. Amortization related to goodwill, patents and the manufacturing
technology was $1,484,000, $1,364,000, and $1,082,000 in fiscal 1998, 1997, and
1996, respectively. Accumulated amortization of goodwill, patents and the
manufacturing technology was $6,884,000 and $5,400,000 at June 30, 1998 and
1997, respectively.
F-6
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 $2,647,000 and $2,333,000 as of 1998 and 1997, 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 five years. During all periods
presented herein, the Company has used the straight-line method to amortize such
capitalized costs. Amortization of software costs was $531,000, $756,000 and
$794,000 in 1998, 1997 and 1996, 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:
1998 1997 1996
---------- -------- ----------
Interest received $ 601,000 $711,000 $ 718,000
Interest paid 602,000 393,000 4,000
Income taxes paid 2,230,000 644,000 1,177,000
Interest received from STLs is presented on a constructive
receipt basis.
Supplemental Schedule of Noncash Investing and Financing Activities:
1998 1997 1996
----- ---------- -----
Stock issued for acquired
companies $ 0 $2,681,000 $ 0
Obligation under capital
lease 0 7,140,000 0
F-7
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Service and monitoring income is recognized 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 as the services are
provided. Where extended warranties are sold together with other products in a
sales-type lease transaction, related revenues are deferred and recognized
ratably over the term of the extended warranty. Costs associated with standard
one-year warranties are estimated and accrued at the time of sale.
Net Income Per Share
Earnings Per Share ("EPS") is computed in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which
specifies the computation, presentation, and disclosure requirements for EPS.
SFAS 128 replaces the presentation of primary and fully diluted EPS with basic
and diluted EPS. Basic EPS excludes all dilution and is based upon the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Common equivalent shares are excluded in periods in which they have an anti-
dilutive effect. The Company has adopted SFAS 128 for 1998 and has restated all
previously reported per share amounts to conform to the new presentation. For
the periods presented the primary difference between weighted average shares
outstanding - basic and weighted average shares outstanding - diluted is
attributable to outstanding options to purchase common stock.
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.
Recent Accounting Pronouncements
The Company has determined that the adoption of recently issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," No. 131, "Disclosures about Segments of an Enterprise and Related
Information" and SOP 97-2, "Software Revenue Recognition," will not have a
material impact on its financial condition or results of operations. SOP 97-2
and SFAS Nos. 130 and 131 are effective for fiscal 1999.
F-8
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company sold products to JEMTEC, Inc. for $75,000, $551,000 and
$435,000 during 1998, 1997 and 1996, 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 10% of total revenue in 1998, 12% of total
revenue in 1997, and 12% of total revenue in 1996.
Receivables
Receivables consist of the following (in thousands):
June 30,
1998 1997
--------------------------
Trade, net of allowance for doubtful accounts
of $1,316 in 1998 and $1,760 in 1997 $12,145 $8,624
Due from officers and employees 43 23
--------------------------
$12,188 $8,647
==========================
Net investment in sales-type leases
The components of net investment in sales-type leases are as follows (in
thousands):
June 30,
1998 1997
----------------------------
Total minimum lease payments $ 8,530 $ 7,335
Less: Unearned income (664) (577)
Less: Allowance for doubtful accounts 0 (1)
----------------------------
Net investment 7,866 6,757
Less: Current portion (4,337) (3,993)
----------------------------
Long-term portion $ 3,529 $ 2,764
============================
Future minimum lease payments to be received under sales-type leases at
June 30, 1998 are $4,772,000, $2,616,000, $1,107,000 and $35,503 in fiscal 1999,
2000, 2001 and 2002, respectively.
F-9
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1998 1997
-------------------------
Raw materials $2,223 $1,682
Work-in-process 588 1,363
Finished goods 902 1,058
-------------------------
3,713 4,103
Less: allowance for obsolescence (320) (242)
-------------------------
$3,393 $3,861
=========================
NOTE 5 - EQUIPMENT AND INTANGIBLES
Rental and Monitoring Equipment
Rental and monitoring equipment consist of the following (in thousands):
June 30,
1998 1997
---------------------------
Rental equipment $ 1,376 $ 1,173
Monitoring equipment 16,257 13,359
---------------------------
17,633 14,532
Less: accumulated depreciation (12,761) (10,166)
---------------------------
$ 4,872 $ 4,366
===========================
F-10
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment consist of the following (in thousands):
June 30,
1998 1997
----------------------
Property and equipment $22,565 $17,683
Less: accumulated depreciation and amortization (9,315) (7,016)
----------------------
$13,250 $10,667
======================
Intangibles
Intangibles consist of the following (in thousands):
June 30,
1998 1997
-----------------------
Goodwill $14,258 $13,945
Patents 1,673 1,363
Manufacturing technology 3,000 3,000
-----------------------
18,931 18,308
Less: accumulated amortization (6,884) (5,400)
-----------------------
$12,047 $12,908
=======================
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
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 of CCC 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
CCC 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.
F-11
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition of PCI 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
PCI have been included in the results of operations since February 1, 1997.
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, (8.5% at June 30, 1998) expiring in October
1999. At June 30, 1998, 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.
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,
1998:
Year ending June 30 (in thousands):
1999 $ 726
2000 762
2001 800
2002 840
2003 882
Thereafter 7,963
-------
Total minimum lease payments 11,973
Less amount representing interest (4,945)
-------
Present value of net minimum
lease payments $ 7,028
=======
The Company leases office space and certain equipment under operating
leases. Rental expense was $933,000, $683,000 and $476,000 for fiscal 1998,
1997 and 1996, 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, 1998 are as follows:
Year ending June 30 (in thousands):
1999 $1,272
2000 989
2001 672
2002 321
2003 142
------
Total minimum payments required $3,396
======
F-12
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES
The provision for income taxes is comprised of the following (in
thousands):
1998 1997 1996
---------------------------------------
Current provision
Federal $2,065 $1,574 $1,342
State 434 300 296
Foreign 218 0 0
Deferred provision/
(benefit)
Federal (522) (349) 262
State (53) (65) 49
---------------------------------------
$ 2,142 $ 1,460 $1,949
=======================================
A reconciliation of the effective tax rate to the statutory rate is as
follows:
1998 1997 1996
---------------------------------
Expected statutory rate 34% 34% 34%
State taxes 5% 5% 5%
Goodwill amortization 6% 7% 3%
Tax exempt interest on STL's (2)% (4)% (2)%
Increase of valuation allowance 4% 0% 0%
Other (2)% 2% 1%
---------------------------------
45% 44% 41%
=================================
F-13
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant components of the Company's deferred income tax assets and
liabilities for fiscal 1998 and 1997 were as follows (in thousands):
1998 1997
------------------------
Deferred tax assets:
Tax credit carryforwards $ 208 $ 0
Accrued liabilities 189 89
Depreciation and amortization 1,513 1,352
Bad debt 431 710
Accrued rent 239 96
Maintenance - unearned revenue 120 0
Other 353 114
------------------------
Total deferred tax asset 3,053 2,361
Less: valuation allowance (178) 0
------------------------
Net deferred tax asset 2,875 2,361
Deferred tax liabilities:
Deferred revenue (224) (119)
Capitalized software (662) (580)
Other (35) (283)
------------------------
Gross deferred tax liabilities (921) (982)
------------------------
Net deferred tax asset $1,954 $1,379
========================
NOTE 9 - EMPLOYEE BENEFIT PLANS AND OPTIONS
At June 30, 1998, 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 plans and its stock purchase
plans. Had compensation cost for the Company's two stock-based 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:
1998 1997 1996
-----------------------------------
Net income:
As reported $2,671 $1,833 $2,863
Pro forma 1,696 1,099 2,646
Net income per share - basic:
As reported .36 .25 .42
Pro forma .23 .15 .36
Net income per share - diluted:
As reported .34 .25 .40
Proforma .22 .15 .36
F-14
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 one 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.
On July 30, 1998, the Board of Directors approved, subject to shareholder
approval on November 5, 1998, an amendment of the 1996 Stock Option Plan to
increase the number of shares available for issuance by 400,000.
The fair value of each option 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 1998, 1997 and 1996, respectively: No
estimated dividends for all three years; expected volatility of 56.9% for 1998,
57.5% for 1997, and 46.4% for 1996; risk-free interest rates between 5.44% and
5.95% for 1998, 6.20% and 6.86% for 1997, and 6.20% and 6.48% for 1996; and
expected option terms between seven and ten years for both 1998 and 1997, and
seven years for 1996.
The following table summarizes option transactions under all five plans
during each of the three years in the period ended June 30, 1998 (in thousands):
Number of Weighted Average
Shares Exercise Price
---------------------------------------------------------------------
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
F-15
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------
Outstanding, June 30, 1997 1,359 6.34
Granted 278 8.29
Exercised (202) 5.94
Canceled (58) 6.70
---------------------------------------------------------------------
Outstanding, June 30, 1998 1,377 $6.78
=====================================================================
Options exercisable and the weighted average exercise price of these
options as of the end of the year were 716,000 and $6.17, 591,000 and $5.61, and
465,000 and $5.05, in 1998, 1997 and 1996, respectively. The weighted average
fair value of options granted during 1998, 1997 and 1996 were $5.41, $5.11 and
$3.77, respectively.
The following table summarizes information about fixed stock options
outstanding at June 30, 1998 (in thousands):
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 6/30/98 Contractual Life Exercise Price at 6/30/98 Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
$4.19-4.88 83 2.8 years $4.26 73 $4.27
$5.13 186 1.0 years $5.13 186 $5.13
$5.50-6.88 240 4.6 years $6.60 121 $6.54
$7.00-7.50 760 7.5 years $7.02 336 $7.00
$10.13-10.69 108 6.6 years $10.29 0 $0.00
----- ---
$4.19-10.69 1,377 716
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 21,000, 15,000 and 24,000 shares to employees in 1998,
1997 and 1996, 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 1998,
1997 and 1996: no estimated dividends; expected volatility of 28.6% and 29.2%,
27.3% and 72.0%, and 23.0% and 39.9%, respectively; risk free interest rates
between
F-16
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5.23% and 5.44% for 1998, 6.20% and 6.66% for 1997 and 5.63% and 6.83% for 1996;
and an expected life of six months 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 1998, 1997 and 1996 were $80,000, $66,000 and
$79,000, respectively.
NOTE 10 - LEGAL PROCEEDINGS
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 allegedly 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 and was therefore unmarketable. 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 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. The Company intends to defend against this action
vigorously. The matter is presently in discovery.
The Company is involved in five additional legal proceedings, one alleging
negligence in manufacturing, one alleging general negligence and
misrepresentation, one alleges misrepresentation, breech of warranty and general
negligence, another suit alleges negligence under product liability, and the
last suit alleges wrongful death from general negligence. One seeks damages of
$3,000,000, another seeks damages of $3,977,500, the third seeks $250 million in
damages, the fourth seeks damages in excess of $150,000, and the last seeks
damages in excess of $100,000. Management believes the Company has adequate
legal defenses and/or insurance coverage against all claims and intends to
defend them vigorously. 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 loss
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
F-17
BI INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 - SUBSEQUENT EVENT (UNAUDITED)
On August 25, 1998, the Company announced that it has engaged an investment
banker to attempt to sell its CIS business unit.
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following interim financial information presents the 1998 and 1997
results of operations on a quarterly basis (in thousands, except per share
amounts):
Fiscal quarters ended
9/30/97 12/31/97 3/31/98 6/30/98
----------------------------------------------
Total revenue $14,867 $14,942 $15,125 $17,067
----------------------------------------------
Gross profit 7,405 7,433 7,688 8,537
----------------------------------------------
Net income $428 $534 $731 $978
==============================================
Diluted earnings per share $0.06 $0.07 $0.09 $0.12
==============================================
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
==============================================
Diluted earnings per share $0.02 $0.05 $0.08 $0.10
==============================================
F-18
BI INCORPORATED
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
SCHEDULE II
Allowance for losses on Sales-Type Leases:
- --------------------------------------------------------------------------------------
Balance Charged to
beginning of cost and Charged to Balance at end
period expenses other accounts Write-offs of period
- --------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------
7-1-97-6-30-98 $1,000 $0 $(1,000) $0 $0
- --------------------------------------------------------------------------------------
Allowance for losses on Accounts Receivable:
- --------------------------------------------------------------------------------------
Balance Charged to Beginning
beginning of cost and Balance at Balance at end
period expenses Acquisition Write-offs of period
- --------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------
7-1-97-6-30-98 $1,760,000 $1,806,000 $0 $(2,250,000) $1,316,000
- --------------------------------------------------------------------------------------
F-19