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1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K / A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 12, 1998
--------------------
GOVERNMENT TECHNOLOGY SERVICES, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-19394 54-1248422
- ------------------------ ------------ -----------------
(State or other (Commission (IRS Employer
jurisdiction of File Identification
incorporation) Number) Number)
4100 Lafayette Center Drive, Chantilly, Virginia 20151-1200
- ---------------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 703-502-2000
-----------------
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2
This Form 8-K/A Amendment No. 1 is filed by Government Technology Services,
Inc. (the "Registrant" or "GTSI") to provide the required financial
statements in connection with the Registrant's acquisition of substantially
all the assets of BTG Technology Systems (a business unit of BTG, Inc. that
is a reseller of computer hardware, software and integrated systems to the
federal government; hereafter, the "Division"), as reported by the
Registrant on a Current Report on Form 8-K dated February 12, 1998.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
1. Independent Auditors' Report.
2. Statements of Operations for the years ended March 31, 1997,
1996 and 1995; and for the interim nine months ended
December 31, 1997 and 1996.
3. Balance Sheets as of March 31, 1997 and 1996; and as of
December 31, 1997.
4. Statements of Cash Flows for the years ended March 31, 1997,
1996 and 1995; and for the interim nine months ended
December 31, 1997 and 1996.
(b) Unaudited Pro Forma Consolidated Financial Statements of the
Division.
1. Description of Pro Forma Consolidated Financial Statements.
2. Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1997.
3. Pro Forma Consolidated Balance Sheet as of December 31,
1997.
(c) Exhibits.
10.30 Asset Purchase Agreement dated as of February 12, 1998
among GTSI, BTG, Inc., BTG Technology Systems, Inc. and
Concept Automation, Inc. of America (excluding
attachments and exhibits).*
10.31 Standstill Agreement between GTSI and BTG, Inc. dated
as of February 12, 1998.*
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3
10.32 Certificate of Designations, Preferences and Rights of
Series C 8% Cumulative Redeemable Convertible Preferred
Stock of GTSI filed February 12, 1998 with the
Secretary of State of Delaware.*
23.1 Consent of KPMG Peat Marwick LLP.
99.1 Press release dated February 12, 1998.*
____________________
*Previously filed.
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4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: April 2, 1998
GOVERNMENT TECHNOLOGY SERVICES, INC.
By: /s/ STEPHEN L. WAECHTER
--------------------------------------
Stephen L. Waechter
Senior Vice President and
Chief Financial Officer
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5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of BTG, Inc.:
We have audited the accompanying balance sheets of BTG Technology Systems
(the "Company"), a business unit of BTG, Inc., as of March 31, 1997 and
1996, and the related statements of operations and cash flows for each of
the years in the three-year period ended March 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company, a business
unit of BTG, Inc., as of March 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year
period ended March 31, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
March 31, 1998
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6
BTG TECHNOLOGY SYSTEMS
(a business unit of BTG, Inc.)
STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $290,216 $128,911 $109,859
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 254,983 111,961 95,585
-------- -------- --------
35,233 16,950 14,274
Indirect, general and administrative costs. . . . . . . . 26,439 13,415 10,851
Amortization expense. . . . . . . . . . . . . . . . . . . 994 647 411
-------- -------- --------
Income before income taxes. . . . . . . . . . . . . . . . 7,800 2,888 3,012
Provision for income taxes. . . . . . . . . . . . . . . . 3,377 1,349 1,312
-------- -------- --------
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 4,423 $ 1,539 $ 1,700
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
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7
BTG TECHNOLOGY SYSTEMS
(a business unit of BTG, Inc.)
BALANCE SHEETS
MARCH 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Restricted cash and equivalents . . . . . . . . . . . . $ -- $ 47
Receivables, net. . . . . . . . . . . . . . . . . . . . 61,331 40,158
Inventory, net. . . . . . . . . . . . . . . . . . . . . 15,344 7,606
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 6,694 3,928
Other . . . . . . . . . . . . . . . . . . . . . . . . . 284 163
-------- --------
Total current assets . . . . . . . . . . . . . . . . 83,653 51,902
Property and equipment:
Furniture and equipment . . . . . . . . . . . . . . . . 3,126 2,266
Leasehold improvements. . . . . . . . . . . . . . . . . 444 155
-------- --------
3,570 2,421
Accumulated depreciation and amortization . . . . . . . (1,497) (1,170)
-------- --------
2,073 1,251
Goodwill, net of accumulated amortization of
$1,899 and $1,154, respectively . . . . . . . . . . . . 14,018 14,763
Other intangible assets, net of accumulated
amortization of $639 and $390, respectively . . . . . . 436 685
Deposits and other assets . . . . . . . . . . . . . . . . 146 42
-------- --------
$100,326 $ 68,643
======== ========
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . $ 16,664 $ 18,179
Accrued expenses. . . . . . . . . . . . . . . . . . . . 2,951 1,758
Deferred revenue. . . . . . . . . . . . . . . . . . . . 1,066 1,046
Other . . . . . . . . . . . . . . . . . . . . . . . . . 214 97
-------- --------
Total current liabilities. . . . . . . . . . . . . . 20,895 21,080
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 567 387
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . . 21,462 21,467
-------- --------
Due to parent corporation . . . . . . . . . . . . . . . . 78,864 47,176
-------- --------
$100,326 $ 68,643
======== ========
</TABLE>
See accompanying notes to financial statements.
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8
BTG TECHNOLOGY SYSTEMS
(a business unit of BTG, Inc.)
STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 4,423 $ 1,539 $ 1,700
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . 1,514 964 652
Reserves for receivables and inventory . . . . . . 1,324 915 547
Loss on disposals of property and equipment. . . . 18 -- --
Changes in assets and liabilities, net of the
effects from purchases of subsidiaries:
(Increase) decrease in restricted cash. . . . 47 (16) 1,058
(Increase) decrease in receivables. . . . . . (22,415) (10,697) (5,096)
(Increase) decrease in inventory. . . . . . . (7,820) (1,434) (3,112)
(Increase) decrease in prepaid
expenses and other . . . . . . . . . . . . (2,887) 3,964 (5,778)
(Increase) decrease in other assets . . . . . (104) 11 32
Increase (decrease) in accounts payable . . . (1,515) 1,263 2,479
Increase (decrease) in accrued expenses . . . 1,193 391 129
Increase (decrease) in other liabilities. . . 317 1,181 (1,060)
-------- -------- --------
Net cash used in operating activities. . . (25,905) (1,919) (8,449)
-------- -------- --------
Cash flows from investing activities:
Purchases of subsidiaries, net of cash acquired . . . . -- (9,367) (2,392)
Purchases of property and equipment . . . . . . . . . . (1,360) (654) (550)
-------- -------- --------
Net cash used in investing activities. . . (1,360) (10,021) (2,942)
-------- -------- --------
Cash flows from financing activities:
Increase in amounts due to parent corporation . . . . . 27,265 11,940 11,391
-------- -------- --------
Net cash provided by financing
activities . . . . . . . . . . . . . . . 27,265 11,940 11,391
-------- -------- --------
Increase (decrease) in unrestricted cash and
equivalents . . . . . . . . . . . . . . . . . . . . . -- -- --
Unrestricted cash and equivalents, beginning of year. . . -- -- --
-------- -------- --------
Unrestricted cash and equivalents, end of year. . . . . . $ -- $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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9
BTG TECHNOLOGY SYSTEMS
(a business unit of BTG, Inc.)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
1. NATURE OF OPERATIONS
BTG Technology Systems ("BTS" or the "Company"), a business unit of
BTG, Inc. ("BTG" or the "Parent"), is primarily involved in the reselling
of computer hardware, software and integrated systems.
Approximately 90%, 88%, and 88% in fiscal 1997, 1996, and 1995,
respectively, of the Company's revenues resulted from product sales to the
United States Government and its agencies and departments (the
"Government"). The Company operates principally in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements include all of the relevant
assets, liabilities, revenues and expenses attributable to the operations
of BTS. At March 31, 1997 and 1996, and during the three-year period ended
March 31, 1997, BTS was not a separate legal entity and, accordingly, had
no assets or liabilities of its own. Rather, BTS resulted from the
Parent's merger of the product reselling operations of three separate
companies previously acquired by BTG: BDS, Inc. ("BDS") in June 1992;
ACTech, Inc. ("ACTech") in July 1994; and Concept Automation, Inc. of
America ("CAI") in October 1995. These financial statements do not include
any corporate assets or liabilities of the Parent that cannot be
specifically identified to BTS. BTS relies on BTG to provide short- and
long-term financing, cash management, and treasury functions on its behalf.
Revenue Recognition
The Company provides off-the-shelf computer hardware and software and
integrated computer systems to the Government under a variety of contract
vehicles and to commercial companies and state and local governments as a
third-party distributor. Related revenue is recognized when products are
shipped or when customers have accepted the products or services, depending
on contractual terms. Estimated future costs of providing customer support
for products sold by the Company are recorded at the point of revenue
recognition.
Revenue that is contractually billable prior to performance or
delivery is deferred until the work has been performed and/or the product
has been delivered.
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10
Cash and Equivalents
All highly liquid debt instruments with original maturities of three
months or less are classified as cash equivalents. The Company had
restricted cash of approximately $47,000 at March 31, 1996, relating to
customer agreements which require such cash to be held in escrow until
related payments to vendors have been settled and which is not included in
cash and equivalents for purposes of the Statements of Cash Flows. The
Company had no restricted cash at March 31, 1997.
Inventory
Inventory, net of an allowance for obsolescence, consists principally
of purchased products held for resale and is valued at the lower of cost,
determined on the average cost basis, or market value.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over
their estimated useful lives, three to seven years, using accelerated and
straight-line methods. Leasehold improvements are amortized over the terms
of the related leases using the straight-line method. Assets recorded
under capital leases are amortized using the straight-line method over
either the lease term or the estimated useful lives of the leased assets
depending on the criteria used for lease capitalization.
Goodwill and Intangible Assets
Goodwill, the excess of cost over the fair value of net tangible and
identifiable intangible assets of acquired companies, is amortized over the
expected periods of benefit, 15 to 30 years, on a straight-line basis.
Intangible assets are amortized on a straight-line basis over the expected
periods of benefit, two to 13 years. While the operations of BDS and
ACTech were substantially all in the product reselling industry, the
operations of CAI were in both the product reselling and the computer
integration, maintenance, and supporting services industries. As a result,
the goodwill and intangible assets of CAI which are included in the
accompanying balance sheets are based on an estimate of the relative fair
value of CAI's operations that were in the product reselling industry on
the date of acquisition.
The Company assesses the recoverability of its goodwill and intangible
assets by determining whether the balances can be recovered through
estimated, undiscounted future operating cash flows of the acquired
operations. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows.
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11
Due to Parent Corporation
A number of overhead services are maintained centrally by BTG and
allocated to its business units based on the benefits provided. These
services include most of the costs associated with the human resources
function and certain general and administrative costs of the corporate
function such as accounting and finance, treasury, legal, investor
relations and corporate communications.
In addition, the Parent provides for the working capital needs of BTS.
There is no borrowing arrangement between the Company and BTG.
Accordingly, no interest expense is provided on amounts due to the Parent
corporation in the accompanying financial statements.
Income Taxes
BTS is not a tax paying entity for Federal and state tax purposes.
Rather, the Company's operations are included in the Federal and state
income tax returns of BTG and its subsidiaries. There is no tax sharing
agreement between BTS and BTG. The provisions for income taxes in the
accompanying financial statements have been computed at current tax rates
based on reported financial statement income on a separate return basis.
All current and deferred tax assets and liabilities are included in amounts
due to the Parent corporation.
Fair Value of Financial Instruments
The carrying value of the Company's receivables and payables
approximates fair value since such instruments are short-term in nature.
Statements of Cash Flows
The Company made no payments for interest or income taxes during
fiscal 1997, 1996 or 1995.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and
disclosure of contingencies as of the dates of the financial statements,
and the reported amounts of revenues and expenses during the reporting
periods. Actual results may differ from those estimates.
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12
3. RECEIVABLES
The components of receivables are as follows (in thousands):
March 31,
-------------------
1997 1996
-------- --------
Amounts billed . . . . . . . . . . . . $ 62,521 $ 39,865
Other receivables. . . . . . . . . . . 842 1,083
-------- --------
63,363 40,948
Allowance for doubtful accounts. . . . (2,032) (790)
-------- --------
$ 61,331 $ 40,158
======== ========
Of the Company's total receivables at March 31, 1997 and 1996, more
than 90% were outstanding with the Government. The Company anticipates
collecting substantially all receivables within one year.
4. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
March 31,
-------------------
1997 1996
-------- --------
Accrued salaries . . . . . . . . . . . $ 1,556 $ 884
Accrued leave. . . . . . . . . . . . . 624 304
Other. . . . . . . . . . . . . . . . . 771 570
-------- --------
$ 2,951 $ 1,758
======== ========
5. PARENT CORPORATION EXPENSE ALLOCATIONS AND DUE TO PARENT CORPORATION
Certain overhead services are centralized by BTG and allocated to each
of its business units based on the estimated relative fair values of the
benefits provided using factors such as number of personnel and costs of
certain activities. Included in indirect expenses in the accompanying
financial statements are costs of approximately $1.8 million, $1.2 million,
and $700,000 in fiscal 1997, 1996, and 1995, respectively, which have been
allocated to BTS by its parent corporation for services such as executive
management, human resources, finance and accounting, treasury, legal, and
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13
corporate communications. Management believes that its allocation
methodology results in a fair estimation of the costs associated with the
provision of these services.
In addition, BTG provides the Company with its working capital
financing requirements through BTG's line of credit facility. No interest
expense has been provided for in the accompanying financial statements as a
result of these working capital needs as BTS has no borrowing arrangement
with its Parent.
The following is a summary of the intercompany activity in the Due to
Parent Corporation account (in thousands):
Fiscal Years Ended
March 31,
-----------------------------
1997 1996 1995
-------- -------- --------
Balance, beginning of period . . . . . $ 47,176 $ 33,697 $ 20,606
Net income. . . . . . . . . . . . 4,423 1,539 1,700
Net intercompany activity . . . . 27,265 11,940 11,391
-------- -------- --------
Balance, end of period . . . . . . . . $ 78,864 $ 47,176 $ 33,697
======== ======== ========
6. INCOME TAXES
The provision for income taxes of BTS has been determined as if the
Company were a stand-alone tax paying entity, and is based on financial
statement income, after consideration of all costs which are not deductible
for income tax return purposes. The tax effect of significant temporary
differences comprising the deferred provision result primarily from
financial statement reserves for receivables and inventory; depreciation of
property and equipment; certain employee benefits accrued for financial
statement purposes; and differences in the timing of revenue recognition
for income tax return purposes. The income tax provision is summarized
between the federal and state portions as follows (in thousands):
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14
Fiscal Years Ended
March 31,
-----------------------------
1997 1996 1995
-------- -------- --------
Current:
Federal . . . . . . . . . . . . . $ 3,814 $ 1,907 $ 1,622
State . . . . . . . . . . . . . . 754 377 321
-------- -------- --------
4,568 2,284 1,943
-------- -------- --------
Deferred:
Federal . . . . . . . . . . . . . (994) (781) (527)
State . . . . . . . . . . . . . . (197) (154) (104)
-------- -------- --------
(1,191) (935) (631)
-------- -------- --------
$ 3,377 $ 1,349 $ 1,312
======== ======== ========
Income tax expense differs from the amount of income taxes determined
by applying the U.S. federal income tax statutory rates to income before
income taxes as follows:
Fiscal Years Ended
March 31,
-----------------------------
1997 1996 1995
-------- -------- --------
Statutory Federal income tax rate. . . 35.0% 35.0% 35.0%
State income tax, net of Federal
income tax benefit. . . . . . . . 4.7 5.1 4.8
Phase-in tax rate differential . . . . (1.0) (1.0) (1.0)
Non-deductible amortization expense. . 4.3 7.6 4.6
Other permanent differences. . . . . . 0.3 -- 0.2
-------- -------- --------
Effective tax rate. . . . . . . . 43.3% 46.7% 43.6%
======== ======== ========
7. PROFIT SHARING PLAN
The Parent has established a qualified 401(k) profit sharing plan
under which eligible employees of the Company can participate by electing
to defer a portion of their salary. At the discretion of the Board of
Directors of BTG, the Parent may contribute to the plan. The current
contribution, as approved by the Board, is one percent of salaries for all
eligible employees and a matching contribution of an additional amount up
to three percent of eligible employees' deferrals. Employees participating
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15
in the plan vest in the employer contribution at 20% per year, after first
completing six months of service.
Company contributions to the profit sharing plan were approximately
$430,000, $180,000, and $123,000 in fiscal 1997, 1996 and 1995,
respectively.
8. BUSINESS COMBINATIONS
In July 1994, the Parent acquired all of the outstanding stock of
ACTech, a value-added reseller and manufacturer of computer systems, for
$1.9 million and merged all of ACTech's operations into BTS at such time.
The acquisition was accounted for as a purchase and, accordingly, the
results of operations of ACTech have been included in BTS' financial
statements from the date of acquisition, July 1, 1994. The excess of the
purchase price over the fair value of the net tangible and identifiable
intangible assets acquired of approximately $1.1 million has been recorded
as goodwill and is being amortized on a straight-line basis over 15 years.
In connection with the closing of the transaction, the Parent also entered
into certain non-compete agreements that require payment of $100,000 to
former ACTech officers over a three-year period. This acquisition did not
have a significant effect on pro forma operations.
In October 1995, the Parent acquired, for $13.0 million in cash,
50,057 shares of BTG common stock valued at approximately $463,000, and
$1.25 million due in April 1996, all of the outstanding stock of CAI, which
was primarily involved in the sale and maintenance of electronic data
processing equipment and related support services. The operations of CAI
which were primarily involved in the reselling of computer hardware,
software and integrated systems were merged into BTS on the date of
acquisition. The remaining operations of CAI were merged into a separate
business unit of the Parent. The acquisition was accounted for as a
purchase and, accordingly, the results of operations of CAI's product
reselling activities have been included in BTS' financial statements from
the date of acquisition, October 20, 1995. The excess of the purchase
price over the fair value of the net tangible and identifiable intangible
assets acquired of $11.5 million has been recorded as goodwill by the
Parent and is being amortized on a straight-line basis over 20 years. For
purposes of BTS' stand-alone financial statements, approximately $9.0
million of the total goodwill was allocated to BTS and is recorded in the
accompanying financial statements. In connection with the closing of the
transaction, the Parent also entered into various employment and
non-compete agreements with certain of CAI's officers.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and the CAI acquisition as if
the acquisition had occurred as of the beginning of the fiscal years ended
March 31, 1996 and 1995. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had
the Company and CAI constituted a single entity during such periods.
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16
March 31,
-------------------
1996 1995
-------- --------
(unaudited)
(in thousands)
Revenues . . . . . . . . . . . . . . . $163,185 $196,055
Net income . . . . . . . . . . . . . . 10 2,180
9. COMMITMENTS AND CONTINGENCIES
The Company utilizes office space and equipment under certain
operating lease agreements held by its Parent. The Company has no formal
commitment for future lease payments under any of such agreements. During
fiscal 1997, 1996, and 1995, BTG allocated to the Company costs of
approximately $1.3 million, $1.0 million, and $370,000, respectively,
relating to these leases.
10. SUBSEQUENT EVENT (UNAUDITED)
On February 12, 1998, BTG and Government Technology Services, Inc.
("GTSI") completed the sale from BTG to GTSI of (i) certain of the assets
of BTS, principally inventory and property and equipment, and (ii) certain
of the existing contracts, employees and outstanding customer orders. As
consideration for the sale, the Parent received approximately $8.0 million
and 15,375 shares of a new series of preferred stock of GTSI, designated
Series C 8% cumulative redeemable convertible preferred stock. Ten percent
of the purchase price was placed in escrow for a one-year period to serve
as security for the Parent's indemnification for potential obligations
under the acquisition agreement. The preferred stock received by the
Parent automatically converts into 3,000,000 shares of GTSI common stock
once the GTSI shareholders approve an amendment to GTSI's charter to
increase its authorized common stock to permit the conversion. The
preferred stock is nonvoting except for the right to elect one member of
the GTSI Board of Directors. Pursuant to the standstill agreement executed
at closing, the Parent has certain restrictions on its ability to transfer
and vote its shares of GTSI stock.
The accompanying financial statements do not reflect any charges to be
made in connection with the business divestiture. However, given the
nature of the divestiture, management of the Company believes that
substantially all of the goodwill and intangible assets included in the
accompanying balance sheets will be deemed to have become impaired
coincident with the divestiture date. Accordingly, it is planned that the
carrying value of these assets will be charged to operations on such date.
Further, a portion of the inventory being held on the divestiture date is
impaired as a result of the nature of the transaction. Management of the
Company estimates the amount of impairment to be between $5 and $7 million.
<PAGE>
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17
BTG TECHNOLOGY SYSTEMS
(a business unit of BTG, Inc.)
INTERIM STATEMENTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $363,881 $230,932
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 332,742 203,360
-------- --------
31,139 27,572
Indirect, general and administrative costs. . . . . . . . 28,852 18,350
Amortization expense. . . . . . . . . . . . . . . . . . . 646 746
-------- --------
Income before income taxes. . . . . . . . . . . . . . . . 1,641 8,476
Provision for income taxes. . . . . . . . . . . . . . . . 881 3,670
-------- --------
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 760 $ 4,806
======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
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18
BTG TECHNOLOGY SYSTEMS
(a business unit of BTG, Inc.)
INTERIM BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
Current assets:
Receivables, net. . . . . . . . . . . . . . . . . . . . . . . . $114,333
Inventory, net. . . . . . . . . . . . . . . . . . . . . . . . . 37,163
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . 6,860
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
--------
Total current assets . . . . . . . . . . . . . . . . . . . . 158,582
--------
Property and equipment:
Furniture and equipment . . . . . . . . . . . . . . . . . . . . 3,652
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . 425
--------
4,077
Accumulated depreciation and amortization . . . . . . . . . . . (1,993)
--------
2,084
Goodwill, net of accumulated amortization of $2,441 . . . . . . . 13,476
Other intangible assets, net of accumulated amortization of $743. 332
Deposits and other assets . . . . . . . . . . . . . . . . . . . . 96
--------
$174,570
========
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . $ 69,548
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . 2,876
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . 686
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
--------
Total current liabilities. . . . . . . . . . . . . . . . . . 73,304
--------
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274
--------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 73,578
--------
Due to parent corporation . . . . . . . . . . . . . . . . . . . . 100,992
--------
$174,570
========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
<PAGE>
19
BTG TECHNOLOGY SYSTEMS
(a business unit of BTG, Inc.)
INTERIM STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 760 $ 4,806
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . 1,171 1,153
Loss on disposals of property and equipment. . . . . . . . . 64 18
Reserves for receivables and inventory . . . . . . . . . . . 829 1,168
Changes in assets and liabilities:
(Increase) decrease in restricted cash. . . . . . . . . -- 47
(Increase) decrease in receivables. . . . . . . . . . . (53,139) (32,982)
(Increase) decrease in inventory. . . . . . . . . . . . (22,511) (12,861)
(Increase) decrease in prepaid expenses and other . . . (108) (5,800)
(Increase) decrease in other assets . . . . . . . . . . 50 --
Increase (decrease) in accounts payable . . . . . . . . 52,884 13,327
Increase (decrease) in accrued expenses . . . . . . . . (75) (1,453)
Increase (decrease) in other liabilities. . . . . . . . (693) (504)
-------- --------
Net cash used in operating activities. . . . . . . . (20,768) (33,081)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . (600) (516)
-------- --------
Net cash used in investing activities. . . . . . . . (600) (516)
-------- --------
Cash flows from financing activities:
Increase in amounts due to parent corporation . . . . . . . . . . 21,368 33,597
-------- --------
Net cash provided by financing activities. . . . . . 21,368 33,597
-------- --------
Increase (decrease) in unrestricted cash and equivalents. . . . . . -- --
Unrestricted cash and equivalents, beginning of year. . . . . . . . -- --
-------- --------
Unrestricted cash and equivalents, end of year. . . . . . . . . . . $ -- $ --
======== ========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
<PAGE>
20
BTG TECHNOLOGY SYSTEMS
(a business unit of BTG, Inc.)
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
BTG Technology Systems ("BTS" or the "Company"), a business unit of
BTG, Inc. ("BTG" or the "Parent"), is primarily involved in the reselling
of computer hardware, software and integrated systems.
The accompanying interim financial statements include all of the
relevant assets, liabilities, revenues and expenses attributable to the
operations of BTS. At December 31, 1997 and 1996, and during the nine
month periods then ended, BTS was not a separate legal entity and,
accordingly, had no assets or liabilities of its own. Rather, BTS resulted
from the Parent's merger of the product reselling operations of three
separate companies previously acquired by BTG: BDS, Inc. in June 1992;
ACTech, Inc. in July 1994; and Concept Automation, Inc. of America in
October 1995. These interim financial statements do not include any
corporate assets or liabilities of the Parent that cannot be specifically
identified to BTS. BTS relies on BTG to provide short- and long-term
financing, cash management, and treasury functions on its behalf.
In addition, the Parent provides for the working capital needs of BTS.
There is no borrowing arrangement between the Company and BTG.
Accordingly, no interest expense is provided on amounts due to the Parent
corporation in the accompanying interim financial statements.
The interim financial statements included herein have been prepared by
the Company's management, without audit. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of interim period results have been included. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These unaudited interim financial statements
should be read in conjunction with the Company's financial statements for
its fiscal year ended March 31, 1997. The results of operations for the
nine-month period ended December 31, 1997, are not necessarily indicative
of the results of operations to be expected for the full fiscal year ending
March 31, 1998.
2. SUBSEQUENT EVENT
On February 12, 1998, BTG and Government Technology Services, Inc.
("GTSI") completed the sale from BTG to GTSI of (i) certain of the assets
of BTS, principally inventory and property and equipment, and (ii) certain
<PAGE>
<PAGE>
21
of the existing contracts, employees and outstanding customer orders. As
consideration for the sale, the Parent received approximately $8.0 million
and 15,375 shares of a new series of preferred stock of GTSI, designated
Series C 8% cumulative redeemable convertible preferred stock. Ten percent
of the purchase price was placed in escrow for a one-year period to serve
as security for the Parent's indemnification for potential obligations
under the acquisition agreement. The preferred stock received by the
Parent automatically converts into 3,000,000 shares of GTSI common stock
once the GTSI shareholders approve an amendment to GTSI's charter to
increase its authorized common stock to permit the conversion. The
preferred stock is nonvoting except for the right to elect one member of
the GTSI Board of Directors. Pursuant to the standstill agreement executed
at closing, the Parent has certain restrictions on its ability to transfer
and vote its shares of GTSI stock.
The accompanying interim financial statements do not reflect any
charges to be made in connection with the business divestiture. However,
given the nature of the divestiture, management of the Company believes
that substantially all of the goodwill and intangible assets included in
the accompanying balance sheets will be deemed to have become impaired
coincident with the divestiture date. Accordingly, it is planned that the
carrying value of these assets will be charged to operations on such date.
Further, a portion of the inventory being held on the divestiture date is
impaired as a result of the nature of the transaction. Management of the
Company estimates the amount of impairment to be between $5 and $7 million.
<PAGE>
<PAGE>
22
GOVERNMENT TECHNOLOGY SERVICES, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma consolidated financial statements
reflect the acquisition of the Division by GTSI as if the acquisition had
occurred on January 1, 1997. These pro forma financial statements also
give effect, for the period presented, to the following pro forma
adjustments: (a) an increase in interest expense in connection with
financing for the $7,825,000 cash portion of the purchase price; and (b) an
adjustment to the consolidated tax provision resulting from the net
operating loss position of the consolidated company.
The following unaudited pro forma financial statements should be read
in conjunction with the notes thereto included herewith, with GTSI's
audited consolidated financial statements and notes thereto for the periods
presented and with the Division's audited and unaudited financial
statements and notes thereto for the periods presented. The unaudited pro
forma consolidated financial statements are not necessarily indicative of
future operating results or of what would have occurred had the acquisition
been consummated at the time specified. The pro forma adjustments are
based on available information and certain adjustments that management
believes to be reasonable. In the opinion of management, all material
adjustments have been made that are necessary to present fairly the pro
forma information.
<PAGE>
<PAGE>
23
GOVERNMENT TECHNOLOGY SERVICES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------------------
(1) Pro forma Pro forma
(In thousands) GTSI Division Adjustments Consolidated
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $486,377 $423,165 $ - $909,542
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 449,454 384,365 - 833,819
-------- -------- -------- --------
Gross margin. . . . . . . . . . . . . . . . . . . . . . . 36,923 38,800 - 75,723
Operating expenses. . . . . . . . . . . . . . . . . . . . 38,927 37,835 - 76,762
-------- -------- -------- --------
Income (loss) from operations . . . . . . . . . . . . . . (2,004) 965 - (1,039)
Interest expense, net . . . . . . . . . . . . . . . . . . 3,100 - 626 (5) 3,726
-------- -------- -------- --------
Income (loss) before taxes. . . . . . . . . . . . . . . . (5,104) 965 (626) (4,765)
Income tax provision. . . . . . . . . . . . . . . . . . . - 588 (588)(6) -
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ (5,104) $ 377 $ (38) $ (4,765)
======== ======== ======== ========
Pro forma net income (loss) per share . . . . . . . . . . $(0.76) $(0.71)(7)
Pro forma weighted average shares outstanding . . . . . . 6,733 6,733 (7)
</TABLE>
<PAGE>
<PAGE>
24
GOVERNMENT TECHNOLOGY SERVICES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------------------
Pro forma Pro forma
(In thousands) GTSI Division Adjustments Consolidated
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 856 $ - $ - $ 856
Accounts receivable, net. . . . . . . . . . . . . . . . 90,905 114,333 (114,333)(2) 90,905
Merchandise inventories . . . . . . . . . . . . . . . . 33,000 37,163 (15,163)(2,3) 55,000
Net deferred taxes and other. . . . . . . . . . . . . . 3,423 7,086 (7,086)(2) 3,423
-------- -------- --------- --------
Total current assets . . . . . . . . . . . . . . . . 128,184 158,482 (136,582) 150,184
Property and equipment, net . . . . . . . . . . . . . . . 8,217 2,084 (1,584)(2,3) 8,717
Intangible assets, net. . . . . . . . . . . . . . . . . . 534 13,808 (13,808)(2) 534
Net deferred taxes and other. . . . . . . . . . . . . . . 529 96 (96)(2) 529
-------- -------- --------- --------
Total assets . . . . . . . . . . . . . . . . . . . . $137,464 $174,570 $(152,070) $159,964
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks. . . . . . . . . . . . . . . . . $ 21,569 $ - $ 7,825 (4) $ 29,394
Accounts payable. . . . . . . . . . . . . . . . . . . . 67,720 69,548 (69,548)(2) 67,720
Accrued liabilities . . . . . . . . . . . . . . . . . . 8,035 2,876 (1,152)(2,4) 9,759
Deferred revenue. . . . . . . . . . . . . . . . . . . . - 686 (686)(2) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . - 194 (194)(2) -
-------- -------- --------- --------
Total current liabilities. . . . . . . . . . . . . . 97,324 73,304 (63,755) 106,873
Other liabilities . . . . . . . . . . . . . . . . . . . 266 274 (274)(2) 266
-------- -------- --------- --------
Total liabilities. . . . . . . . . . . . . . . . . . 97,590 73,578 (64,029) 107,139
-------- -------- --------- --------
Stockholders' equity:
Due to parent corporation . . . . . . . . . . . . . . . - 100,992 (100,992)(2) -
Preferred Stock - Series C. . . . . . . . . . . . . . . - - 12,951 (4,7) 12,951
Common stock. . . . . . . . . . . . . . . . . . . . . . 34 - - 34
Capital in excess of par value. . . . . . . . . . . . . 33,086 - - 33,086
Retained earnings . . . . . . . . . . . . . . . . . . . 7,295 - - 7,295
Treasury stock. . . . . . . . . . . . . . . . . . . . . (541) - - (541)
-------- -------- --------- --------
Total stockholders' equity . . . . . . . . . . . . . 39,874 100,992 (88,041) 52,825
-------- -------- --------- --------
Total liabilities and stockholders' equity . . . . . $137,464 $174,570 $(152,070) $159,964
======== ======== ========= ========
</TABLE>
<PAGE>
<PAGE>
25
GOVERNMENT TECHNOLOGY SERVICES, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The Division statement of operations for the year ended December 31,
1997 is derived by combining its fourth quarter ended March 31, 1997,
with the unaudited nine-month interim period ended December 31, 1997.
(2) Reflects assets, liabilities and net assets of the Division not
acquired by GTSI.
(3) Reflects the acquisition of the Division by GTSI for a preliminarily
determined purchase price of $22,500,000, consisting of assets
received as follows: (a) $22,000,000 in inventory and (b) $500,000 in
furniture, fixtures, and equipment. The acquisition is recorded using
the purchase method of accounting, based on the fair value of assets
exchanged rather than specific value assigned to the series C
preferred stock, for which no public market exists.
(4) To effect the transaction, GTSI: (a) paid cash of $7,825,265, (b)
issued 15,375 shares of series C Preferred Stock having a liquidation
preference of $15,375,000, and (c) assumed Division liabilities of
$274,135. GTSI incurred direct acquisition costs of $1,449,040
related to the transaction, which are reflected in accrued liabilities
and a reduction of preferred stock. The cash paid of $7,825,265 is
reflected as an increase in notes payable.
(5) Reflects interest incurred to finance the cash portion of the purchase
price. The adjustment of $626,021 consists of GTSI's 1997 weighted
average interest rate of 8% multiplied by the $7,825,265 increase in
notes payable.
(6) Gives effect to the net operating loss position of the consolidated
Company. A full valuation allowance is reflected in connection with
the resulting deferred tax asset from the net operating loss, and, as
such, no net tax provision or benefit is recorded.
(7) For purposes of these pro forma financial statements, no effect has
been given to the conversion of the Preferred Stock to Common Stock.
Upon stockholder approval, the Preferred Stock automatically converts
into 3,000,000 additional shares of Common Stock (aggregate par value
$15,000). The effect of the conversion would be as follows: (a) in
the pro forma Statement of Operations, consolidated net loss per share
would be $0.49 and consolidated weighted average shares outstanding
would be 9,733,000; and (b) in the pro forma Balance Sheet,
$12,951,560 from Preferred Stock would be reclassified to $15,000 in
Common Stock and $12,936,560 in capital in excess of par value. In
addition, no effect is given to accrue dividends on the Preferred
Stock, as those dividends would commence accruing on the earlier of:
(a) January 1, 1999, or (b) the date of the Company's annual meeting
if, at the meeting, stockholder approval for the conversion is not
obtained.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
BTG, Inc.:
We consent to the inclusion of our report dated March 31, 1998, with respect
to the balance sheets of BTG Technology Systems, a business unit of BTG,
Inc., as of March 31, 1997 and 1996, and the related statements of operations
and cash flows for each of the years in the three-year period ended March 31,
1997, which report appears in the Form 8-K/A of Government Technology
Services, Inc. dated April 2, 1998.
/s/ KPMG PEAT MARWICK LLP
-----------------------------
KPMG Peat Marwick LLP
Washington, D.C.
April 2, 1998
