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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-25094
BTG, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
VIRGINIA 54-1194161
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3877 FAIRFAX RIDGE ROAD, FAIRFAX, VIRGINIA 22030-7448
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 383-8000.
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(Not applicable)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) 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. [ ]
Based upon the closing price of the registrant's common stock as of June
17, 1997, the aggregate market value of the voting stock held by non-affiliates
of the registrant is $88,804,202 *.
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date is:
Class: Common Stock.
Outstanding at June 17, 1997: 8,507,922 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
PART II: PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR
ENDED MARCH 31, 1997.
PART III: PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON SEPTEMBER 17, 1997.
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* Solely for purposes of this calculation, all executive officers and directors
of the registrant and all shareholders reporting beneficial ownership of more
than 5% of the registrant's common stock are considered to be affiliates.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
BTG, Inc. ("BTG" or the "Company") is an information technology company
providing complete solutions to a broad range of complex systems and product
needs of the United States Government and its agencies and departments (the
"Government"), state and local governments and commercial clients. The Company
provides systems development, integration, engineering and network design,
implementation and security expertise services (its "Systems Business"). In
addition, the Company resells computer hardware, software and integrated systems
(its "Product Reselling Business"). Through acquisitions, internal growth and
successful contract awards, the Company has increased its participation as a
significant provider of information technology solutions to the Government. The
Company intends to continue to expand and diversify its Government client base
and to pursue other opportunities for commercial application of its expertise.
For fiscal years 1997 and 1996, the Company's revenues were $400.0 million and
$213.6 million, respectively, and its net income was $4.3 million and $3.0
million respectively.
BTG was formed in 1982 by Dr. Edward H. Bersoff to provide systems
engineering and software development services to the defense intelligence
community. During the 1980s, the Company primarily focused on the development of
operational prototyping techniques for software development and software
configuration management for its Government customers. In June 1992, the Company
acquired BDS, Inc. ("BDS"), a value-added reseller of computer software and
hardware and a provider of integrated information systems. The acquisition of
BDS complemented the Company's then-existing systems development, engineering
and integration services business by providing access to a broad array of
high-end, commercial off-the-shelf ("COTS") software and hardware products. In
July 1994, the Company acquired Advanced Computer Technology, Inc., a
value-added reseller of software and hardware and a seller of high-performance
computers under its own trade name. In November 1994, the Company acquired Delta
Research Corporation, a software developer and systems integrator focused on
project planning, cost controls and environmental engineering, primarily for the
Government. In October 1995, the Company acquired Concept Automation, Inc. of
America ("CAI"), which was primarily involved in the integration, sale and
maintenance of electronic data processing equipment and related support services
principally to both civilian agencies of the Government and certain commercial
entities. These strategic acquisitions, combined with the Company's internal
growth from existing operations, have enhanced the Company's presence in the
markets it serves and have led BTG to become a single source for customers who
need start-to-finish technology solutions. Subsequent to its fiscal year ended
March 31, 1997, the Company announced that it has acquired Nations, Inc., a
privately held software and systems engineering company headquartered in Tinton
Falls, New Jersey, for approximately $10.0 million in cash.
The Company's headquarters and executive offices are located at 3877
Fairfax Ridge Road, Fairfax, Virginia 22030-7448, and its telephone number is
(703) 383-8000.
INDUSTRY BACKGROUND
Since the mid- to late 1980s, the Government, like many corporate
organizations, has increasingly adopted computer networking technology to
interconnect personal computers into resource-sharing work groups referred to as
local area networks ("LANs"). In recent years, there has been an increasing
demand in the information technology industry for open systems approaches
designed to create interoperability among COTS computer software and hardware
products manufactured by different suppliers. In addition, concerns over
excessive development costs and the rapid pace of technological change have led
both Government and commercial customers to demand more flexible systems created
by adapting readily-available COTS software and hardware, rather than systems
that have been built to customized specifications.
The Government information technology market is generally characterized by
highly structured procurement rules and procedures, large contracts, a
relatively long sales cycle (often several years), significant
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barriers to entry, and low collection risks. In addition, many contracts in the
defense and intelligence areas require high-level security clearances.
Since the late 1980s, the Government has made use of fewer, but
larger-scale procurements to meet its information technology requirements,
requiring companies to have greater financial and technical resources in order
to participate in competitive bids. This has necessitated increased use of
teaming agreements among several firms in order to fulfill the requirements of
the larger procurements, which have typically been awarded as indefinite
delivery-indefinite quantity ("IDIQ") type contracts. Increasingly, such IDIQ
awards have been made to more than one team which has resulted in post-award
competition for contract orders. See "Government Contracts -- Negotiated
Procurement Contracts."
The 1990s marked the emergence of rapidly developing Internet/intranet
technologies. Although information technologies, such as ARPANET, secure data
transmissions, and data encryption have long been in use in the military
intelligence arena, recent technological advancements in computer hardware and
software technology have now made such applications economically viable for use
by private companies. This has given rise to the need for specialized expertise
in the areas of local and wide area network design and installation, network
management and operation, and network security, all using new and complex
information technology hardware and software products.
COMPANY OPERATIONS
The Company has organized its business into two principal areas: the
Systems Business and the Product Reselling Business. Overall, the Systems
Business accounted for approximately 27.5% and 31.4% of total revenues in fiscal
1997 and 1996, respectively, while the Product Reselling Business accounted for
approximately 72.5% and 68.6% of total revenues during such periods.
The Systems Business
At the beginning of fiscal 1997, the Company organized the Systems Business
into two strategic units: the Systems Engineering Business Unit and the
Integration and Network Systems Business Unit. The Systems Engineering Business
Unit is generally engaged in system development, integration and engineering
activities primarily for defense oriented applications. The Integration and
Network Systems Business Unit is generally engaged in network development,
document imaging and electronic data interchange activities primarily for
non-defense oriented applications.
Systems Engineering Business Unit. The Systems Engineering Business Unit
designs, develops and integrates command, control, communications and
intelligence systems that provide open, modular computer-based solutions for
specific military applications, including information warfare. Through this
business unit, the Company provides competitive and rapidly accessible solutions
to its clients using either COTS software and hardware from multiple providers
or custom-built systems.
The Company has specific expertise in data assimilation and correlation
applications, that is, the technique of accepting, processing, correlating,
displaying and analyzing electronic data from land-, sea-, air-, and space-based
sensors, so it can be rapidly evaluated. The Company's systems give a coherent
picture of the available electronic information, as well as the means to share
such information. The Company has developed both tactical systems, which allow
users to act upon intelligence data immediately, and analytical systems, which
permit the use of data for evaluation and planning purposes. These types of
systems have been used in a variety of military settings, including operations
in the Middle East, Somalia, Bosnia, and Korea, for tracking troop movements and
other intelligence functions.
Integration and Network Systems Business Unit. The Integration and Network
Systems Business Unit focuses on the adaptation of the Systems Business
expertise to non-defense oriented applications and seeks to leverage the Systems
Business expertise with the procurement capabilities of the Product Reselling
Business. The Company uses its specialized expertise to develop custom networks
and Websites, to provide innovative document storage and retrieval services, and
to create Electronic Data Interchanges ("EDI"s) to help its clients implement
inventory programs.
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THE PRODUCT RESELLING BUSINESS
Technology Systems Business Unit. As a product reseller of computer
hardware, software and integrated systems, the Company, through its Technology
Systems Business Unit, provides clients with advanced technology products in the
areas of enterprise networking, the UNIX operating system environment, data
storage, image processing and high-performance client/servers. The Company
emphasizes open architecture and widely accepted industry standards in
identifying specific products to be used in clients' systems. The Company sells
directly to the Government and to systems integrators and prime contractors
selling to the Government market.
A significant percentage of the Company's revenues (52.0% in fiscal 1997
and 41.3% in fiscal 1996) is derived from product sales to the Government under
a variety of agency-specific IDIQ contracts. Another significant percentage
(13.1% in fiscal 1997 and 19.4% in fiscal 1996) of the Company's revenue is
derived from sales to the Government under the General Services Administration
("GSA") Schedule, either directly from the Company's GSA Schedule contracts (the
"GSA Schedules") or from sales to other prime contractors with GSA Schedule
contracts. See "Government Contracts -- The GSA Schedules." GSA Schedule
contracts permit the Company to offer over 40,000 products from more than 100
suppliers.
In order to complement its ability to provide complete solutions to its
customers, the Company's Product Reselling Business assembles and sells a line
of high-performance Intel-based computers under its own BTG trade name. The BTG
line includes different models with a variety of microprocessors, memory
configurations and other features. The BTG systems range in base price from
$1,000 to $20,000, although with customized features the price can be
significantly higher. The BTG systems offer Microsoft's Windows and Windows NT
operating systems, with access to thousands of COTS software applications.
Approximately 3.7% and 4.2% of total revenues in fiscal 1997 and 1996,
respectively, were obtained from sales of products carrying the BTG trade name.
CUSTOMERS AND CUSTOMER SUPPORT
The Company derives a substantial portion of its revenues from contracts
with various agencies of the Government, including all four armed forces, the
Defense Intelligence Agency ("DIA"), the GSA, the National Security Agency
("NSA"), and many of the civilian Government agencies such as the Environmental
Protection Agency, and the Departments of Treasury and Education. Under its
Basic Ordering Agreement ("BOA") with the North Atlantic Treaty Organization
("NATO"), the Company has sold services and products to member countries and
agencies of NATO. In addition, the Company has performed projects for, or
supplied computer hardware, software and integrated systems to, a number of
commercial customers, as well as several state and local governments. As of
March 31, 1997, the Company was performing on over 175 active Government
contracts, with a total contract capacity (including option periods) in excess
of $1.0 billion. See "-- Backlog."
In fiscal 1997 and 1996, the Company derived approximately 89% and 90% of
revenues, respectively, from Government contracts. The following table sets
forth the Company's estimates of the sources of its revenues in the last two
fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31,
-----------------
1997 1996
---- ----
(% OF TOTAL
REVENUES)
<S> <C> <C>
DoD -- armed forces............................................. 26.9% 31.3%
DoD -- national security agencies............................... 6.5 8.7
NATO............................................................ 0.9 15.2
GSA (including BTG customers with GSA Schedule sales)........... 13.1 19.4
Other civilian agencies......................................... 41.6 15.2
Commercial customers, state and local governments, and other.... 11.0 10.2
</TABLE>
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The Company offers its customers a full range of support services for the
systems it develops. Each of the Company's project teams strives to understand
thoroughly the environment of the end user of its systems. Members of the team
work with customers throughout each project to ensure that the Company's
solutions are fully responsive to the customer's requirements. The Company
stresses on-time performance and provides rapid support and backup, by telephone
hotline and in person, to systems in use throughout the world.
The Company's revenues are highly dependent on the Government's demand for
the products and services offered by the Company. Changes in the structure,
composition and/or buying patterns of the Government could affect the Company's
future operations.
TEAMING RELATIONSHIPS
The Company maintains teaming relationships with major Government
contractors, including Hughes Data Systems, Lockheed Martin Corporation, UNISYS,
Inc., EDS Corporation, and UUNET in order to bid on and participate in a greater
number of increasingly large and complex procurement projects. Teaming
relationships have enabled BTG to secure several government contracts recently
including the GSA's CINEMA program, which was awarded in April 1997 to a team
comprised of BTG, as the prime contractor, and Sterling Commerce and UUNET. The
CINEMA program requires the BTG team to provide Internet access, electronic mail
and electronic commerce services for the entire Government. The contract has a
base period of two years with options to extend the contract for an additional
three years and a potential contract capacity of $600 million. Of this amount,
the Company believes that the potential value to BTG is approximately $200
million over five years.
SALES AND MARKETING
Within its Systems Business, the Company's marketing activities are largely
conducted by senior management and its own professional staff of engineers,
analysts and other personnel. Within its Product Reselling Business, the Company
employs approximately 115 marketing and sales personnel, of whom eight are
primarily engaged in marketing activities and 107 are primarily engaged in
sales. Marketing personnel design and direct the Company's market research,
telemarketing and direct mail campaigns, and oversee product management efforts.
The Company's marketing personnel also plan and implement Company-sponsored
catalogues and seminars, advertising in specialty trade publications and
participation in major trade shows. The Company provides training to its sales
force on various government procurement processes and technical features of the
products and services it offers. All sales personnel have been trained on, and
have on-line access to, the Company's computerized system for maintaining price,
product availability, bid, ordering and order-status information. The Company
believes its sales and marketing efforts also benefit from its retail sales
outlet located in the Pentagon.
GOVERNMENT CONTRACTS
Approximately 89% and 90% of the Company's total revenues in fiscal 1997
and 1996, respectively, were derived from business performed under the following
two types of Government contracts: (i) contracts obtained through a negotiated
procurement process and (ii) GSA Schedule contracts. The Company's activities
within its Systems Business are generally performed under contracts obtained
through negotiated procurements, while the Company's product reselling
activities are generally performed under both negotiated procurement contracts
(IDIQ type) and GSA Schedule contracts.
Government contracts are generally subject to a number of inherent risks
including, for example, the Government's right to terminate contracts for
convenience as well as for default, the uncertainty of Government funding, the
right of the Government not to exercise option years under contracts, the
adjustment of costs and revenue by Government auditors, the shutdown or partial
shutdown of selected Government agencies, and protests by unsuccessful offerors.
Prior to fiscal 1996, the Company had not been materially affected by the
foregoing risks. In the latter half of fiscal 1996, however, the Company's
operations were adversely affected by the Government's budget impasse which
resulted in the partial shutdown of the Government for several weeks during the
third and fourth quarters of the Company's fiscal year. The
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Company believes this partial shutdown had a negative impact on its operations
for two primary reasons: (i) the Government's delay in purchasing the Company's
products, which resulted in the loss of incremental profit that otherwise would
have been earned during the shutdown and (ii) the higher indirect costs
experienced as a result of compensation paid to employees who were unable to
work under active Government contracts for which funding was delayed. In
addition, the processing of Government payments was delayed by the shutdowns.
This resulted in the Company having to carry its outstanding receivable accounts
for longer periods of time which, in turn, meant higher interest costs. The
extent of any impact on the Company's results of operations, financial position,
or liquidity resulting from possible future shutdowns cannot be predicted at
this time.
Negotiated Procurement Contracts
Negotiated procurement contracts include cost-reimbursement contracts (both
cost-plus-fixed-fee and cost-plus-award-fee), time and materials contracts,
fixed-price contracts and IDIQ contracts. Fiscal 1997 and 1996 revenues
(including non-Government revenues) derived under negotiated procurement
contracts were as follows by contract type:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------------------
1997 1996
------------------- -------------------
(DOLLARS IN THOUSANDS)
REVENUE PERCENT REVENUE PERCENT
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cost-reimbursement............................. $ 31,287 10.3% $ 32,249 20.8%
Time and materials............................. 18,410 6.1 5,515 3.5
Fixed-price.................................... 13,771 4.5 19,695 12.7
IDIQ *......................................... 239,988 79.1 97,657 63.0
-------- ------- -------- -------
$303,456 100.0% $155,116 100.0%
======== ===== ======== =====
</TABLE>
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* Approximately $31.9 million and $9.6 million of total Company revenues in
fiscal 1997 and 1996, respectively, were generated under IDIQ-type, negotiated
procurement contracts which were primarily service-oriented. Approximately
$208.1 million and $88.1 million of total Company revenues in fiscal 1997 and
1996, respectively, were generated under IDIQ-type, negotiated procurement
contracts which were primarily product-oriented.
Cost-plus-fixed-fee contracts provide for the reimbursement of incurred
costs during contract performance, to the extent that such costs are allowable
and allocable, and the payment of a fixed fee. The size of such fees as a
proportion of the contract value is limited by law. Cost-plus-award-fee
contracts typically provide for the reimbursement of costs with a base fee and
an additional fee that is based upon a periodic evaluation of the contractor's
performance against specified criteria. Under time and materials contracts, the
contractor agrees to provide, at a fixed hourly rate, certain categories of
labor that satisfy established education and experience qualifications. To the
extent a contractor's costs differ from the fixed hourly rate, the contractor
realizes all of the benefit or detriment resulting from decreases or increases
in the cost of performing the work. Under fixed-price contracts, the contractor
agrees to perform certain work for a fixed price and, accordingly, realizes all
the benefit or detriment resulting from decreases or increases in the cost of
performing the work.
Under typical IDIQ contracts, the contractor agrees to provide specific
products and related services at specified unit prices. These contracts, which
are often awarded for large-scale Government purchases of computer hardware,
software and integrated systems, are typically awarded through a formal
competitive bid process. The periods of performance for IDIQ contracts typically
span a number of years. Under IDIQ contracts, the Government is under no
obligation to make purchases at levels approved under the contract. As part of
the Government mandate to streamline procurement procedures, agencies are
awarding IDIQ contracts to multiple parties. Each winner then has an opportunity
to provide the types of products and services described in the contract. The
agency typically buys from the most competitive contractor without going through
additional formal procurement procedures. IDIQ contracts are often subject to
modification as
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products included in original contract specifications are replaced with new
technology. Generally, the Company has had a record of profitability on its time
and materials, fixed-price, and IDIQ type contracts.
The GSA Schedules
Approximately 13.1% and 19.4% of the Company's revenue in fiscal 1997 and
1996, respectively, were derived from sales pursuant to both the GSA Schedules
held by the Company during those periods and from sales to other prime
contractors of the Government with GSA Schedule contracts. The Company is one of
the ten largest GSA Schedule holders and holds three GSA Schedule contracts: one
GSA Schedule A contract for turnkey and large systems products; one GSA Schedule
B/C contract for microcomputers, software and peripheral equipment; and one GSA
Schedule E contract for electronic commerce, electronic data interchange,
automated procurement systems and BTG services. GSA Schedule contracts are
negotiated by the GSA, which is the central procurement agency of the executive
branch of the Government. Although Government agencies are not required to
purchase products under GSA Schedule contracts, these contracts provide
Government agencies with an efficient and cost-effective means for buying
relatively small dollar amounts of commercial products, often with dramatically
reduced paperwork. Government agencies may purchase goods under these contracts
with funds from their own agency budgets at predetermined prices, terms and
conditions.
GSA Schedule contracts are awarded on the basis of a number of factors, the
most important of which are compliance with applicable regulations and the
prices of the products to be sold. Any number of competing suppliers may be
awarded a GSA Schedule contract for a given product. GSA Schedule contracts
require that each bidder must either be the manufacturer of the product covered
by the contract or furnish a letter from the manufacturer committing to provide
the bidder with the product for the period of the GSA Schedule contract.
Products may be added to a GSA Schedule contract during its term with the
consent of both the contractor and Government, but only if the manufacturer of
each product added is already represented on such Schedule contract. In April
1996, the Company's GSA Schedule B/C was awarded for a three-year term ending on
March 31, 1999. The GSA Schedule E contract has a nominal term from April 1 to
March 31 each year, and GSA Schedule A contracts have a nominal term from
October 1 to September 30 each year. However, actual awards often occur several
weeks or even months after the relevant end date of the contract. The Company
has not experienced any difficulty in obtaining annual renewal of its GSA
Schedule contracts.
At the time of initial award, prices to the end users under the Company's
GSA Schedule contracts are set for the duration of the contract at a specified
level or at specified levels varying over time. In addition, under certain
circumstances, BTG is required under the terms of its GSA Schedule contracts to
pass on any savings, resulting from supplier discounts, or other price
reductions, to the Government in the form of corresponding price reductions.
Furthermore, the GSA Schedule contracts do not have pre-set delivery schedules
or minimum purchase levels. The uncertainties related to future contract
performance costs, quantities to be shipped and dates of delivery make it
difficult to predict the future sales and profits, if any, that may result from
such contracts.
THE PROCUREMENT PROCESS
The Company's contracts department prepares bids on procurements and
advises Company personnel on a wide variety of technical and practical issues
relating to the procurement process. It is involved in evaluating bid
opportunities, identifying key products or services needed to respond to
solicitations, negotiating favorable agreements with suppliers and
co-contractors, preparing written responses to the solicitation document,
meeting all mandatory technical requirements and, in general, successfully
processing the proposal effort from initial submission to post-award
implementation. This department also monitors compliance with relevant
procurement regulations and keeps abreast of changes in such regulations. The
Company believes its experience in the procurement process enables it to
effectively identify realistic procurement opportunities and to manage resources
cost-effectively in the pursuit of a variety of procurement opportunities.
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SUPPLIERS
The Company devotes significant resources to establishing and maintaining
relationships with its suppliers. The Company offers its suppliers a number of
opportunities to expand their sales to the Government market, including access
to the Government market through numerous diverse contracts, relief from
compliance costs of procurement regulations for selling directly to the
Government market, lower costs for selling and marketing programs, elimination
of billing and collection costs related to the Government market, and
participation in product services, including numerous Government-specific
marketing programs and end-user technical support.
The terms of the Company's agreements with its suppliers vary widely, but
typically permit the Company to purchase products for resale for use by the
Government. Most of the Company's supplier agreements do not require the Company
to purchase any specified quantities of product. The Company typically requires
suppliers acting under its Government contracts to provide the Company with
supply and price protection for the duration of such contracts. Other than
supplier agreements under Government contracts, the Company's supplier
agreements are typically terminable by the supplier on short notice, at will or
immediately upon default by the Company. These supplier agreements also
typically permit the Company to return previous product purchases at no charge,
for a specified restocking fee, and/or in exchange for other products of the
supplier. The Company also purchases some products from independent
distributors.
Suppliers provide the Company with incentives in the form of discounts,
rebates, credits, inventory financing programs and cooperative advertising and
market development funds. In accordance with the terms of its Government
contracts, the Company provides periodic reporting of pertinent supplier
contract terms and conditions to Government contracting officials. A reduction
in or discontinuance of these incentives or significant delays in receiving
reimbursements could materially adversely affect the Company.
As a product reseller, the Company must continue to obtain products at
competitive prices from leading suppliers in order to provide a centralized
source of price-competitive products for its customers and to be awarded new
Government contracts and Government orders under its existing IDIQ contracts.
Although most of the Company's suppliers currently do not sell their products
under their own GSA Schedule contracts, one or more may elect to apply for its
own GSA Schedule contract and may sell their products at lower end-user selling
prices than those the Company currently offers or could profitably offer.
Although the Company believes its relationships with its key suppliers to be
good, a decision by one or more to sell directly to the Government (especially
if at significantly lower prices than the Company), to sell their products to
the Company's competitors on more favorable terms than to the Company, to allow
additional resellers to represent their products on a GSA Schedule contract, to
restrict or terminate the Company's rights to sell their products, or to
restrict their products from being carried on a GSA Schedule contract, could
have a material adverse affect on the Company.
BACKLOG
The Company's total contract backlog is only a portion of total contract
capacity (i.e., the maximum amount that the Government can purchase under its
contracts with the Company) and represents management's estimate of the
aggregate revenues that will be earned by the Company over the life of all of
its contracts, including option periods. Because many of BTG's contracts are
multi-year contracts and contracts with option years, total contract backlog
represents revenues expected to be realized over a number of years into the
future. The Company's estimated total contract backlog as of March 31, 1997 and
1996 was $1.0 billion and $788 million, respectively. The Company estimates that
the CINEMA contract, awarded in April 1997, increased the Company's total
contract backlog by approximately $200 million. Because total contract backlog
is based on management's estimate as to the future potential of existing
contracts, there can be no assurance that all of such backlog will be recognized
as revenue.
Because the Government operates under annual appropriations, agencies of
the Government typically fund contracts on an incremental basis. Accordingly,
only a portion of the Company's total contract backlog is "funded". Funded
backlog consists of the aggregate dollar portion of contracts that is currently
appropriated by Government customers and allocated to contracts by the
purchasing Government agencies or otherwise
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allocated for payment by customers upon completion of specified work. The
Company estimates that as of March 31, 1997 and 1996, its funded contract
backlog was $48.2 million and $36.0 million, respectively.
Funded backlog generally varies depending on procurement and funding cycles
and other factors beyond the Company's control. Accordingly, period-to-period
comparisons are difficult and not necessarily indicative of any future trends in
revenues. Moreover, the unfunded backlog cannot be relied upon as an indicator
of future contract revenue because there is no assurance that the unfunded
portion will be funded. Finally, the Government's ability to select multiple
winners under IDIQ contracts, as well as its right to limit orders to any
particular awardee, mean that there is no assurance that unfunded contract
backlog will result in actual orders.
The preceding information, regarding contract backlog and future revenues
to be derived therefrom, is forward-looking and is subject to certain risks and
uncertainties including, but not limited to, a dependence on the continued
funding of Government programs and contract procurements and the risk of
contract termination.
COMPETITION
In seeking to provide a broad range of services and products that address
the complete information technology needs of its customers, the Company
participates, to varying degrees, in multiple segments of the information
technology market, including markets for systems engineering, development and
integration services and for the sale of products and component parts. Within
each segment, the Company competes against different firms of varying sizes,
with different specializations and skills. Each of the market segments in which
the Company operates is competitive. The number and size of competitors vary
among operating groups and within the individual divisions of each group.
Frequently, the number and identity of competitors vary even from program to
program within a given business area. Many of the Company's competitors are
significantly larger and have greater financial resources than the Company. Some
of these competitors are a part of large, diversified companies that have access
to the financial resources of their parent companies. In the Product Reselling
Business, the Company competes with certain computer manufacturers who sell
directly to the Government market, as well as a number of systems integrators,
resellers and distributors.
The Company believes that the principal competitive factors in the Systems
Business are technical understanding, management capability, past contract
performance, personnel qualifications and price. In the Product Reselling
Business, the Company believes that price is the most important competitive
factor. During its recent history, the Company has been very successful in
winning new and repeat contract awards in its Product Reselling Business and in
the exercise of contract option years in its Systems Business, both of which the
Company believes are attributable to the strength of its past contract
performance and its competitive prices. Further, the Company's senior management
team has an extensive number of years of industry-specific technical and
managerial experience. As a result, the Company believes that it competes
favorably on each of the principal competitive factors within both its Systems
and Product Reselling Businesses.
Government contracts are periodically subjected to the competitive bidding
process, and the Company generally has been successful in retaining its
incumbent business. In addition, a significant number of the opportunities the
Company pursues are large dollar value procurements. In such cases, in order to
enhance its ability to compete, the Company will often team or joint venture
with one or more firms possessing complementary technical skills, which firms
may be competitors of the Company in other procurements.
CERTAIN REGULATORY MATTERS
The nature of the Company's business subjects the Company to various
regulatory restrictions and limitations, including those set forth below.
Security Clearances. Many of the Company's Government contracts require
the Company to maintain facility security clearances complying with DoD
requirements, including its four Sensitive Compartmented Information Facilities
("SCIFs") for the performance of classified work under its contracts. The
Company believes that it is in compliance with these requirements. As of March
31, 1997, approximately 35% of the Company's employees possessed secret or top
secret security clearances, which are required for the
8
<PAGE> 10
performance of certain of the Company's contracts. The Company has never had a
contract terminated for security reasons.
Government Contract Audits and Investigations. Government contractors are
commonly subject to various audits and investigations by Government agencies.
Among the agencies that oversee or enforce contract performance are the Defense
Contract Audit Agency ("DCAA"), the Inspectors General of the various
departments, the Defense Criminal Investigative Service, the GAO and the
Department of Justice. These audits and investigations involve a review of a
contractor's performance on its contracts, as well as its pricing practices,
costs and compliance with applicable laws, regulations and standards. The DCAA
generally audits cost-reimbursable contracts to verify that costs have been
properly charged to the Government. Final audits by the DCAA have been completed
for the Company's fiscal years through 1994. The Company has not experienced any
material adverse effects as a result of these completed audits. Management does
not expect the completion of future audits on open years 1995 through 1997 to
have a material adverse effect on the Company's consolidated financial position.
One of the Company's significant contracts was audited during fiscal 1996
by the Inspector General of the Government agency involved. The Company was
notified that the customer was seeking to recover approximately $156,000 as a
result of the audit. The Company disagrees with certain of the claims made under
the audit and intends to vigorously defend its position through the appeals
process.
Export Regulations. United States law and regulations issued by various
agencies of the Government, including but not limited to the Department of
Commerce, the Department of the Treasury and the Department of State, restrict
and regulate the export of technology as well as goods and commodities provided
by United States businesses to controlled foreign subsidiaries and affiliates.
The Company is subject to certain of these regulations with respect to
technology developed by the Company which is sold to non-US customers (other
than NATO agencies).
EMPLOYEES
As of March 31, 1997 the Company employed 1,168 employees, 897 of whom were
technical/managerial staff, 156 of whom were administrative staff and 115 of
whom were engaged in sales and marketing. The Company believes that it is
competitive in hiring and retaining qualified personnel. The Company's ability
to remain competitive will be based in large measure upon its ability to recruit
and train qualified personnel. None of the Company's employees is represented by
a labor union. The Company considers its relations with its employees to be good
and has not experienced any significant labor problems.
EXECUTIVE OFFICERS
Following is a biographical summary of the experience of the current
executive officers of the Company:
Edward H. Bersoff has served as BTG's President, Chief Executive
Officer and Chairman of the Board of Directors since the Company's founding
in 1982. From 1975 until 1982, he was employed by CTEC Corporation
("CTEC"), a provider of systems integration services, serving first as Vice
President, then Executive Vice President, and later as President.
Previously, he was employed by Logicon, Inc., a provider of advanced
technology systems and services to national security, civil and industrial
clients, and the National Aeronautics and Space Administration, in
Cambridge, Massachusetts. Dr. Bersoff has over 28 years of experience in
intelligence system development, software, quality assurance, configuration
management, corporate management and management of software product design,
development, implementation and maintenance. Dr. Bersoff serves as a
director of Phillips Business Information, Inc., a publishing firm. He is
the husband of Marilynn D. Bersoff.
John M. Hughes has served as Vice President and Chief Financial
Officer of BTG since 1992 and is currently Senior Vice President and Chief
Financial Officer. From 1974 to 1992 he held various positions at ManTech
International Corporation ("ManTech"), a professional and technical
services company, where he served most recently as Senior Vice President
and Corporate Treasurer. His primary responsibilities at ManTech included
business development, strategic planning and implementation. His
9
<PAGE> 11
role at BTG is to provide financial management and direct strategic support
for BTG's growth through internal strategy, financing alternatives and
acquisitions. Mr. Hughes has 24 years of experience in the financial
operations and management of technology growth companies.
Marilynn D. Bersoff has served as Vice President and Secretary of BTG
since 1993 and is currently Senior Vice President of Administration and
Corporate Secretary. She also served as Secretary of BTG from 1982 to 1987
and as Secretary and Treasurer from 1987 to 1993. She was employed by CTEC
from 1978 to 1982 and by a data transmission company prior to CTEC. As
Corporate Secretary, Ms. Bersoff works with the Company's Board of
Directors and is responsible for maintenance of the corporate records. As
Senior Vice President of Administration, she is responsible for legal,
human resources, office automation, security, and facilities functions
within the Company. Ms. Bersoff has over 20 years of experience in
administration, management and technical support. She is the wife of Edward
H. Bersoff.
Clifton Y. Bumgardner has served as a Vice President of BTG since 1982
and is currently Senior Vice President and Chief Technical Officer. His
primary responsibility is research and development and technical assistance
on large proposal efforts. He has been with BTG since the founding of the
Company in 1982. He has over 23 years of experience in systems development,
integration and engineering. Previously, he was manager of software
development and later Vice President of CTEC.
John Littley, III has served as Vice President, Corporate Development,
in charge of developing new business opportunities, since April 1994 and is
currently Senior Vice President, Corporate Development. In this capacity,
he performs corporate oversight of several significant Government contract
proposals and contracts. He served as Director of Corporate Development for
the Company from September 1993 to April 1994. Between 1991 and 1993 he was
Vice President of Corporate Development for SEA, Inc., a computer
engineering firm. Mr. Littley originally joined the Company in 1982, and
has served in a variety of other positions, including Director of Advanced
Programs, Director of Engineering Services and Director of Systems
Development. In addition, Mr. Littley currently serves as the acting
General Manager for the Company's Technology Systems Business Unit.
Randall C. Fuerst has served as a Vice President of BTG since 1991 and
is currently Senior Vice President and General Manager of the Company's
Systems Engineering Business Unit. Mr. Fuerst has been with BTG since 1982
and has served in a variety of positions with the Company including Program
Manager, Tactical Programs Division Director, and Group Manager of
Engineering and Development. He has over 17 years of experience in complex
systems development, integration and world-wide systems support.
Previously, Mr. Fuerst worked at CTEC, Inc., where he was manager of
fielded systems support.
Leland R. Phipps is currently Senior Vice President and General
Manager of the Company's Integration and Network Systems Business Unit.
Prior to joining BTG in October 1995, Mr. Phipps was an owner and corporate
officer of Concept Automation, Inc., where he had been employed since 1982.
While at CAI, Mr. Phipps served in a variety of management positions
including President and Chief Operating Officer from 1989 to 1995. In
addition, he currently is a director for two privately-held companies. He
has over 15 years of general management, finance, marketing, operational
and technical development experience in the information technology
industry.
10
<PAGE> 12
ITEM 2. PROPERTIES
The Company leases all of the offices and facilities used in connection
with its operations, which comprise approximately 430,000 square feet at various
sites located in 13 states, the District of Columbia and Europe. The following
table sets forth information relating to the significant offices and facilities
currently leased by the Company (1):
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE EXPIRATION OF LEASE(S)
- ---------------------- -------------- -----------------------------------
<S> <C> <C>
Fairfax, Virginia 210,000 November 2010
Chantilly, Virginia 95,000 March 2002
San Diego, California 30,000 October 1999
Niceville, Florida 18,000(2) April and July 1998, December 1998
and February 2003
</TABLE>
- ---------------
(1) The Company consolidated much of its Washington, D.C. area facilities in
March and April 1997. Data for the prior leased facilities, which leases
expired in March and April 1997, is not included in the above information.
(2) This property is held under four leases.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of BTG shareholders during the fourth
quarter of the fiscal year ended March 31, 1997.
11
<PAGE> 13
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is publicly traded on the Nasdaq National Market
under the symbol "BTGI". The stock has been publicly traded since December 1994.
The high and low sale prices per share of common stock for each quarter of
fiscal 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------------------------------------------------------------ ------- -------
<S> <C> <C>
FY 1997:
June 30, 1996................................................ $15.250 $ 9.250
September 30, 1996........................................... 15.750 11.500
December 31, 1996............................................ 27.250 14.000
March 31, 1997............................................... 27.375 17.500
FY 1996:
June 30, 1995................................................ $10.000 $ 7.750
September 30, 1995........................................... 11.750 8.375
December 31, 1995............................................ 15.000 8.875
March 31, 1996............................................... 11.875 8.750
</TABLE>
The Company has never paid cash dividends and is currently prohibited from
doing so under its debt agreements. It is the present policy of the Company to
retain earnings to finance the growth and development of its business, and
therefore, the Company does not anticipate paying cash dividends on its common
stock in the foreseeable future.
The Company has authorized 10,000,000 shares of common stock and 1,000,000
shares of preferred stock. At March 31, 1997, 8,443,844 shares of common stock
were outstanding. No preferred shares have been issued. The Company had
approximately 850 shareholders of record on March 31, 1997.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below under the captions
"Statement of Operations Data" and "Balance Sheet Data" for, and as of the end
of, each of the years in the five-year period ended March 31, 1997, are derived
from the consolidated financial statements of BTG, Inc. and subsidiaries, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The consolidated financial statements as of March
31, 1997 and 1996, and for each of the years in the three-year period ended
March 31, 1997, and the report thereon, are included in the BTG Incorporated
1997 Annual Report (the "1997 Annual Report") and are incorporated herein by
reference under Item 8. "Financial Statements and Supplementary Data."
12
<PAGE> 14
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------------------------------------
1997 1996(4) 1995(4) 1994 1993(4)
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract revenue...................... $109,817 $ 67,014 $ 46,130 $ 35,509 $32,071
Product sales......................... 290,216 146,544 109,859 68,045 24,436
-------- -------- -------- -------- -------
400,033 213,558 155,989 103,554 56,507
Direct costs:
Contract costs........................ 66,665 35,577 23,046 17,287 15,838
Cost of product sales................. 254,823 128,070 95,585 60,276 20,978
-------- -------- -------- -------- -------
321,488 163,647 118,631 77,563 36,816
Indirect, general and administrative
expenses................................. 64,587 40,827 29,388 20,858 16,864
Amortization and other operating costs,
net...................................... 1,916 1,595 1,070 905 342
-------- -------- -------- -------- -------
387,991 206,069 149,089 99,326 54,022
Operating income........................... 12,042 7,489 6,900 4,228 2,485
Interest expense........................... (6,107) (3,045) (1,362) (817) (555)
Equity in earnings of affiliate(1)......... 1,887 792 -- -- --
Other income............................... 107 -- -- -- --
-------- -------- -------- -------- -------
Income before income taxes................. 7,929 5,236 5,538 3,411 1,930
Provision for income taxes................. 3,658 2,282 2,406 1,593 737
-------- -------- -------- -------- -------
Net income................................. $ 4,271 $ 2,954 $ 3,132 $ 1,818 $ 1,193
======== ======== ======== ======== =======
Earnings per share(2)...................... $ 0.60 $ 0.47 $ 0.60 $ 0.38 $ 0.25
======== ======== ======== ======== =======
Weighted average shares of common stock and
common stock equivalents................. 7,141 6,233 5,196 4,774 4,756
======== ======== ======== ======== =======
BALANCE SHEET DATA:
Cash and equivalents....................... $ -- $ 47 $ 1,267 $ 1,182 $ 454
Receivables, net........................... 99,017 69,146 44,677 35,331 15,153
Inventory, net............................. 16,716 9,421 6,327 2,685 3,289
Working capital(3)......................... 83,551 47,949 13,125 4,441 2,393
Total assets............................... 156,080 109,460 72,309 48,142 27,271
Lines of credit............................ 30,021 30,453 23,419 11,993 5,843
Shareholders' equity....................... 66,245 27,745 23,039 10,877 9,518
</TABLE>
- ---------------
(1) Equity in earnings of affiliate in fiscal 1997 and 1996 relates to the
Company's 49% interest in an unincorporated joint venture which is accounted
for using the equity method. See Note 12 of Notes to the Consolidated
Financial Statements included in the Company's 1997 Annual Report and
incorporated herein by reference under Item 8. "Financial Statements and
Supplementary Data." The audited financial statements of the unincorporated
joint venture for its fiscal year ended December 31, 1996 are included as
Exhibit 99.2.
(2) Fully diluted earnings per share are substantially the same as primary
earnings per share for the years presented. The Company has never declared
or paid cash dividends on its capital stock and no cash dividends are
presently contemplated.
(3) The significant increase in working capital from March 31, 1995 to March 31,
1996 is primarily attributable to a new line of credit facility, which was
entered into during fiscal 1996, and to the senior subordinated notes issued
by the Company in February 1996, both of which represent noncurrent debt.
Borrowings under the Company's previous line of credit facility were of a
short-term nature.
(4) In fiscal 1993, the Company acquired all the outstanding common stock of
BDS, Inc. In fiscal 1995, the Company acquired all of the outstanding common
stock of Advanced Computer Technology, Inc. and Delta Research Corporation.
In fiscal 1996, the Company acquired all of the outstanding common stock of
Concept Automation, Inc. The acquisitions were accounted for as purchases
and, accordingly, the results of their operations have been included in the
Company's consolidated financial statements from the dates of acquisition.
See Note 13 of Notes to the Consolidated Financial Statements included in
the Company's 1997 Annual Report and incorporated herein by reference under
Item 8. "Financial Statements and Supplementary Data" for information
relating to the 1995 and 1996 acquisitions.
13
<PAGE> 15
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the section so titled in the 1997 Annual Report is
incorporated herein by reference.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included on pages 22 through 34 of
the 1997 Annual Report and is incorporated herein by reference.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the information set forth under the captions "Election
of Directors" appearing in the Company's definitive proxy statement with respect
to its annual meeting of shareholders to be held September 17, 1997 (the "Proxy
Statement"), which information is incorporated herein by reference. Information
required by this item with respect to executive officers is provided in Item 1
of this report. See "Item 1. Business -- Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption
"Management -- Executive Compensation" appearing in the Company's Proxy
Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information set forth under the captions "Stock
Owned by Management" and "Principal Holders of Voting Securities of BTG"
appearing in the Company's Proxy Statement, which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information set forth under the caption
"Management -- Certain Transactions" appearing in the Company's Proxy Statement,
which information is incorporated herein by reference.
14
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. The following financial statements, together
with the report of KPMG Peat Marwick LLP, appearing in the indicated
portions of the Company's 1997 Annual Report, filed as Exhibit 13.2,
are incorporated herein by reference and filed as part of this report:
A. Independent Auditors' Report (Annual Report page 21)
B. Consolidated Statements of Operations (Annual Report page 22)
C. Consolidated Balance Sheets (Annual Report page 23)
D. Consolidated Statements of Shareholders' Equity (Annual Report page
24)
E. Consolidated Statements of Cash Flows (Annual Report page 25)
F. Notes to Consolidated Financial Statements (Annual Report pages 26
through 34)
2. Financial Statement Schedules. The following additional financial data
should be read in conjunction with the Consolidated Financial
Statements in the 1997 Annual Report. Schedules other than those listed
below have been omitted because they are inapplicable or are not
required.
<TABLE>
<S> <C>
Valuation and Qualifying Accounts Schedule VIII
Statement regarding computation of per share earnings Exhibit 11
Independent Auditors' Report on Consolidated Financial Statement
Schedule Exhibit 99.1
</TABLE>
3. The following exhibits are either filed with this Report or are
incorporated herein by reference:
<TABLE>
<C> <S>
3.1 Amended and Restated Articles of Incorporation of the Company (incorporated
by reference to the Company's registration statement on Form S-1 (File No.
33-85854)).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference to the
Company's registration statement on Form S-1 (File No. 33-85854)).
4.1 Specimen certificate of share of Common Stock (incorporated by reference to
the Company's registration statement on Form S-8 (File No. 33-97302)).
10.1 Business Loan and Security Agreement, dated November 28, 1995, among BTG,
Inc. and its subsidiaries and NationsBank, N.A. (incorporated by reference
to the Company's Form 10-Q for the quarter ended December 31, 1995), First
and Second Modifications thereto, dated February 16 and March 28, 1996
(incorporated by reference to the Company's Form 10-K for the year ended
March 31, 1996), Third Modification thereto, dated October 1, 1996
(incorporated by reference to the Company's registration statement on Form
S-1 (File No. 333-14767)), and Fourth Modification thereto, dated February
12, 1997.
10.2 1995 Employee Stock Option Plan (incorporated by reference to the Company's
registration statement on Form S-8 (File No. 333-10473)).*
10.3 Employee Stock Purchase Plan (incorporated by reference to the Company's
registration statement on Form S-8 (File No. 333-10473)).*
10.4 Annual Leave Stock Plan (incorporated by reference to the Company's
registration statement on Form S-8 (File No. 33-97302)).*
10.5 Directors Stock Option Plan (incorporated by reference to the Company's Form
10-K for the year ended March 31, 1996).*
10.6 Non-Employee Director Stock Purchase Plan (incorporated by reference to the
Company's registration statement on Form S-1 (File No. 333-14767)).*
</TABLE>
15
<PAGE> 17
<TABLE>
<C> <S>
10.7 Employment Agreement between the Company and Edward H. Bersoff (incorporated
by reference to the Company's registration statement on Form S-1 (File No.
33-85854)).*
10.8 Stock Purchase Agreement by and among BTG, Inc., Concept Automation, Inc. of
America, and the Stockholders of Concept Automation, Inc. of America, dated
October 20, 1995 (incorporated by reference to the Company's Current Report
on Form 8-K dated October 20, 1995).
10.9 Note and Warrant Purchase Agreement, dated February 16, 1996, between BTG,
Inc. and Nomura Holding America, Inc. (incorporated by reference to the
Company's Form 10-K for the year ended March 31, 1996), amendment thereto
dated October 1, 1996 and Second Amendment thereto dated October 31, 1996
(incorporated by reference to the Company's registration statement on Form
S-1 (File No. 333-14767)).
10.10 Agreement for Wholesale Financing dated October 31, 1996 between BTG and
Deutsche Financial Services Corporation and amendment thereto dated October
31, 1996 (incorporated by reference to the Company's registration statement
on Form S-1 (File No. 333-14767)).
11 Statement regarding computation of per share earnings.
13.1 Management's Discussion and Analysis of Financial Condition and Results of
Operations incorporated by reference to pages 16 through 21 of the 1997
Annual Report.
13.2 Financial Statements and Supplementary Data incorporated by reference to
pages 22 through 34 of the 1997 Annual Report.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
99.1 Independent Auditors' Report of KPMG Peat Marwick LLP.
99.2 Audited financial statements of Joint Venture between Intellisys Technology
Corporation and Concept Automation, Inc. of America, including independent
auditors' report thereon, as of December 31, 1996 and for the year then
ended.
</TABLE>
-----------------------
* Management contract or compensatory plan or arrangement.
(b) The Registrant did not file any Current Reports on Form 8-K during the
fourth quarter of its fiscal year ended March 31, 1997.
(c) Exhibits to this Form 10-K are filed herewith, unless incorporated by
reference.
(d) Schedules to this Form 10-K are filed herewith.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 as of the 30th day of
June, 1997.
BTG, INC.
--------------------------------------
Registrant
By: /s/ EDWARD H. BERSOFF
------------------------------------
Edward H. Bersoff
President and Chief Executive
Officer
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
registrant and in the capacities indicated as of June 30, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ EDWARD H. BERSOFF Chairman of the Board, President and Chief
- --------------------------------------------- Executive Officer (Principal Executive
Edward H. Bersoff Officer)
/s/ JOHN M. HUGHES Senior Vice President and Chief Financial
- --------------------------------------------- Officer (Principal Financial Officer and
John M. Hughes Principal Accounting Officer)
/s/ RUTH M. DAVIS Director
- ---------------------------------------------
Ruth M. Davis
/s/ JAMES V. KIMSEY Director
- ---------------------------------------------
James V. Kimsey
/s/ ALAN G. MERTEN Director
- ---------------------------------------------
Alan G. Merten
/s/ RAYMOND T. TATE Director
- ---------------------------------------------
Raymond T. Tate
/s/ RONALD L. TURNER Director
- ---------------------------------------------
Ronald L. Turner
/s/ DONALD M. WALLACH Director
- ---------------------------------------------
Donald M. Wallach
</TABLE>
17
<PAGE> 19
SCHEDULE VIII
BTG, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE OTHER BALANCE
AT CHANGES AT
BEGINNING ADDITIONS ADDITIONS END OF
OF YEAR AT COST RETIREMENTS (DEDUCTIONS) YEAR
--------- --------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1997
Allowances for doubtful accounts
receivable.......................... $ 221 $ 1,510 $ 729 $ -- $ 1,002
Allowances for inventory
obsolescence........................ 925 82 57 -- 950
Allowances for income tax
valuations.......................... 105 -- 105 -- --
------- ------- ----- ------ -------
$ 1,251 $ 1,592 $ 891 $ -- $ 1,952
======= ======= ===== ====== =======
FISCAL YEAR ENDED MARCH 31, 1996
Allowances for doubtful accounts
receivable.......................... $ 322 $ 140 $ 241 $ -- $ 221
Allowances for contract losses........ 26 -- 26 -- --
Allowances for inventory
obsolescence........................ 371 125 59 488(A) 925
Allowances for income tax
valuations.......................... 197 -- 92 -- 105
------- ------- ----- ------ -------
$ 916 $ 265 $ 418 $ 488 $ 1,251
======= ======= ===== ====== =======
FISCAL YEAR ENDED MARCH 31, 1995
Allowances for doubtful accounts
receivable.......................... $ 130 $ 233 $ 41 $ -- $ 322
Allowances for contract losses........ 300 -- 274 -- 26
Allowances for inventory
obsolescence........................ 185 314 128 -- 371
Allowances for income tax
valuations.......................... 200 -- 3 -- 197
------- ------- ----- ------ -------
$ 815 $ 547 $ 446 $ -- $ 916
======= ======= ===== ====== =======
</TABLE>
- ---------------
(A) Relates to an estimated accrued expense in fiscal 1995 which was settled in
fiscal 1996 at a lesser amount.
18
<PAGE> 1
EXHIBIT 10.1
FOURTH MODIFICATION TO BUSINESS LOAN AND SECURITY AGREEMENT
THIS FOURTH MODIFICATION TO BUSINESS LOAN AND SECURITY AGREEMENT
(this "Modification") is made as of the 12th day of February, 1997, by and
among (i) NATIONSBANK, N.A., a national banking association ("NationsBank"),
having offices at 8300 Greensboro Drive, Suite 550, McLean, Virginia 22102;
(ii) FLEET CAPITAL CORPORATION, a Rhode Island corporation ("Fleet"), having
offices at 300 Galleria Parkway Northwest, Suite 800, Atlanta, Georgia 30339;
(iii) SIGNET BANK, a Virginia banking corporation ("Signet"), having offices at
7799 Leesburg Pike, Falls Church, Virginia 22043; and (iv) BTG, INC., a
Virginia corporation ("BTG"); ADVANCED COMPUTER TECHNOLOGY, INC., a Delaware
corporation ("ACTECH"); BDS, INC., a Virginia corporation ("BDS"); DELTA
RESEARCH CORPORATION, a Virginia corporation ("DELTA"); BTG PRODUCTS, INC., a
Virginia corporation ("BTGPRO"); CONCEPT AUTOMATION, INC. OF AMERICA, a
Virginia corporation ("CAI"); and CONCEPT AUTOMATION SERVICES, INC., a Virginia
corporation ("CAS"); all having principal offices at 1945 Old Gallows Road,
Vienna, Virginia 22182. For purposes hereof, (a) NationsBank (acting in its
capacity as agent for the Lenders) is referred to herein as the "Agent"; (b)
NationsBank (acting on its own behalf as a Lender), Fleet and Signet and each
other person or entity hereafter becoming a "Lender" pursuant to the Loan
Agreement (hereinafter defined) are hereinafter referred to individually as a
"Lender" and collectively as the "Lenders"; and (c) BTG, ACTECH, BDS, DELTA,
BTGPRO, CAI, CAS and each other person or entity hereafter executing a "Joinder
Agreement" pursuant to the Loan Agreement are hereinafter referred to
individually as a "Borrower" and collectively as the "Borrowers". Capitalized
terms used, but not defined, in this Modification shall have the meanings
attributed to such terms in the Loan Agreement.
W I T N E S S E T H T H A T:
WHEREAS, pursuant to the terms and conditions of a certain Business Loan and
Security Agreement dated November 28, 1995 (the "Original Loan Agreement", and
as amended by the hereinafter defined First Modification, Second Modification
and Third Modification, the "Loan Agreement"), by and among the Borrowers,
NationsBank and the Agent, the Borrowers obtained a loan (the "Loan") from
NationsBank in the maximum principal amount of Sixty Million and No/100 Dollars
($60,000,000.00), secured by, among other things, certain collateral more fully
described in Article III, Section 1 of the Loan Agreement; and
WHEREAS, the Loan was originally evidenced by a certain Revolving
Promissory Note dated November 28, 1995 (the "Original Note"), made by the
1
<PAGE> 2
Borrowers and payable to the order of the Agent, in the maximum principal
amount of Sixty Million and No/100 Dollars ($60,000,000.00); and
WHEREAS, pursuant to the terms and conditions of a certain First
Modification to Business Loan and Security Agreement dated February 16, 1996
(the "First Modification"), the Original Loan Agreement was amended to evidence
NationsBank's consent to, among other things, BTG's issuance and sale of
certain subordinate notes and warrants to Nomura Holding of America, Inc., a
Delaware corporation; and
WHEREAS, pursuant to the terms and conditions of a certain Second
Modification to Business Loan and Security Agreement dated March 28, 1996 (the
"Second Modification"), Fleet, Sanwa Business Credit Corporation, a Delaware
corporation ("Sanwa") and Signet became Lender parties to the Original Loan
Agreement, as theretofore modified, and agreed to be bound by the terms and
conditions thereof and advance loan proceeds in accordance therewith
(NationsBank, acting in its capacity as a Lender, Fleet, Sanwa and Signet are
each individually referred to as an "Original Lender" and collectively as the
"Original Lenders"); and
WHEREAS, concurrent with the execution of the Second
Modification, the Original Note was substituted and replaced by four (4)
separate Revolving Promissory Notes dated March 28, 1996 (as amended by the
hereinafter defined First Allonge and Second Allonge, each herein referred to
as a "Replacement Note" and all collectively referred to as, the "Replacement
Notes"), each made by the Borrowers and payable to the order of an Original
Lender, in the aggregate maximum principal amount of Sixty Million Dollars
($60,000,000); and
WHEREAS, pursuant to the terms and conditions of a certain Third
Modification to Business Loan and Security Agreement dated October 1, 1996 (the
"Third Modification"), the Original Loan Agreement, as theretofore modified,
was further modified to (i) evidence the Original Lenders' consent to, among
other things, BTG entering into a financing arrangement with Deutsche Financial
Services Corporation, a Nevada corporation ("DFS"), for the sole purpose of
funding BTG's acquisition of inventory, and CAI entering into a financing
arrangement with DFS in connection with CAI's performance under two (2)
particular Government Contracts; and (ii) reflect an increase in the maximum
principal amount of the Loan from Sixty Million and No/100 Dollars
($60,000,000.00) to Eighty-five Million and No/100 Dollars ($85,000,000.00);
and
2
<PAGE> 3
WHEREAS, concurrent with the execution of the Third Modification,
each of the Replacement Notes was amended, respectively, pursuant to four (4)
certain Allonges and First Modifications to Promissory Note dated October 1,
1996 (collectively, the "First Allonges"), to evidence the increase in the
maximum principal amount of the Loan from Sixty Million and No/100 Dollars
($60,000,000.00) to Eighty-five Million and No/100 Dollars ($85,000,000.00);
and
WHEREAS, the Borrowers and Lenders have agreed, subject to the
terms and conditions set forth herein, to (i) increase Borrowers' Tangible Net
Worth requirements; (ii) delete the Funded Debt to Tangible Net Worth Ratio
covenant; (iii) modify the limitation on the amount of investments and/or
capital expenditures which the Borrowers are permitted to make or expend during
the fiscal year ending March 31, 1997; (iv) modify the Additional Libor
Percentage (as defined in the Replacement Notes, as heretofore modified); (v)
provide for the making of payments, loans or advances by the Borrowers to a
newly formed subsidiary of BTG known as Community Networks, Inc., a Virginia
corporation ("CNI"), for the purpose of funding development costs incurred or
to be incurred by CNI; and (vi) confirm that all of the Borrowers' right, title
and interest in and to the capital stock of CNI, whether now owned or hereafter
acquired (the "CNI Stock") has been pledged to the Agent (for the benefit of
the Lenders); and
WHEREAS, the Borrowers and Lenders have agreed, subject to the
terms and conditions set forth herein, that one hundred eighty (180) day
Interest Periods for Loan advances bearing interest on a LIBOR basis shall no
longer be available; and
WHEREAS, the Borrowers and Lenders desire to acknowledge and
confirm that NationsBank has acquired all of Sanwa's right, title and interest
in and to the Loan.
NOW THEREFORE, for Ten Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. The foregoing recitals are hereby incorporated herein by this
reference and made a part hereof, with the same force and effect as if fully
set forth herein.
2. The definition of "Interest Period" set forth in the "Certain
Definitions" section of the Loan Agreement is hereby deleted in its entirety
and the following substituted in lieu thereof:
3
<PAGE> 4
""INTEREST PERIOD" means as to any Loan proceeds for which
the Borrowers have elected LIBOR based interest in
accordance with this Agreement, the period commencing on
and including the date such LIBOR election is effective (or
the effective date of the Borrowers' election to convert
any portion of the Loan to a LIBOR interest basis in
accordance with the provisions of this Agreement) and
ending on and including the day which is between one (1)
and ninety (90) days, as available, and as selected by the
Borrowers in accordance with the provisions of this
Agreement; provided, however, that: (i) the first day of
any Interest Period shall be a Business Day; (ii) if any
Interest Period would end on a day that would not be a
Business day, such Interest Period shall be extended to the
next succeeding Business Day; and (iii) no Interest Period
shall extend beyond (a) the maturity date of the Loan; or
(b) the tenth (10th) day following the expiration of any
Quarterly Period (hereinafter defined), unless such
Interest Period commenced during the first ten (10) days of
the first calendar month of such Quarterly Period (i.e.,
the 1st through the 10th day of February, May, August or
November, as applicable)."
1. The "Certain Definitions" section of the Loan Agreement is hereby
amended by adding the following definitions of "Additional Libor Percentage",
"CNI" and "Funded Debt" therein:
"ADDITIONAL LIBOR PERCENTAGE" shall have the meaning
assigned to such term in Exhibit 7 attached to this
Agreement.
"CNI" shall mean Community Networks, Inc., a
Virginia corporation.
"CONSOLIDATED EBITDA" shall mean earnings, before
interest, taxes, depreciation and amortization for
the four (4) consecutive fiscal quarters of the
Borrowers ended on any date of determination,
calculated on a consolidated basis in accordance
with generally accepted accounting principles.
4
<PAGE> 5
"FUNDED DEBT" shall mean borrowed funds, whether
senior or subordinated, secured or unsecured, or in
the form of loans or capitalized leases."
1. The Tangible Net Worth Covenant set forth in Section 15 of
Article VI of the Loan Agreement is hereby deleted in its entirety and the
following substituted in lieu thereof:
"Tangible Net Worth. The Borrowers will maintain on a
consolidated basis at all times during the following periods, Tangible Net
Worth of not less than the following amounts:
<TABLE>
<CAPTION>
Required Consolidated
Periods Tangible Net Worth
---------------------------------- --------------------
<S> <C>
From 12/31/96 through 03/30/97 $40,000,000
From 03/31/97 through 03/30/98 $45,000,000
From 03/31/98 through the Maturity Date $53,000,000
</TABLE>
For purposes of this Agreement, "Tangible Net Worth" shall mean
all capital stock, paid in capital and retained earnings, less all Treasury
stock, amounts due from officers, directors, stockholders and members of their
immediate families, amounts due from affiliates (to the extent that such
amounts are part of the Borrowers' consolidated net worth), investments in
non-marketable securities, notes receivable of affiliated companies (to the
extent that such amounts are part of the Borrowers' consolidated net worth),
leasehold improvements, goodwill, non-competition agreements, capitalized
organization and development costs, capitalized expenses, loan costs, patents,
trademarks, copyrights, franchises, licenses and other intangible assets."
1. The Funded Debt to Tangible Net Worth Ratio covenant set forth in
Section 15 of Article VI of the Loan Agreement is hereby deleted in its
entirety.
2. Section 10 of Article VII of the Loan Agreement is hereby deleted
in its entirety and the following substituted in lieu thereof:
"CAPITAL EXPENDITURES. On a consolidated basis, make any
investment or capital expenditure including, but not
limited to, expenditures for leasehold improvements or the
5
<PAGE> 6
acquisition of the assets of any other firm, person,
company, corporation or enterprise, in excess of Two
Million Two Hundred Thousand Dollars ($2,200,000) during
the Borrowers' fiscal year ending March 31, 1997, and One
Million Four Hundred Thousand Dollars ($1,400,000) during
any fiscal year thereafter; and"
1. Article VII of the Loan Agreement is hereby amended by adding the
following new negative covenant:
"PAYMENTS TO CNI. Suffer or permit any Borrower to make
any payments, loans or advances to or for the benefit of
CNI in excess of Four Million Four Hundred Thousand Dollars
($4,400,000), in the aggregate, throughout the term of the
Loan; it being understood and agreed that any such
payments, loans or advances constituting capital
expenditures shall also be subject to the limitations set
forth in Section 10 of Article VII and the other provisions
of this Agreement."
1. The form Request for Advance and Certification attached to the
Loan Agreement as Exhibit 4 is hereby deleted in its entirety and the form
Request for Advance and Certification attached hereto as "Exhibit 4"
substituted in lieu thereof.
2. Exhibit 7 attached to the Loan Agreement is hereby amended by
adding the following provision as a new section at the end thereof:
"ADDITIONAL LIBOR PERCENTAGE
From and after the effective date of the Second Allonges
(as defined in the Fourth Modification to Business Loan and
Security Agreement dated February ___, 1997, by and among
the Agent, Lenders and Borrowers) until the first
Calculation Date (hereinafter defined), the term Additional
Libor Percentage shall mean one and three-quarters percent
(1.75%). From and after the first Calculation Date, the
term Additional Libor Percentage shall mean the percentage
which corresponds to the Borrowers' Leverage Ratio, as set
forth below:
6
<PAGE> 7
<TABLE>
<CAPTION>
- -------------------------------------------------------------- Additional
Leverage Ratio Libor Percentage
- -------------- ----------------
<S> <C>
greater than or equal to 4.0, but less than 5.0 2.00%
greater than or equal to 3.0, but less than 4.0 1.75%
greater than or equal to 2.0, but less than 3.0 1.50%
less than 2.0 1.25%
</TABLE>
For purposes hereof the Borrowers' Leverage Ratio shall mean the ratio of
Borrowers' Funded Debt to Consolidated EBITDA. Determinations of the
applicable Additional Libor Percentage shall be made quarterly, on or before
the first (1st) day of each February, May, August and November throughout the
term of the Loan (the 1st day of each such month being herein referred to as a
"Calculation Date"), based on the quarterly financial statements submitted by
the Borrowers for the immediately preceding calendar quarter; it being
understood and agreed that if any such quarterly financial statements are not
submitted as required hereunder, the applicable Additional Libor Percentage for
the ensuing Quarterly Period shall be two percent (2%). The applicable
Additional Libor Percentage so determined shall be effective for any Interest
Period which commences on or after the applicable Calculation Date, and such
rate shall continue to be the applicable Additional Libor Percentage until the
next Calculation Date (each such period of effectiveness being herein referred
to as a "Quarterly Period")."
1. The Lenders and Borrowers hereby acknowledge and confirm that
Sanwa has sold, assigned and transferred to NationsBank, all of Sanwa's right,
title and interest in and to the Loan.
2. Simultaneously with the execution of this Modification, Borrowers
shall execute and deliver to each Lender an Allonge and Second Modification to
Promissory Note (each being referred to herein as a "Second Allonge" and
collectively as the "Second Allonges"), pursuant to which each Replacement
Note, as heretofore modified, shall be further modified to provide that the
Additional Libor Percentage shall be defined and determined in accordance with
Exhibit 7 of the Loan Agreement (as amended hereby).
3. Simultaneously with the execution of this Modification, Borrowers
shall (i) pledge to the Agent (for the benefit of the Lenders), the CNI Stock;
(ii) deliver to the Agent original CNI Stock certificates, accompanied by blank
stock powers therefor, executed by the Borrowers; and (iii) execute and deliver
to the Agent a certain Third Modification to BTG Stock Security Agreement,
pursuant to which the Borrowers
7
<PAGE> 8
acknowledge and agree that the CNI Stock shall be subject to the terms and
conditions of the BTG Stock Security Agreement, as amended.
4. Each Borrower hereby acknowledges and agrees that (i) there are
no set-offs or defenses against the Replacement Notes, as heretofore modified
(collectively, the "Notes"), the Loan Agreement or any other Loan Document;
(ii) except as specifically amended hereby and by the modification documents
expressly referenced herein, all of the terms and conditions of the Notes, the
Loan Agreement and the other Loan Documents shall remain unmodified and in full
force and effect; (iii) the Notes, the Loan Agreement and the other Loan
Documents (as modified hereby and by the other documents expressly referenced
herein) are hereby expressly approved, ratified and confirmed; and (iv) the
execution, delivery and performance by each Borrower of this Modification (a)
is within its corporate powers, (b) has been duly authorized by all necessary
corporate action, and (c) does not require the consent or approval of any other
person or entity.
5. Concurrent with the execution of this Modification, the Borrowers
shall pay all of the Agent's costs and expenses associated with this
Modification and the transactions referenced herein or contemplated hereby,
including, without limitation, the Agent's reasonable legal fees and expenses.
6. This Modification shall be governed by the laws of the
Commonwealth of Virginia and shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns.
7. This Modification may be executed in any number of counterparts,
each of which shall be deemed an original and all of which together shall be
deemed one and the same instrument.
IN WITNESS WHEREOF, the undersigned have signed, sealed and
delivered this Modification on the day and year first above written.
BORROWERS:
---------
[Corporate Seal] BTG, INC.,
ATTEST: a Virginia corporation
/s/ Marilynn D. Bersoff By: /s/ Edward H. Bersoff
- ----------------------- ------------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
-------------------- ----------------------
Title: Secretary Title: President and CEO
-------------------- ---------------------
8
<PAGE> 9
[Corporate Seal] ADVANCED COMPUTER
ATTEST: TECHNOLOGY, INC., a Delaware
corporation
/s/ Marilynn D. Bersoff By: /s/ C. Thomas Nixon
- ------------------------- -----------------------
Name: Marilynn D. Bersoff Name: C. Thomas Nixon
-------------------- ------------------------
Title: Secretary Title: President
------------------- -----------------------
[Corporate Seal] BDS, INC.,
ATTEST: a Virginia corporation
/s/ Marilynn D. Bersoff By: /s/ Edward H. Bersoff
- ----------------------- -----------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
-------------------- ------------------------
Title: Secretary Title: CEO
-------------------- -----------------------
[Signatures Continue on Following Page]
[Corporate Seal] DELTA RESEARCH CORPORATION,
ATTEST: a Virginia corporation
/s/ Marilynn D. Bersoff By: /s/ Edward H. Bersoff
- ----------------------- -----------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
-------------------- ------------------------
Title: Secretary Title: CEO
------------------- -----------------------
[Corporate Seal] BTG PRODUCTS, INC.,
ATTEST: a Virginia corporation
/s/ Marilynn D. Bersoff By: /s/ Edward H. Bersoff
- ----------------------- -----------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
-------------------- ------------------------
Title: Secretary Title: CEO
------------------- -----------------------
[Corporate Seal] CONCEPT AUTOMATION, INC. OF
ATTEST: AMERICA, a Virginia corporation
/s/ Marilynn D. Bersoff By: /s/ Edward H. Bersoff
- ----------------------- -----------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
-------------------- ------------------------
Title: Secretary Title: CEO
------------------- -----------------------
9
<PAGE> 10
[Corporate Seal] CONCEPT AUTOMATION SERVICES,
ATTEST: INC., a Virginia corporation
/s/ Marilynn D. Bersoff By: /s/ Edward H. Bersoff
- ----------------------- -----------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
------------------- ----------------------
Title: Secretary Title: CEO
------------------- ---------------------
AGENT:
-----
NATIONSBANK, N.A., a
national banking association, acting
in its capacity as Agent
By: /s/ Douglas T. Brown
------------------------
Name: Douglas T. Brown
Title: Vice President
[Signatures Continue on Following Page]
LENDER(S):
---------
NATIONSBANK, N.A., a
national banking association
By: /s/ Douglas T. Brown
------------------------
Name: Douglas T. Brown
Title: Vice President
FLEET CAPITAL CORPORATION, a
Rhode Island corporation
By: /s/ Stuart Solomon
------------------------
Name: Stuart Solomon
Title: Senior Vice President
SIGNET BANK, a Virginia banking
corporation
By: /s/ R. Mark Swaak
---------------------------
Name: R. Mark Swaak
Title: Asst. Vice President
---------------------
10
<PAGE> 11
EXHIBIT 4
REQUEST FOR ADVANCE AND CERTIFICATION
$85,000,000 REVOLVING CREDIT FACILITY
REQUEST FOR ADVANCE
12 The undersigned, BTG, Inc., a Virginia corporation ("BTG"), for
itself and as attorney-in-fact for each Borrower (hereinafter defined) under
that certain Business Loan and Security Agreement dated November 28, 1995 (as
heretofore modified, the "Loan Agreement"), by and among (i) NationsBank, N.A.,
a national banking association (acting in its capacity as a Lender), Fleet
Capital Corporation, a Rhode Island corporation and Signet Bank, a Virginia
banking corporation, (ii) NationsBank, N.A., acting in its capacity as agent,
and (iii) BTG, certain subsidiaries of BTG and any person or entity who has
become a party thereto by execution of a "Joinder Agreement" pursuant to the
Loan Agreement (collectively, the "Borrower"), hereby requests that a Loan
advance be made to the Borrower pursuant to Section 4(a) of the Loan Agreement
in the amount of ____________________________________ and No/100 Dollars
($__________________). This Loan advance will be effective on
__________ and will be at the _______ Prime Rate option or the ________ Libor
Rate option (check one). If the Libor Rate option is requested, it shall
be effective for a ____ (select 1 through 90) day period, commencing on
___________________ (a Business Day no less than three (3) days from the date
of submission of this Request and Certification) and expiring on ______________
(not later than (i) August 31, 1998; or (ii) the expiration of any Quarterly
Period (as defined in the Loan Agreement), unless such Interest Period
commenced within ten (10) days immediately preceding the commencement of such
Quarterly Period).
CERTIFICATION
The Borrower hereby represents, warrants and certifies that each
and all of the representations and warranties set forth in the Loan Documents
are being remade and redated as of the date hereof, and are true, correct and
complete in all respects as of the date hereof.
IN WITNESS WHEREOF, the undersigned has executed and delivered
this certificate, this ___ day of __________, 19____.
BTG, INC., a Virginia corporation,
attorney-in-fact for each of the Borrowers
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
12
<PAGE> 1
EXHIBIT 11
BTG, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Net income $ 4,271 $ 2,954 $ 3,132
========== ========== =========
Weighted average common stock
shares outstanding during the
period 6,887 6,042 4,979
Dilutive effect of common stock
equivalents 254 191 217
---------- ---------- ---------
Weighted average shares of common
stock and common stock equivalents 7,141 6,233 5,196
========== ========== =========
Earnings per common and common
equivalent share $ 0.60 $ 0.47 $ 0.60
========== ========== =========
</TABLE>
20
<PAGE> 1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
BTG, Inc. ("BTG" or "the Company") is an information technology company
providing complete solutions to a broad range of complex systems and product
needs of the United States Government and its agencies and departments ("the
Government") and other commercial and state and local government customers. The
Company provides systems development, integration, engineering and network
design, implementation, and security expertise services ("the Systems
Business"). The Company also resells computer hardware, software and integrated
systems ("the Product Reselling Business").
The Company's revenues are derived from both contract activities and product
sales. Contract revenue is typically less seasonal than product sales but
fluctuates month-to-month based on contract delivery schedules. Contract
revenue is characterized by lower direct costs than product sales yet generally
requires a higher relative level of infrastructure support. Year-to-year
increases in contract revenue have generally resulted from increases in volume,
driven by additional work requirements under Government contracts, rather than
price increases, which are generally limited to escalation factors of 3% to 4%
on direct labor costs. Product sales are highly seasonal, with the Company's
second and third fiscal quarters typically accounting for the greatest
proportion of revenues each year. Product sales are characterized by higher
direct costs than contract revenue; however, indirect expenses associated with
product sales are generally lower in comparison. Year-to-year increases in
product sales have generally been driven by higher volumes as opposed to price
increases.
During fiscal 1996, the Company's operations were adversely affected by the
Government's budget impasse, which resulted in partial shutdowns of the
Government for several weeks during the Company's third and fourth fiscal
quarters. These shutdowns had a negative impact on fiscal 1996 third-quarter
operations. In addition, the processing of payments under Government
contracts and purchases was delayed by the shutdowns. This required the Company
to carry higher receivable balances, which, in turn, resulted in higher
interest costs. The extent of any impact on the Company's results of
operations, financial position or liquidity resulting from possible future
shutdowns cannot be determined at this time.
In October 1995, the Company acquired all of the outstanding capital stock of
Concept Automation, Inc. of America ("CAI") for approximately $14.7 million.
CAI was primarily involved in the integration, sale and maintenance of
electronic data processing equipment and related support services, principally
to civilian agencies of the Government. The acquisition was accounted for using
the purchase method of accounting, and accordingly, the results of operations
of CAI have been included in the Company's consolidated statements of
operations since the date of acquisition. The excess of the purchase price over
the fair value of the net tangible and identifiable intangible assets acquired
has been recorded as goodwill and is being amortized on a straight-line basis
over 20 years, the expected period of benefit. Effective April 1, 1996, the
Company integrated CAI's operations with those of its Technology Systems and
Integration and Network Systems business units.
In August 1996, the Company formed a new subsidiary, Community Networks, Inc.
("CNI"), in which the Company maintains a majority interest at March 31, 1997.
CNI was created to be a total solutions provider to broadband network owners
entering the Internet access market. CNI's offerings will allow network
operators to sell enhanced Internet services to residential consumers and
businesses. CNI's initial market has been data-over-cable, high-speed Internet
access via cable television plants, focused on mid-sized and independent cable
operators; however, CNI plans to diversify to serve other broadband
telecommunications providers, including telephone companies, utilities, and
emerging wireless technology companies. During fiscal 1997, BTG contributed
approximately $2.7 million toward the start-up of CNI, principally for the
development and marketing of its products and services. CNI began providing
its services to residential customers for the first time in April 1997. The
Company believes that CNI will continue to require similar investment over the
next fiscal year as it continues to establish itself in the high-speed Internet
access arena.
16
<PAGE> 2
RESULTS OF OPERATIONS
The following table presents for the periods indicated (i) the percentage of
revenues represented by certain income and expense items and (ii) the
percentage period-to-period increase (decrease) in such items:
<TABLE>
<CAPTION>
Period-to-Period
Percentage of Revenue Increase (Decrease) of
Fiscal Year Ended March 31, Dollars
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
compared with compared with
1997 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenue 27.5% 31.4% 29.6% 63.9% 45.3%
Product sales 72.5 68.6 70.4 98.0 33.4
Total revenues 100.0 100.0 100.0 87.3 36.9
Direct costs:
Contract costs (as a % of contract revenue) 60.7 53.1 50.0 87.4 54.4
Cost of product sales (as a % of product sales) 87.8 87.4 87.0 99.0 34.0
Total direct costs (as a % of total revenues) 80.4 76.6 76.1 96.5 37.9
Indirect, general and administrative expenses 16.1 19.1 18.8 58.2 38.9
Amortization and other operating costs, net 0.5 0.8 0.7 20.1 49.1
Operating income 3.0 3.5 4.4 60.8 8.5
Interest expense (1.5) (1.4) (0.9) 100.6 123.6
Equity in earnings of affiliate 0.4 0.4 -- 138.3 100.0
Other income 0.1 -- -- 100.0 --
Income before income taxes 2.0 2.5 3.5 51.4 (5.5)
Provision for income taxes 0.9 1.1 1.5 60.3 (5.2)
Net income 1.1 1.4 2.0 44.6 (5.7)
</TABLE>
FISCAL 1997 COMPARED WITH FISCAL 1996
Revenues for fiscal 1997 increased by $186.5 million, or 87.3%, from fiscal
1996. Of this increase, $42.8 million was attributable to contract revenue and
$143.7 million was attributable to product sales. The increase in contract
revenue was primarily due to an increase of $13.8 million under contracts
acquired in connection with the acquisition of CAI; an increase of $17.7
million of revenue recognized under the Company's Integration for Command,
Control, Communications, Computers and Intelligence ("IC4I") contract; an
increase of $3.2 million in contract sales of certain Internet browser products
and services; $2.1 million of revenue resulting from a new contract with the
Federal Aviation Administration; $1.7 million of revenue resulting from the
Company's National Institutes of Health ("NIH") ImageWorld contract, which was
awarded in August 1996; an increase of $1.3 million in services work related to
a contract with the Tennessee Valley Authority ("TVA"); and a net increase of
$3.0 million from a variety of other contracts. The increase in product sales
was primarily due to an increase of $50.4 million of revenue generated under a
variety of sales vehicles acquired in connection with the acquisition of CAI;
an increase of $95.3 million of revenue resulting from sales under the
Company's electronic computer store contract with the NIH; $11.0 million in
increased sales under General Services Administration ("GSA") Schedule
contracts, either directly from the Company's GSA Schedule contracts or from
sales to other prime contractors with GSA Schedule contracts; an increase of
$7.8 million in orders fulfilled under the Systems Acquisition Support Services
("SASS") contract for the defense intelligence community; and $9.8 million in
increased sales to the commercial market. These increases were offset by
decreases of $28.7 million in sales from purchase contracts under the Basic
Ordering Agreement ("BOA") with the North Atlantic Treaty Organization
("NATO"), and a net decrease of $1.9 million in revenues under a variety of
other sales vehicles. In fiscal 1997, approximately 89% of the Company's
revenues were derived from contracts or subcontracts with and product sales to
the Government, compared with 90% for fiscal 1996.
Direct costs, expressed as a percentage of total revenues, increased from 76.6%
in fiscal 1996 to 80.4% in fiscal 1997, reflecting the increased proportion of
total revenues derived from product sales, which typically have higher direct
costs than do revenues generated from service contracts. Contract costs as a
percentage of contract revenue increased from 53.1% in fiscal 1996 to 60.7% in
fiscal 1997, primarily as a result of revenues generated from the IC4I contract
and from contracts acquired in connection with the acquisition of CAI, both of
which require higher levels of material purchases and/or subcontractor
involvement than does BTG's historical contract base, which has a more
labor-intensive, higher gross margin profile. Contract costs include labor
costs, subcontract costs, material costs and other costs directly related to
contract revenue. As a percentage of product revenues, cost of product sales in
fiscal 1997 was relatively unchanged from fiscal 1996.
Indirect, general and administrative expenses include the costs of indirect
labor, fringe benefits, overhead, sales and administration, bid and proposal,
and research and development. Indirect, general and administrative expenses for
fiscal 1997 increased by $23.8 million, or 58.2%, from fiscal 1996. This
increase resulted primarily from an increase in the overall volume of business
as compared with fiscal 1996; as well as from indirect expenses incurred by
CAI, of which only a portion were included in the
17
<PAGE> 3
Company's consolidated fiscal 1996 results; and from the Company's investment
in CNI. In addition, the Company incurred certain costs during fiscal 1997 that
were directly related to certain extraordinary events occurring during its
fourth quarter, such as the Company's consolidation of its Washington, D.C.
area offices, the alignment of certain employee benefits between the plans of
acquired companies and BTG, and the write-off of a significant receivable
resulting from the bankruptcy of a commercial customer. Expressed as a
percentage of total revenues, indirect, general and administrative expenses
decreased in fiscal 1997 to 16.1%, from 19.1% in fiscal 1996, principally
reflective of the increased proportion of total revenues derived from product
sales, which typically have lower indirect, general and administrative expenses
than do revenues generated from service contracts. In addition, certain
non-recurring costs recognized in fiscal 1996 resulting from compensation paid
to a number of employees that could not be charged as direct labor costs to
federal contracts affected by the Government shutdown contributed to the
decreased percentage of indirect, general, and administrative expenses compared
with total revenues.
Amortization and other operating costs, net, which include the amortization of
goodwill and other intangible assets as well as other operating expenses that
are non-reimbursable under Government contracts, increased by $321,000 in
fiscal 1997 as compared with the previous year. This increase was attributable
to increased amortization expense of approximately $389,000 associated with the
goodwill and other intangible assets arising from the acquisition of CAI in
October 1995, offset by a net reduction of $68,000 in other operating costs.
Interest expense for fiscal 1997 increased by $3.1 million, or 100.6%, from
fiscal 1996. This increase was due, in part, to interest paid on borrowings
related to the Company's acquisition of CAI, as well as to the significant
growth in revenues in fiscal 1997, which generated an increase in the level of
outstanding receivables and in the amount of inventory held by the Company,
thereby resulting in a higher level of interest expense related to the
financing of these operating assets. The Company maintains a revolving line of
credit facility (the "Credit Facility") to fund its working capital needs. (See
"Liquidity and Capital Resources--Credit Facility.") In addition, higher
interest costs were incurred during fiscal 1997 as a result of the issuance of
subordinated notes payable (the "Subordinated Notes") by the Company in
February 1996. These notes bear interest at a stated annual rate of 12.875% and
have an effective annual rate of 14.2%. (See "Liquidity and Capital
Resources--Subordinated Notes.") In December 1996, the Company sold 2,190,000
shares of its common stock in a public offering, at $16.25 per share, for total
proceeds of $33.1 million, net of issuance costs. The proceeds from this
offering were received at the latter part of the Company's third quarter and
were used to reduce borrowings outstanding under the Credit Facility.
Equity in the earnings of unconsolidated affiliates increased by $1.1 million,
or 138.3%, in fiscal 1997 as compared with fiscal 1996. This income is derived
from the Company's 49% interest in an unconsolidated joint venture. The joint
venture entity, which is with an unrelated company, was created for the purpose
of performing under a specific contract. BTG's interest was acquired by the
Company in connection with its acquisition of CAI. The significant increase in
this income during fiscal 1997 as compared with the prior year was a result of
both the higher volume of product sales recognized by the joint venture in
fiscal 1997 and the fact that product sales from the joint venture only
generated income for the Company for the portion of fiscal 1996 coincident
with the acquisition of CAI.
The Company's effective tax rate for fiscal 1997 was 46.1% compared with 43.6%
in fiscal 1996. This increase was principally due to the additional goodwill
and intangible asset amortization expense recorded in fiscal 1997, which is not
deductible for income tax purposes, and an increase in certain other
non-deductible costs offset, in part, by a reduction in the deferred tax asset
valuation allowance.
Net income for fiscal 1997 increased by $1.3 million, or 44.6%, from fiscal
1996, due to the reasons discussed above.
FISCAL 1996 COMPARED WITH FISCAL 1995
Revenues for fiscal 1996 increased by $57.6 million, or 36.9%, from fiscal
1995. Of this increase, $20.9 million was attributable to contract revenue,
which increased by 45.3%, and $36.7 million was attributable to product sales,
which increased by 33.4%. The increase in contract revenue was primarily due
to revenue of $7.7 million recognized by CAI, which was acquired in October
1995; an increase of $7.4 million in revenue recognized from a full year's
operations of Delta, which was acquired in November 1994; and $4.9 million in
sales of Internet-related services. The increase in product sales was primarily
due to sales of $17.6 million recognized by CAI; $20.0 million in sales to
prime contractors of the Government under a variety of contract vehicles; $9.7
million in increased sales from direct Department of Defense ("DOD") orders;
$4.8 million in orders fulfilled under the SASS contract; and $1.0 million in
increased sales to the commercial market. These increases were offset by
decreases of $10.7 million in sales from purchase contracts under the NATO BOA
and $6.3 million in decreased sales under the Company's GSA Schedule contracts,
the latter of which the Company believes was in large part attributable to the
Government's budget impasse during fiscal 1996. In fiscal 1996, approximately
90% of the Company's revenues were derived from contracts or subcontracts with
and product sales to the Government, as compared with 91% for fiscal 1995.
Direct costs, expressed as a percentage of total revenues, increased to 76.6%
in fiscal 1996 from 76.1% in fiscal 1995. Contract costs as a percentage of
contract revenue increased to 53.1% in fiscal 1996 from 50.0% in fiscal 1995,
primarily as a result of revenue generated from CAI's contracts, which
typically required higher levels of material purchases than BTG's historical
contract base, which has a more labor-intensive, higher gross margin profile.
Contract costs include labor costs, subcontract costs, material costs and other
costs directly related to contract revenue. Cost of product sales as a
percentage of product revenue increased slightly to 87.4% in fiscal 1996 from
87.0% in fiscal 1995. This increase was primarily attributable to the inclusion
of CAI's product sales, which generated lower gross margins for the year than
the company has typically experienced in its other product sales business.
Indirect, general and administrative expenses include fringe benefits,
overhead, selling and administrative, bid and proposal,
18
<PAGE> 4
and research and development expenses. Indirect, general and administrative
expenses increased by $11.4 million, or 38.9%, in fiscal 1996 as compared with
fiscal 1995. Expressed as a percentage of total revenues, indirect, general and
administrative expenses increased slightly in fiscal 1996 to 19.1%, from 18.8%
in fiscal 1995. This increase was due primarily to indirect expenses of $5.3
million at CAI and a net increase in indirect expenses of $3.6 million at
Delta, which was acquired during the latter half of fiscal 1995. These
increases were offset by decreased bid and proposal costs of $1.1 million in
fiscal 1996 as compared with fiscal 1995. The remainder of the increase was
primarily attributable to an increase in the overall volume of business and to
higher indirect costs resulting from compensation paid to a number of employees
who could not be charged as direct labor costs to federal contracts affected by
the Government shutdown.
Amortization and other operating costs, which include the amortization of
goodwill and other intangible assets as well as other operating expenses that
are non-reimbursable under Government contracts, increased by $525,000, or
49.1%, in fiscal 1996 as compared with fiscal 1995. This increase was largely
attributable to $394,000 of additional amortization expense associated with
goodwill and other intangible assets arising from the business combinations
made by the Company in fiscal 1996 and the latter half of fiscal 1995. The
remaining increase was attributable to additional non-reimbursable operating
costs incurred principally as a result of the overall increase in the Company's
business and from unconsummated merger and acquisition transactions.
Interest expense increased by $1.7 million, or 123.6%, in fiscal 1996 as
compared with fiscal 1995. This increase was due in large part to interest paid
on borrowings related to the Company's acquisition of ACTech, Delta, and CAI in
fiscal 1995 and 1996. In addition, the growth in revenues in fiscal 1996
generated an increase in receivable balances, thereby resulting in a higher
level of interest expense related to receivable financing. Further, the
Government shutdowns during the third and fourth quarters of fiscal 1996
delayed the processing of payments under Government contracts and purchases.
This required the Company to carry its outstanding receivable accounts for
longer periods of time than would otherwise have been the case, which, in turn,
resulted in higher interest costs to the Company. In November 1995, the Company
entered into the Credit Facility, a revolving line of credit that is primarily
used to fund ongoing operations of the Company. Interest paid under the Credit
Facility is based on current market rates adjusted monthly. The average
interest rate incurred under the Credit Facility during fiscal 1996 was 8.1%,
as compared with 7.9% in fiscal 1995. The increase in the average interest rate
paid reflects the higher rate payable under the formula set forth in the Credit
Facility as compared with the Company's former credit facility, partially
offset by a decline in prevailing market rates during fiscal 1996.
The Company's effective tax rate for fiscal 1996 was 43.6% compared with 43.4%
in fiscal year 1995. The increase was due to the additional goodwill and
intangible asset amortization expense, which typically is not deductible for
income tax purposes, offset in part by a reduction in the deferred tax asset
valuation allowance.
Net income for fiscal 1996 decreased by $178,000, or 5.7%, from fiscal 1995,
due to the reasons discussed above.
INFLATION
Approximately 31.6% and 56.8% of the Company's contract revenue for fiscal 1997
and 1996, respectively, were under cost-reimbursement-type contracts, under
which inflationary increases are borne by the customer. Although the Company
performs on several multi-year, fixed-price and time-and-materials contracts,
under which it bears the risk of inflationary pressures on its costs, to date
it has not been materially adversely affected by inflation. In addition, the
Company's product sales generally have not been affected by inflation.
LIQUIDITY AND CAPITAL RESOURCES
Principally as a result of the Company's significant growth in fiscal 1997,
operating activities used cash of approximately $27.6 million in fiscal 1997,
primarily reflecting increases in accounts receivable, inventory, and prepaid
expenses of approximately $30.6 million, $7.3 million, and $5.3 million,
respectively. These increases were offset by increases in accounts payable and
accrued expenses of approximately $6.8 million and $2.6 million, respectively.
In addition, decreases in other liabilities and income taxes currently payable
of approximately $1.6 million and $1.3 million, respectively, contributed to
the use of cash by the Company's operating activities in fiscal 1997. Net cash
of $5.2 million and $13.3 million was used by operating activities during
fiscal 1996 and 1995, respectively. The cash used in operations during fiscal
1996 was largely the result of increases in accounts receivable resulting from
higher business volumes.
Cash flow related to investing activities during fiscal 1997 resulted in a net
use of cash of approximately $5.3 million and primarily consisted of
investments in capital expenditures and product development. The Company
invested approximately $2.0 million in the development of various software
products during fiscal 1997, principally for products to be used by the
Company's newly formed subsidiary, CNI, in the delivery of its products and
services. In addition, the Company invested cash of approximately $2.8 million
in capital expenditures during fiscal 1997, primarily relating to the
acquisition of office and computer-related equipment for use in the performance
of contracts and increased efficiency in the Company's administration and to
leasehold improvements associated with the Company's physical relocation of its
principal facilities. The Company expects to invest less cash in capital
expenditures in fiscal 1998. In addition, the Company invested $200,000 during
fiscal 1997 in WheelGroup Corporation ("WGC"), which is principally involved in
network security products and services, and purchased a $300,000 convertible
note from WGC.
In fiscal 1996 and 1995, approximately $15.2 million and $4.2 million,
respectively, were used by investing activities. The cash used in investing
activities during these fiscal years was principally due to the acquisitions of
CAI, ACTech and Delta.
During fiscal 1997, approximately $32.9 million was provided from financing
activities, primarily as a result of $33.1 million in net proceeds resulting
from the Company's follow-on stock offering in December 1996, offset by
approximately $1.0 million in payments under both outstanding debt and capital
lease
19
<PAGE> 5
arrangements and debt issue costs. In addition, the Company received proceeds
of approximately $800,000 from sales of stock under employee stock option and
stock purchase plans during fiscal 1997. The net proceeds received from the
follow-on stock offering were used to reduce borrowings outstanding under the
Company's Credit Facility, under which were available borrowings of $30.2
million at March 31, 1997. During fiscal 1996, $19.1 million was provided from
financing activities, primarily as the result of $15.0 million in proceeds
received from the issuance of the Subordinated Notes and increased borrowings
of $7.0 million under the Company's Credit Facility. In fiscal 1996, these
funds were used to finance the cash portion of the Company's acquisition of CAI
and to fund the Company's significant business growth. In fiscal 1995, $18.6
million was provided from financing activities, reflecting $8.7 million in net
proceeds from the Company's initial public offering and increased borrowings of
$11.4 million under the Company's working capital line of credit.
At March 31, 1997, working capital was approximately $83.6 million, a $35.6
million increase over the working capital level at March 31, 1996. This
increase was primarily attributable to the higher levels of accounts receivable
and inventory at March 31, 1997 as compared with the prior year, resulting from
the Company's significant growth in fiscal 1997.
The Company believes that funds available under its revolving line of credit
facility will be sufficient to fund the Company's receivable financing and
capital expenditure requirements for the next 12 months. The Company is
currently negotiating with its lenders to increase the availability of funds
under its inventory financing facility in anticipation of increased volumes in
its Product Reselling Business during fiscal 1998.
CREDIT FACILITY. The Credit Facility is a secured revolving credit facility
consisting of three revolving promissory notes provided to the Company and its
subsidiaries by NationsBank, N.A. ("NationsBank"), Fleet Capital Corporation,
and Signet Bank, N.A. in the principal amount of up to $85.0 million. (See,
however, "Subordinated Notes" regarding limitations on the Company's
borrowings under the Credit Facility.) The principal amount outstanding under
the Credit Facility may not exceed the lesser of (i) $85.0 million or (ii) a
defined borrowing base, which is a variable amount calculated by aggregating a
specified set of the Company's accounts receivable and unbilled costs. If for
any quarter during the term of the Credit Facility, the average daily
outstanding principal balance under the Credit Facility is less than 50% of the
commitment amount ($85 million unless otherwise reduced), the Company must pay
a commitment fee at the rate of three-eighths of 1% per annum on the difference
between the commitment amount and the daily outstanding principal balance under
the Credit Facility during such quarter. The Credit Facility expires on August
31, 1998. Interest on revolving loan advances made under the Credit Facility
is, at the option of the Company, either (i) the NationsBank prime rate or (ii)
LIBOR plus a percentage ranging from 1.25% to 2.00% depending on the Company's
leverage ratio. At March 31, 1997, the balance outstanding under the Credit
Facility was approximately $30.0 million and approximately $30.2 million was
available for additional borrowing. The Credit Facility is secured by
substantially all assets of the Company with the exception of inventory and
includes certain financial and other covenants restricting, among other things,
changes in capital structure, mergers, acquisitions, sales of assets, changes
of operations, purchases and redemptions of stock, additional indebtedness,
payment of dividends and other payments to shareholders, investments, capital
expenditures, a net loss by the Company for any fiscal quarter and certain
other matters without the approval of the lenders. At March 31, 1997, the
Company was not in compliance with some of the covenants under the Credit
Facility, and has obtained a waiver of such non-compliance from the lenders.
SUBORDINATED NOTES. On February 16, 1996, the Company entered into a Note and
Warrant Purchase Agreement ("the Nomura Agreement") with Nomura Holding
America, Inc. ("Nomura") under which the Company issued $15.0 million of
Subordinated Notes. The Subordinated Notes, which bear interest at 12.875% per
annum, are due in February 2001. In connection with the issuance of the
Subordinated Notes, the Company also issued common stock purchase warrants
("Warrants") to the holder of the Subordinated Notes, entitling such holder to
purchase up to 317,478 shares of Common Stock at $9.50 per share and to certain
registration rights with respect to such shares. The Warrants are exercisable
at any time through February 16, 2003. Both the number of shares obtainable
from exercise of the Warrants and the exercise price per share are subject to
adjustment based on certain anti-dilution provisions included in the Nomura
Agreement. The Nomura Agreement also contains certain covenants that, among
other matters, restrict or limit the ability of the Company to pay dividends,
incur indebtedness, make capital expenditures and acquire other companies. The
Company is also required to maintain certain financial ratios regarding
interest coverage, leverage, and net worth, among other things. At March 31,
1997, the Company was not in compliance with some of the covenants under the
Nomura Agreement, and has obtained a waiver of such non-compliance from Nomura.
On October 1, 1996, the Company obtained the consent of the Subordinated Notes
holder to increase its borrowings under the Credit Facility to $85.0 million
(the Nomura Agreement originally restricted the Company from borrowing amounts
over $60.0 million from the Credit Facility) through March 31, 1997, and $65.0
million thereafter.
INVENTORY FINANCING FACILITY. On October 31, 1996, the Company entered into an
agreement with Deutsche Financial Services Corporation ("DFS") under which it
can borrow up to $15.0 million to finance inventory purchases. Borrowings under
this inventory financing facility are secured by all of the Company's
inventory. The interest rate and other finance charges on each advance under
this facility are set by mutual agreement of the parties based on the
particular item of inventory being financed, the availability of vendor
discounts, prevailing economic conditions, DFS' floor planning volume with the
Company and its vendors, and certain other economic factors. The lenders of
both the Credit Facility and the Subordinated Notes have approved this
inventory financing facility, subject to the condition that the maximum amount
of outstanding debt
20
<PAGE> 6
under this facility and the Credit Facility not exceed $90.0 million in the
aggregate. Outstanding advances to the Company under the inventory financing
facility at March 31, 1997 totaled $3.1 million. In addition, the Company is
subject to certain restrictive covenants under this facility. At March 31,
1997, the Company obtained a waiver from the lending financial institution for
non-compliance with one of the financial covenants.
MARKET INFORMATION
The Company's common stock trades on the Nasdaq National Market under the
symbol "BTGI." The stock has been publicly traded since December 1994. The high
and low sale prices per share of common stock for each quarter of fiscal 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Quarter Ended High Low
- ----------------------------------------------------------
FY 1997
<S> <C> <C>
June 30, 1996 $15.250 $ 9.250
September 30, 1996 15.750 11.500
December 31, 1996 27.250 14.000
March 31, 1997 27.875 17.500
FY 1996
June 30, 1995 10.000 7.750
September 30, 1995 11.750 8.375
December 31, 1995 15.000 8.875
March 31, 1996 11.875 8.750
</TABLE>
The Company has never paid cash dividends and is currently prohibited from
doing so under its debt agreements. It is the present policy of the Company to
retain earnings to finance the growth and development of its business, and
therefore, the Company does not anticipate paying cash dividends on its common
stock in the foreseeable future.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of BTG, Inc.:
We have audited the accompanying consolidated balance sheets of BTG, Inc. and
subsidiaries as of March 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BTG, Inc. and
subsidiaries as of March 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
McLean, Virginia
May 20, 1997
21
<PAGE> 1
EXHIBIT 13. 2
BTG, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years Ended March 31, 1997, 1996 and 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Contract revenue $109,817 $ 67,014 $ 46,130
Product sales 290,216 146,544 109,859
- ------------------------------------------------------------------------------------------------------------------------
$400,033 $213,558 $155,989
Direct costs:
Contract costs 66,665 35,577 23,046
Cost of product sales 254,823 128,070 95,585
- ------------------------------------------------------------------------------------------------------------------------
$321,488 $163,647 $118,631
Indirect, general and administrative expenses 64,587 40,827 29,388
Amortization and other operating costs, net 1,916 1,595 1,070
- ------------------------------------------------------------------------------------------------------------------------
$387,991 $206,069 $149,089
- ------------------------------------------------------------------------------------------------------------------------
Operating income $ 12,042 $ 7,489 $ 6,900
Interest expense (6,107) (3,045) (1,362)
Equity in earnings of unconsolidated affiliates 1,887 792 --
Other income 107 -- --
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 7,929 $ 5,236 $ 5,538
Provision for income taxes 3,658 2,282 2,406
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 4,271 $ 2,954 $ 3,132
========================================================================================================================
Earnings per common and common equivalent share $ 0.60 $ 0.47 $ 0.60
========================================================================================================================
Weighted average shares of common stock and common stock equivalents 7,141 6,233 5,196
========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 2
BTG, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Fiscal Years Ended March 31, 1997 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Restricted cash and equivalents $ -- $ 47
Investments, at fair value -- 250
Receivables, net 99,017 69,146
Inventory, net 16,716 9,421
Prepaid expenses 8,424 5,163
Other 2,546 466
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets $126,703 $ 84,493
- -----------------------------------------------------------------------------------------------------------------------------------
Property and equipment:
Furniture and equipment 11,038 8,299
Leasehold improvements 2,246 1,151
- -----------------------------------------------------------------------------------------------------------------------------------
$ 13,284 $ 9,450
Accumulated depreciation and amortization (6,823) (5,871)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 6,461 $ 3,579
Other assets:
Goodwill, net of accumulated amortization of $1,935 and $1,062
at March 31, 1997 and 1996, respectively $ 16,267 $ 17,140
Other intangible assets, net 4,199 3,119
Investments 478 --
Other 1,972 1,129
- -----------------------------------------------------------------------------------------------------------------------------------
$156,080 $109,460
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 100 $ 134
Current maturities of capital lease obligations 557 96
Accounts payable 30,902 24,120
Accrued expenses 9,894 7,516
Deferred income 1,111 1,534
Income taxes:
Currently payable -- 1,310
Deferred 298 26
Other 290 1,808
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities $ 43,152 $ 36,544
- -----------------------------------------------------------------------------------------------------------------------------------
Line of credit 30,021 30,453
Long-term debt, excluding current maturities, net 14,225 14,131
Capital lease obligations, excluding current maturities 1,179 210
Deferred income taxes 770 248
Other 488 129
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 89,835 $ 81,715
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 1,000,000 shares authorized; no shares issued or outstanding $ -- $ --
Common stock, no par value, 10,000,000 shares authorized;
8,443,844 and 6,128,102 shares outstanding at March 31, 1997
and 1996, respectively, net of 50,057 reacquired shares 52,079 17,915
Retained earnings 14,693 10,422
Treasury stock, at cost, 50,057 shares (527) (527)
Unrealized losses on investments, net of related tax effects -- (65)
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 66,245 $ 27,745
- -----------------------------------------------------------------------------------------------------------------------------------
$156,080 $109,460
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 3
BTG, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Fiscal Years Ended March 31, 1997, 1996 and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized Total
Common Retained Treasury Losses on Shareholders'
Stock Earnings Stock Investments Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1994 $ 6,541 $ 4,336 $ -- $ -- $10,877
Net income -- 3,132 -- -- 3,132
Sale of 1,280,000 common shares
related to an initial public offering,
net of related issuance costs 8,685 -- -- -- 8,685
Sale of 87,574 common shares
under employee stock option
and stock purchase plans 345 -- -- -- 345
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 $15,571 $ 7,468 $ -- $ -- $23,039
Net income -- 2,954 -- -- 2,954
Sale of 179,241 common shares
under employee stock option
and stock purchase plans 881 -- -- -- 881
Issuance of 50,057 common shares
upon business combination 463 -- -- -- 463
Purchase of 50,057 common shares -- -- (527) -- (527)
Issuance of common stock
purchase warrants 1,000 -- -- -- 1,000
Change in unrealized investment
losses, net of related tax effects -- -- -- (65) (65)
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 $17,915 $10,422 $ (527) $ (65) $27,745
Net income -- 4,271 -- -- 4,271
Sale of 2,190,000 common shares
related to a follow-on public offering,
net of related issuance costs 33,061 -- -- -- 33,061
Sale of 125,742 common shares
under employee stock option
and stock purchase plans 1,067 -- -- -- 1,067
Tax benefits applicable to stock
option plans 36 -- -- -- 36
Change in unrealized investment
losses, net of related tax effects -- -- -- 65 65
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 $52,079 $14,693 $ (527) $ -- $66,245
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 4
BTG, INC. AND SUBSIDIARIES
Consolidated 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 $ 4,271 $ 2,954 $ 3,132
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 3,698 2,161 988
Deferred income taxes 794 (513) (4)
Reserves for accounts receivable and inventory 785 399 192
Loss on sales of property and equipment 61 20 17
Gain on sales of investments (63) -- --
Changes in assets and liabilities, net of the effects from purchases
of subsidiaries:
(Increase) decrease in restricted cash 47 (16) 1,069
(Increase) decrease in receivables (30,630) (10,925) (6,323)
(Increase) decrease in inventory (7,319) (831) (2,604)
(Increase) decrease in prepaids and other (5,307) 4,953 (6,994)
(Increase) decrease in other assets (353) (723) (27)
Increase (decrease) in accounts payable 6,782 (5,792) 986
Increase (decrease) in accrued expenses 2,617 1,837 542
Increase (decrease) in other liabilities (1,630) (41) (3,267)
Increase (decrease) in income taxes currently payable (1,310) 1,310 (1,023)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $(27,557) $ (5,207) $(13,316)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of subsidiaries, net of cash acquired -- (13,238) (3,416)
Purchases of investments (593) (362) --
Proceeds from sales of investments 425 -- --
Purchases of notes receivable (375) -- --
Purchases of property and equipment (2,780) (1,570) (734)
Proceeds from sales of property and equipment -- 18 --
Capitalized product development costs (2,003) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (5,326) $(15,152) $ (4,150)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net advances (repayments) under line of credit (432) 7,034 11,426
Principal payments on long-term debt (140) (1,573) (986)
Principal payments on capital lease obligations (220) -- --
Proceeds from the issuance of subordinated notes -- 15,000 --
Repayments of subordinated notes -- -- (850)
Payment of debt issue costs (215) (1,587) --
Proceeds from the issuance of common stock 33,890 776 9,030
Purchase of treasury stock -- (527) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 32,883 $ 19,123 $ 18,620
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in unrestricted cash and equivalents -- (1,236) 1,154
Unrestricted cash and equivalents, beginning of year -- 1,236 82
- ----------------------------------------------------------------------------------------------------------------------------------
Unrestricted cash and equivalents, end of year $ -- $ -- $ 1,236
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 5
BTG, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
1. NATURE OF OPERATIONS
BTG, Inc. ("BTG" or the "Company") is an information technology company
providing complete solutions to the specific systems and product needs of its
customers. The Company's business combines systems development, integration and
engineering with reselling of computer hardware, software and integrated
systems.
Approximately 89%, 90%, and 91% in fiscal 1997, 1996, and 1995, respectively,
of the Company's revenues resulted from contracts or subcontracts with, and
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
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of all
majority-owned subsidiaries of the Company. All significant intercompany
balances and transactions have been eliminated in consolidation. Investments in
unconsolidated affiliates owned more than 20%, but not in excess of 50%, are
recorded on the equity method.
REVENUE RECOGNITION
The Company provides systems development, integration and engineering services,
primarily to the Government, on a contractual basis. Revenue on cost-plus-fee
contracts is recognized to the extent of costs incurred plus a proportionate
amount of fees earned. Revenue on time-and-materials contracts is recognized to
the extent of billable rates times hours delivered plus other direct costs.
Revenue on fixed-price contracts is recognized using the
percentage-of-completion method based on costs incurred in relation to total
estimated costs. Anticipated contract losses are recognized as soon as they
become known and estimable.
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.
The Company also provides off-the-shelf hardware and software to the Government
under a variety of contract vehicles and to commercial companies 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.
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 that
require such cash to be held in escrow until related payments to vendors have
been settled and that is not included in cash and equivalents for purposes of
the Consolidated Statements of Cash Flows. The Company had no restricted cash
at March 31, 1997.
INVESTMENTS
Investments in marketable debt and equity securities are accounted for under
the provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("Statement
115"). At March 31, 1996, the Company's investments consisted solely of
marketable equity securities that were classified as "available for sale" in
accordance with the provisions of Statement 115. Accordingly, such investments
were carried at fair value in the accompanying consolidated financial
statements. Fair value was determined based on quoted market prices. Net
unrealized gains and losses from these investments were carried as a separate
component of shareholders' equity, net of the related tax effects. At March 31,
1997, the Company held no investments in marketable debt or equity securities.
Investments in equity securities for which there are no readily determinable
fair values and for which the Company does not have the ability to exercise
significant influence over the operating or financial policies of the investee
entity are accounted for under the cost method of accounting. Accordingly, such
investments are carried at the lower of cost or net realizable value. At March
31, 1997, the Company's investments consisted solely of common stock ownership
in privately held companies.
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.
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.
26
<PAGE> 6
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
RESEARCH AND DEVELOPMENT EXPENSES
The Company expenses research and development costs as they are incurred.
Research and development expenses for fiscal 1997, 1996 and 1995 were
approximately $187,000, $55,000, and $100,000, respectively.
CAPITALIZED PRODUCT DEVELOPMENT COSTS
Costs associated with software development are capitalized once a product's
technological feasibility is established. Capitalized product development costs
are amortized on a product-by-product basis based on the ratio of recorded
revenue to total estimated revenue, with a minimum amortization using the
straight-line method over the product's estimated economic life. Capitalized
product development costs are carried at the lower of unamortized cost or net
realizable value.
The establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized product development costs require considerable
judgment by the Company's management with respect to certain external factors
such as anticipated future revenues, estimated economic lives, and changes in
hardware and software technologies.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's receivables and revolving line of credit
instruments approximates fair value since all such instruments are either short
term in nature or bear interest rates that are indexed to current market
interest rates. Fair value for the Company's notes payable is determined based
on current rates offered for debt of similar remaining maturities. At March 31,
1997, the Company's subordinated notes payable had a fair value of
approximately $15.4 million on an undiscounted basis. At March 31, 1996, the
carrying value for the subordinated notes payable approximated fair value.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income for the year by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year. Common stock equivalents include all issued and
outstanding options and warrants.
RECLASSIFICATION
Certain amounts in the prior years' financial statements have been reclassified
to conform to the fiscal 1997 presentation.
USE OF ESTIMATES
The preparation of consolidated 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.
3. RECEIVABLES
The components of receivables are as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
- ----------------------------------------------------------
1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Amounts billed $89,480 $61,927
Amounts currently billable 4,991 3,024
Retainages billable upon contract
completion 1,572 1,381
Other unbilled amounts 2,960 2,180
Other receivables 1,016 855
Allowance for doubtful accounts (1,002) (221)
- ----------------------------------------------------------
$99,017 $69,146
==========================================================
</TABLE>
The Company anticipates collecting substantially all receivables, except
retainages, within one year.
4. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
- ----------------------------------------------------------
1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Contract backlog $ 848 $ 848
Debt issue costs 1,802 1,587
Non-compete covenants 700 700
Favorable leasing arrangements 455 455
Product development costs 2,003 --
Other 300 300
- ----------------------------------------------------------
6,108 3,890
Accumulated amortization (1,909) (771)
- ----------------------------------------------------------
$4,199 $3,119
==========================================================
</TABLE>
During the year ended March 31, 1997, the Company capitalized approximately
$2.0 million of costs associated with the internal development of certain
software products. Of this amount, approximately $1.5 million relates to
products designed for use by the Company's newly formed subsidiary, Community
Networks, Inc. ("CNI"). CNI, a separate legal entity in which BTG holds a 95%
ownership interest, was formed for the purpose of providing local communities
with high-speed Internet access, specialized intranets and electronic commerce
capability. The remaining $500,000 of product development costs capitalized
during fiscal 1997 relate to costs associated with the Company's development of
a software product used in the document imaging industry. This product,
TeraCAPTURE NT, was made available for sale in April 1997.
5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
- ----------------------------------------------------------
1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Accrued salaries and related taxes $4,704 $3,852
Accrued leave 3,094 2,320
Other 2,096 1,344
- ----------------------------------------------------------
$9,894 $7,516
==========================================================
</TABLE>
27
<PAGE> 7
6. INCOME TAXES
The provisions for income taxes include the following
(in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
- --------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
Current provision:
Federal $2,393 $2,334 $1,978
State 471 461 390
- --------------------------------------------------------------
2,864 2,795 2,368
- --------------------------------------------------------------
Deferred provision (benefit):
Federal 663 (428) 36
State 131 (85) 2
- --------------------------------------------------------------
794 (513) 38
- --------------------------------------------------------------
$3,658 $2,282 $2,406
==============================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
- ----------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax rate 35.0% 35.0% 35.0%
State income tax, net of
federal income tax benefit 5.2 4.9 5.3
Phase-in tax rate differential (1.0) (1.0) (1.0)
Non-deductible amortization
expense 5.9 5.1 3.3
Change in the valuation
allowance (1.3) (1.7) --
Other permanent differences 2.3 1.3 0.8
- ----------------------------------------------------------------
Effective tax rate 46.1% 43.6% 43.4%
================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, 1997 and
1996, are presented below (in thousands):
<TABLE>
<CAPTION>
March 31,
- ----------------------------------------------------------
1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Employee benefits, accrued for
financial reporting purposes $ 943 $ 734
Financial reporting reserves 747 447
Deferred revenue 499 336
Capital loss carryforwards 173 197
Other 414 364
- ----------------------------------------------------------
Total deferred tax assets 2,776 2,078
Less: valuation allowance -- (105)
- ----------------------------------------------------------
Net deferred tax assets 2,776 1,973
- ----------------------------------------------------------
Deferred tax liabilities:
Revenues not contractually billable 2,552 1,366
Product development costs 764 --
Net profits accrued on sales 97 427
Other 431 454
- ----------------------------------------------------------
Total deferred tax liabilities 3,844 2,247
- ----------------------------------------------------------
Net deferred tax liability $1,068 $ 274
==========================================================
</TABLE>
The valuation allowance for deferred tax assets as of April 1, 1995, was
$197,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of the deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which the temporary differences become deductible. Management
considers taxes paid during the previous three years, scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies that can be implemented by the Company in making this assessment.
Based on these factors, the Company has established a valuation allowance
against that portion of the deferred tax assets for which management believes
that ultimate realization cannot presently be assessed as "more likely than
not."
7. LINES OF CREDIT
In November 1995, the Company entered into a revolving line of credit facility
(the "Credit Facility") with a financial institution that provided for
borrowings up to $60 million based on specified percentages of eligible
accounts receivable (the "borrowing base"). On October 1, 1996, the Credit
Facility was amended to increase the ceiling for available borrowings to $85
million; however, this ceiling is limited to $65 million after March 31, 1997,
as the result of a restriction imposed by a subordinated lender. The Credit
Facility is secured by substantially all assets of the Company as well as the
pledge of a security interest in the Company's stock in one of its
subsidiaries. Through February 1997, interest on advances made under the Credit
Facility was equal to, at the option of the Company, either the lender's prime
rate or LIBOR plus 2.00%. In February 1997, the Credit Facility was amended to
provide for an interest rate equal to, at the Company's option, either the
lender's prime rate or LIBOR plus a percentage ranging from 1.25% to 2.00%
depending on the Company's leverage ratio. The Company is required to comply
with various financial covenants under the Credit Facility and is restricted
from, among other things, paying dividends, changing its capital structure or
making acquisitions without the approval of the lender. At March 31, 1997 and
1996, the Company obtained a waiver from the lending financial institution for
non-compliance with certain financial covenants. The Credit Facility expires in
August 1998. At March 31, 1997 and 1996, the entire balance outstanding under
the Credit Facility has been classified as a noncurrent liability in the
accompanying consolidated balance sheets, as the Company anticipates that its
borrowing base over the next fiscal year will provide for a minimum
availability equal to or in excess of amounts outstanding on such dates.
In addition to a revolving loan, the Credit Facility includes a facility under
which the Company can, subject to the approval of the lender and the payment of
certain fees, obtain letters of credit of up to a maximum of $1 million. At
March 31, 1997 and 1996, there were no letters of credit outstanding under this
facility. Costs incurred to obtain the Credit Facility have been capitalized
and are being amortized over the term of the agreement. An analysis of activity
under the Credit Facility is as follows (in thousands):
28
<PAGE> 8
<TABLE>
<CAPTION>
March 31,
- ----------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Maximum line of credit available
during the period $85,000 $48,667
Balance outstanding at the end
of the period $30,021 $30,453
Total borrowing base at the end
of the period $60,262 $39,380
Interest rate at the end of the period:
At the lender's prime rate option 8.50% 8.25%
At the LIBOR option 7.00% 7.35%
Monthly average amount outstanding
during the period $43,874 $31,512
Monthly weighted average interest rate
outstanding during the period 7.79% 8.05%
</TABLE>
In October 1996, the Company entered into an agreement with a separate
financing organization that provides for borrowings up to $15 million to
finance inventory purchases under a wholesale financing agreement (the
"Inventory Financing Facility"). The Inventory Financing Facility, which is
secured by all of the Company's inventory, provides for the financing of
inventory purchases with repayment terms ranging from 30 to 45 days, after
which interest is charged on the average daily balance outstanding at the
current prime rate. In addition, the Company is subject to certain restrictive
covenants under this facility. At March 31, 1997, the Company obtained a waiver
from the lending financial institution for non-compliance with one of the
financial covenants. At March 31, 1997, the Company had approximately $3.1
million in outstanding borrowings under this facility, which are included in
accounts payable in the accompanying consolidated balance sheet. Under the
terms of the agreement, the Inventory Financing Facility has no expiration date
but can be terminated by either party at any time. The Company incurred no
interest expense under this financing vehicle during fiscal 1997.
8. LONG-TERM DEBT
The Company's long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
- ----------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Senior subordinated notes payable,
due in February 2001, interest due
quarterly at 12.875% per annum $15,000 $15,000
Unamortized discount on senior
subordinated notes payable (775) (975)
Note payable to the former stockholders
of Delta Research Corporation
associated with covenants not to
compete, payable in annual installments
of $100,000 100 200
Notes payable to the former stockholders
of ACTech, Inc. associated with
covenants not to compete, $33,333
payable at July 1, 1995 and
January 2, 1996, and $16,667
payable at January 2, 1997 -- 17
Other -- 23
- ----------------------------------------------------------------------
$14,325 $14,265
Less current maturities 100 134
- ----------------------------------------------------------------------
$14,225 $14,131
======================================================================
</TABLE>
On February 16, 1996, the Company entered into a Note and Warrant Purchase
Agreement (the "Agreement") with Nomura Holding America, Inc. under which the
Company issued $15 million of senior subordinated notes (the "Notes"). The
Notes, which bear interest at 12.875% per annum, are due in February 2001. In
connection with the issuance of the Notes, the Company also issued common stock
purchase warrants ("Warrants") to the holder of the Notes entitling such holder
to purchase up to 317,478 shares of the Company's common stock at $9.50 per
share and to certain registration rights with respect to such shares. The
Warrants are exercisable at any time through February 16, 2003. Both the number
of shares obtainable from exercise of the Warrants and the exercise price per
share are subject to adjustment based on certain anti-dilution provisions
included in the Agreement. The fair value of the Warrants on the date of
issuance, which was determined using various pricing models, was estimated as
$1,000,000. Accordingly, this amount has been recorded as a discount on the
Notes and is being amortized into interest expense over the term of the Notes.
The Agreement also contains certain covenants that, among other matters,
restrict or limit the ability of the Company to pay dividends, incur
indebtedness and make capital expenditures. The Company must also maintain
certain financial ratios regarding interest coverage, leverage and net worth,
among others. At both March 31, 1997 and 1996, the Company obtained a waiver
from the holder of the Notes for non-compliance with certain covenants. Costs
incurred to issue the Notes have been capitalized and are being amortized over
the term of the Notes. In October 1996, the Company obtained the consent of the
holder of the Notes to increase the borrowing capacity under the Credit
Facility to $85 million through March 31, 1997, and $65 million thereafter.
Such consent was subject to the condition that
29
<PAGE> 9
the maximum amount of outstanding debt under both the Credit Facility and the
Inventory Financing Facility not exceed $90 million through March 31, 1997, and
$65 million thereafter.
Aggregate scheduled maturities on all long-term indebtedness as of March 31,
1997, are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ending March 31,
- ------------------------------------------------------
<S> <C>
1998 $ 100
1999 --
2000 --
2001 15,000
- ------------------------------------------------------
$15,100
======================================================
</TABLE>
9. CAPITAL LEASE OBLIGATIONS
The Company rents certain furniture and equipment under agreements that qualify
for capital lease treatment. Included in property and equipment are the
following assets held under capital leases (in thousands):
<TABLE>
<CAPTION>
March 31,
- ----------------------------------------------------------
1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Furniture and equipment $1,965 $315
Accumulated amortization (141) (14)
- ----------------------------------------------------------
$1,824 $301
==========================================================
</TABLE>
Future minimum lease payments for assets held under capital leases at March 31,
1997, are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ending
March 31, Amount
- ----------------------------------------------------------
<S> <C>
1998 $ 708
1999 700
2000 434
2001 99
2002 96
Thereafter 5
- ----------------------------------------------------------
Total minimum lease payments $2,042
Less amounts representing interest 306
- ----------------------------------------------------------
Present value of net minimum lease payments $1,736
Less current maturities 557
- ----------------------------------------------------------
$1,179
==========================================================
</TABLE>
10. SHAREHOLDERS' EQUITY AND STOCK OPTIONS
PREFERRED STOCK
In November 1994, the Board of Directors amended the Company's Articles of
Incorporation to authorize up to 1,000,000 shares of preferred stock, with no
par value. No preferred shares have been issued as of March 31, 1997.
COMMON STOCK
The Company has one class of voting common stock with 10,000,000 shares
authorized for issuance. In December 1994, the Company sold 1,280,000 shares of
common stock, pursuant to an initial public offering, at $8.00 per share, for
total proceeds of $8.7 million, net of issuance costs of approximately $1.5
million. In November 1996, the Company sold 2,190,000 shares of common stock,
pursuant to a follow-on public offering, at $16.25 per share, for total
proceeds of $33.1 million, net of issuance costs of approximately $2.5 million.
DIRECTORS STOCK OPTION PLAN
The Company has a Directors Stock Option Plan (the "Directors Option Plan")
which provides for the granting of a maximum of 100,000 nonqualified stock
options to non-employee members of the Board of Directors. The option price per
share is equal to the fair market value of a company share on the date of
grant. The term of each option is ten years and an option first becomes
exercisable six months after the date of grant.
Under the terms of the Directors Option Plan, each non-employee member of the
Board of Directors will be granted 1,000 options on each anniversary date of
the Director's service commencement date. During fiscal 1996, 10,000 options,
with a per share exercise price of $11.25, were granted under the Directors
Option Plan. During fiscal 1997, 6,000 options, with per share exercise prices
ranging from $13.38 to $13.75, were granted under the Directors Option Plan.
EMPLOYEE STOCK OPTION PLANS
In 1986 and again in 1990, the Company adopted qualified Employee Stock Option
Plans (the "Plans"). Under the terms of the Plans, 375,000 and 400,000 shares,
respectively, of common stock were reserved for issuance under the Plans. The
option price per share is determined by the Board of Directors but shall be no
less than the fair value on the date of the grant. Each option is exercisable
no sooner than two years and no later than five years after the grant of the
option. No new options are currently issuable under the Plans.
In fiscal year 1995, the Company adopted a new employee option plan (the "New
Plan"). Under the terms of the New Plan, 250,000 shares of common stock were
reserved for issuance to employees. The New Plan provides for grants of both
qualified and non-qualified options. At March 31, 1996, 178,500 shares of
common stock were reserved for options still to be granted under the New Plan.
In August 1996, the Company's shareholders approved an amendment to the New
Plan, which increased the total number of shares of common stock reserved for
issuance to 750,000. During fiscal 1997, options to acquire 87,500 shares of
common stock were granted under the New Plan. At March 31, 1997, 593,500 shares
of common stock were reserved for options still to be granted under the New
Plan.
30
<PAGE> 10
Additional information with respect to all options under the Company's employee
stock option plans is as follows:
<TABLE>
<CAPTION>
Number Option Price
of Shares Per Share
- -----------------------------------------------------------
<S> <C> <C>
Shares under option,
March 31, 1994 395,895 $2.22-$4.40
Options granted 76,000 $7.75-$8.53
Options exercised (85,193) $2.22-$4.40
Options forfeited (20,662) $2.22-$4.00
- -----------------------------------------------------------
Shares under option,
March 31, 1995 366,040 $2.22-$8.53
Options exercised (96,824) $2.22-$3.74
Options forfeited (10,815) $2.22-$7.75
- -----------------------------------------------------------
Shares under option,
March 31, 1996 258,401 $2.22-$8.53
Options granted 87,500 $9.38-$10.31
Options exercised (57,227) $2.22-$7.75
Options forfeited (15,453) $2.22-$9.38
- -----------------------------------------------------------
Shares under option,
March 31, 1997 273,221 $2.22-$10.31
- -----------------------------------------------------------
- -----------------------------------------------------------
Options exercisable,
March 31, 1997 121,434 $2.22-$8.53
===========================================================
</TABLE>
STOCK PURCHASE PLANS
In August 1995, the Company's shareholders adopted (i) the Annual Leave Stock
Plan (the "Annual Leave Plan") and (ii) the Employee Stock Purchase Plan (the
"ESPP"). Under the Annual Leave Plan, eligible employees are permitted to
exchange certain unused amounts of accrued annual leave for shares of common
stock at the fair market value of the stock on the date of exchange. During
fiscal 1997, 11,355 shares of common stock, valued at approximately $202,000,
were issued under the Annual Leave Plan. During fiscal 1996, 10,840 shares of
common stock, with value of approximately $105,000, were issued under the
Annual Leave Plan.
Under the ESPP, eligible employees of the Company who elect to participate are
permitted to purchase common stock of the Company, through payroll deductions,
at a 15% discount from the fair market value of such stock at the beginning or
ending date of the quarterly election period. Under its original terms, the
total number of shares of common stock that were issuable under the ESPP was
150,000, limited to 12,500 per fiscal quarter. In August 1996, the Company's
shareholders approved an amendment to the ESPP that (i) increased the total
number of shares of common stock issuable under the ESPP to 400,000; (ii)
eliminated the quarterly purchase limitation; and (iii) added a provision to
allow for annual lump sum contributions. A total of 55,080 and 24,979 common
stock shares was issued under the ESPP during fiscal 1997 and 1996,
respectively.
On October 15, 1996, the Company adopted, subject to the approval of the
Company's shareholders, the Non-Employee Director Stock Purchase Plan (the
"Directors Purchase Plan"). Under the terms of the Directors Purchase Plan,
non-employee members of the Board of Directors may elect to have their fees
invested in BTG common stock at a price equal to the lower of 100% of the fair
market value of a company share on the beginning or ending date of the election
period. The election period is the 12-month period beginning on October 1 of
each year. The maximum number of shares that may be issued under the Directors
Purchase Plan is 100,000.
PROFIT SHARING PLANS
The Company established a qualified 401(k) profit sharing plan in 1987 under
which eligible employees may elect to defer a portion of their salary. At the
discretion of the Board of Directors, the Company may contribute to the plan.
The current contribution, as approved by the Board, is 1% of salaries for all
eligible employees and a matching contribution of an additional amount up to 3%
of eligible employees' deferrals. Employees participating in the plan vest in
the employer contribution at 20% per year, after first completing six months of
service.
Through December 31, 1996, the Company maintained a separate 401(k) profit
sharing plan that covered substantially all employees of a subsidiary of the
Company meeting minimum service requirements. Contributions to the plan were
made through voluntary employee salary reductions and were matched by the
Company up to a maximum of 3.5%. In addition to the Company matching
contribution, in which the employee is immediately vested, the plan provided
for an additional discretionary contribution by the Company. Employees
participating in the plan vest in the Company discretionary contributions over
a seven-year period.
Company contributions to the profit sharing plans were approximately $1.6
million, $1.1 million, and $732,000 in fiscal 1997, 1996 and 1995,
respectively.
DISCLOSURES PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company applies Accounting Principles Board Opinion 25 and its related
interpretations in accounting for its equity participation programs.
Accordingly, no compensation cost has been recognized for its incentive stock
option plans and its stock purchase plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method of accounting under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated as follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
March 31,
- -------------------------------------------------------------
1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $4,271 $2,954
Pro forma $4,181 $2,939
Earnings per common and As reported $0.60 $0.47
common equivalent share Pro forma $0.59 $0.47
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for option grants during the years ended March 31, 1997 and
1996, respectively: dividend yield of 0%, expected volatility of 46%, risk-free
interest rate of 6%, forfeiture rate of 6%, and expected terms ranging from 3
to 7 years.
31
<PAGE> 11
A summary of the Company's stock option plans is presented
as follows:
<TABLE>
<CAPTION>
Weighted-Average
Number Exercise Price
of Shares Per Share
- -----------------------------------------------------------
<S> <C> <C>
Shares under option,
March 31, 1995 366,040 $4.04
Options exercised (96,824) $3.29
Options forfeited (10,815) $5.11
- -----------------------------------------------------------
Shares under option,
March 31, 1996 258,401 $4.47
Options granted 87,500 $9.51
Options exercised (57,227) $3.28
Options forfeited (15,453) $4.19
- -----------------------------------------------------------
Shares under option,
March 31, 1997 273,221 $6.35
- -----------------------------------------------------------
- -----------------------------------------------------------
Options exercisable,
March 31, 1997 121,434 $3.93
===========================================================
</TABLE>
The per share weighted-average fair value of stock options granted during
fiscal 1997 was $4.49. At March 31, 1997, the weighted average remaining
contractual life of options outstanding was 5.2 years.
11. INVESTMENTS
In May 1996, the Company entered into an agreement with WheelGroup Corporation
("WheelGroup") under which it (i) purchased 214,042 shares of the outstanding
common stock of WheelGroup for $200,000; (ii) purchased a convertible note
receivable from WheelGroup for $300,000; and (iii) committed to the purchase of
certain distribution rights and consulting services from WheelGroup for
approximately $1 million, payable in various installments over fiscal years
1997 and 1998. The convertible note, which bears interest at an annual rate of
2% above the prime rate established by the Company's principal lender, is
convertible at any time at the Company's option. The convertible note is due in
quarterly installments beginning on April 1, 1999 and ending on January 2,
2001. In addition, the Company has the option to purchase additional shares of
WheelGroup's common stock in conjunction with any future issuance of common
stock by WheelGroup at the same terms available to other purchasers.
During fiscal 1997, the Company paid $700,000 to WheelGroup under its
commitment for distribution rights and consulting services. As the result of a
significant investment in WheelGroup by a venture capital fund, BTG was given
the option to purchase an additional 28,146 shares of WheelGroup for $9.87 per
share. In March 1997, $277,799 of amounts previously paid to WheelGroup under
the distribution rights and consulting services agreement were used to purchase
the additional 28,146 shares. The Company's convertible note receivable is
included in other noncurrent assets in the accompanying consolidated balance
sheet.
WheelGroup, which is a privately held company formed in October 1995, is a
provider of intrusion detection and response products and services that protect
data in computer networks from fraud or misuse. The Company's investment in
WheelGroup is accounted for using the cost method of accounting.
12. EQUITY IN UNCONSOLIDATED AFFILIATES
A subsidiary of the Company has a 49% interest in an unincorporated joint
venture (the "Joint Venture"). The Joint Venture was formed, with an unrelated
company, in February 1994 for the purpose of obtaining and performing under a
certain contract. The contract, which is with an agency of the Government,
requires the Joint Venture to provide certain computer equipment, software and
peripherals to the Government. The equity method is used to account for the
Company's interest in the Joint Venture. At March 31, 1997 and 1996, the
Company's investment in the Joint Venture was approximately $740,000 and
$620,000, respectively, and is included in other noncurrent assets in the
accompanying consolidated balance sheets.
Condensed financial information of the Joint Venture as of March 31, 1997 and
1996, for the year ended March 31, 1997, and for the period from October 20,
1995 (the date of acquisition of the subsidiary) through March 31, 1996 is as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------
(unaudited)
<S> <C> <C>
Current assets $ 4,436 $ 3,912
Total noncurrent assets 4,436 3,936
Current liabilities 3,097 2,785
Total noncurrent liabilities 3,097 2,785
Partners' ownership equity 1,339 1,151
Revenue 25,883 13,673
Income to the Joint Venture partners 3,851 1,616
</TABLE>
13. BUSINESS COMBINATIONS
In July 1994, the Company acquired for $1.9 million cash all of the outstanding
stock of Advanced Computer Technology, Inc. ("ACTech"), a value-added reseller
and manufacturer of computer systems. The acquisition has been accounted for as
a purchase and, accordingly, the results of operations of ACTech have been
included in the Company's consolidated 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 Company entered into certain non-compete agreements that
require payments to former ACTech officers over a three-year period. This
acquisition did not have a material effect on pro forma operations.
In November 1994, the Company acquired for $2.8 million cash all of the
outstanding stock of Delta Research Corporation ("Delta"), which provides
software development and systems integration services focusing on project
planning and cost controls and environmental engineering, primarily for the
Government. The acquisition has been accounted for as a purchase and,
accordingly, the results of operations of Delta have been included in the
Company's consolidated financial statements from the date of acquisition,
November 15, 1994. The excess of the purchase price over the fair value of the
net tangible and identifiable intangible assets acquired of approximately
$146,000 has been recorded as goodwill and is being amortized on a
straight-line basis over 15 years. In connection with the
32
<PAGE> 12
closing of the transaction, the Company entered into certain non-compete
agreements that require payments of $100,000 per year for four years.
In October 1995, the Company acquired, for $13.0 million in cash, 50,057 shares
of common stock valued at approximately $463,000, and for $1.25 million due in
April 1996, all of the outstanding shares of Concept Automation, Inc. of
America ("CAI"), which is primarily involved in the sale and maintenance of
electronic data processing equipment and related support services. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of CAI have been included in the Company's consolidated 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 approximately $11.5 million has been recorded as
goodwill and is being amortized on a straight-line basis over 20 years. In
connection with the closing of the transaction, the Company entered into
various employment and non-compete agreements with certain of CAI's officers.
In addition, the agreement provides that certain contingent payments are to be
made to the former stockholders of CAI in the event that future income, in
excess of a specified amount, is generated under a certain contract for which
CAI had a proposal outstanding on the date of acquisition. At March 31, 1996,
no amounts had been included in the purchase price relating to these contingent
payments. On April 18, 1996, the Company was notified that this contract was
awarded to CAI. During fiscal 1997, no amounts have been paid to the former
shareholders of CAI as a result of this arrangement.
The following unaudited pro forma financial information presents the combined
results of operations of the Company and the Delta and CAI acquisitions as if
the acquisitions 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 such acquired companies constituted a single entity during such
periods.
<TABLE>
<CAPTION>
Fiscal Years Ended
March 31,
- -------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C>
Revenues $247,832 $246,362
Net income 1,474 3,794
Earnings per common share 0.23 0.72
</TABLE>
In January 1997, the Company entered into a letter of intent to acquire all of
the issued and outstanding stock of Nations, Inc., a privately held technology
company specializing in software and systems engineering principally to the
Government, for approximately $10 million in cash. Management anticipates that
this transaction will be completed in June 1997.
14. COMMITMENTS AND CONTINGENCIES
AUDIT REVIEW
Substantially all payments to the Company under cost reimbursable contracts are
provisional payments that are subject to adjustment upon audit by the Defense
Contract Audit Agency or other regulatory agency. Audits through fiscal 1994
have been completed and final rates have been established. Audits for 1995 and
subsequent years are not expected to result in a material adverse effect on the
Company's consolidated financial position.
One of the Company's significant contracts was audited during fiscal 1996, and
the Company was notified that the customer was seeking to recover approximately
$156,000 as a result of the audit. The Company disagrees with certain of the
claims made under the audit and intends to vigorously defend its position
through the appeals process. Management of the Company believes that sufficient
reserves are available to offset any potential adjustments.
As the result of a sales and use tax audit by the Commonwealth of Virginia (the
"Commonwealth"), the Company recently received an assessment for approximately
$265,000. The Company disagrees with the Commonwealth's position with respect
to the majority of assessed amounts and has notified the Commonwealth of its
intent to appeal the assessment. A reserve has been established for that
portion of the assessment upon which the Company is in agreement. Management of
the Company anticipates that the ultimate resolution of this matter will not
have a material adverse effect on the Company's consolidated financial
position.
LEASES
The Company leases office space and equipment under certain operating lease
agreements expiring at various dates through March 2007. Most leases include
provisions for periodic rent escalations based on changes in various economic
indices. Rent expense in fiscal 1997, 1996 and 1995 was $5,886,000,
$4,846,000, and $2,796,000, respectively. In March 1997, the facility lease for
the Company's principal headquarters location expired and the Company moved its
headquarters to a new location under an operating lease that commences on April
1, 1997.
Future minimum lease payments on non-cancelable operating leases were as
follows on March 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ending March 31, Amount
- --------------------------------------------------------
<S> <C>
1998 $ 7,006
1999 6,328
2000 5,962
2001 5,277
2002 5,189
Thereafter 31,543
- --------------------------------------------------------
$61,305
========================================================
</TABLE>
15. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
- ----------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year
for (in thousands):
Interest $5,075 $2,934 $1,200
Income taxes 5,806 1,468 3,424
</TABLE>
33
<PAGE> 13
During fiscal 1997 and 1996, the Company issued common stock shares of 11,355
and 10,840, respectively, to employees in exchange for $202,000 and $105,000,
respectively, of previously accrued annual leave balances under the Company's
Annual Leave Stock Plan.
In connection with the Company's business combinations in fiscal 1996 and 1995,
liabilities were assumed as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Fair value of tangible and intangible
assets acquired $30,120 $8,801
Cash paid and notes payable issued (14,488) (5,178)
Common stock issued (463) --
- ---------------------------------------------------------------
Liabilities assumed $15,169 $3,623
===============================================================
</TABLE>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for fiscal 1997 and 1996 are as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Fiscal 1997: Quarter Ended
- -------------------------------------------------------------------------
June 30 Sept 30 Dec 31 March 31
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $75,442 $115,125 $119,456 $90,010
Operating income 2,196 4,580 4,938 328
Net income (loss) 757 1,994 2,001 (481)
Earnings (loss)
per common share 0.12 0.31 0.28 (0.05)
Weighted average
common and
common equivalent
shares outstanding 6,336 6,418 7,201 8,811
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1996: Quarter Ended
- -------------------------------------------------------------------------
June 30 Sept 30 Dec 31 March 31
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $39,589 $ 50,730 $63,487 $59,752
Operating income 1,718 2,807 1,401 1,563
Net income 671 1,295 288 700
Earnings per
common share 0.11 0.21 0.05 0.11
Weighted average
common and
common equivalent
shares outstanding 6,191 6,208 6,259 6,297
</TABLE>
34
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAME
- ------------------ ------------- -------------
<S> <C> <C>
BDS, Inc. Virginia BTG Technology Systems
Concept Automation, Inc. of America Virginia CAI
Delta Research Corporation Virginia Delta
Community Networks, Incorporated Virginia CNI
BTG Technology Resources, Inc. Florida BTR
Nations, Inc. New Jersey Nations
</TABLE>
- -----------------
21
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
To The Board of Directors and Shareholders
BTG, Inc.:
We consent to incorporation by reference in the registration
statements (Nos. 33-97302 and 333-10473) on Form S-8 of BTG, Inc. and
subsidiaries of our reports dated May 20, 1997, relating to the consolidated
balance sheets of BTG, Inc. and subsidiaries as of March 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended March 31, 1997,
and related schedule, which reports appear in the March 31, 1997 annual report
on Form 10-K of BTG, Inc. and subsidiaries.
/s/ KPMG Peat Marwick LLP
McLean, Virginia
June 26, 1997
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 99,017
<ALLOWANCES> 1,002
<INVENTORY> 16,716
<CURRENT-ASSETS> 126,703
<PP&E> 13,284
<DEPRECIATION> 6,823
<TOTAL-ASSETS> 156,080
<CURRENT-LIABILITIES> 43,152
<BONDS> 44,246
0
0
<COMMON> 52,079
<OTHER-SE> 14,166
<TOTAL-LIABILITY-AND-EQUITY> 156,080
<SALES> 290,216
<TOTAL-REVENUES> 400,033
<CGS> 254,823
<TOTAL-COSTS> 321,488
<OTHER-EXPENSES> 64,993
<LOSS-PROVISION> 1,510
<INTEREST-EXPENSE> 6,107
<INCOME-PRETAX> 7,929
<INCOME-TAX> 3,658
<INCOME-CONTINUING> 4,271
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,271
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
BTG, Inc.:
Under date of May 20, 1997, we reported on the consolidated
balance sheets of BTG, Inc. and subsidiaries (the "Company") as of March 31,
1997 and 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended March 31, 1997, as contained in the 1997 annual report to
shareholders. These consolidated financial statements and our report thereon
are incorporated by reference in the Company's annual report on Form 10-K for
the year 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related
consolidated financial statement schedule as listed in Item 14(a)2 in the
Company's Form 10-K for the year 1997. This consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the consolidated financial statement schedule based
on our audits.
In our opinion, based on our audits, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
McLean, Virginia
May 20, 1997
23
<PAGE> 1
EXHIBIT 99.2
JOINT VENTURE BETWEEN INTELLISYS
TECHNOLOGY CORPORATION AND CONCEPT
AUTOMATION, INC. OF AMERICA
FINANCIAL STATEMENTS
DECEMBER 31, 1996
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Members of the
Joint Venture between IntelliSys Technology Corporation and
Concept Automation, Inc. of America:
We have audited the accompanying balance sheet of the Joint Venture between
IntelliSys Technology Corporation and Concept Automation, Inc. of America
(the "Joint Venture") as of December 31, 1996, and the related statements of
operations, members' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Joint Venture's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit 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 audit provides 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 Joint Venture as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
McLean, Virginia
June 26, 1997
<PAGE> 3
JOINT VENTURE BETWEEN INTELLISYS TECHNOLOGY CORPORATION
AND CONCEPT AUTOMATION, INC. OF AMERICA
<TABLE>
<CAPTION>
Balance Sheet
December 31, 1996
======================================================================================
<S> <C>
ASSETS
- --------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 269,044
Accounts receivable 1,840,660
Inventory 963,924
Due from related party 120,876
- --------------------------------------------------------------------------------------
Total assets $ 3,194,504
======================================================================================
LIABILITIES AND MEMBERS' EQUITY
- --------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,522,040
Line-of-credit 770,392
- --------------------------------------------------------------------------------------
Total liabilities 2,292,432
Members' equity 902,072
- --------------------------------------------------------------------------------------
Total liabilities and members' equity $ 3,194,504
======================================================================================
</TABLE>
See accompanying notes to the financial statements.
2
<PAGE> 4
JOINT VENTURE BETWEEN INTELLISYS TECHNOLOGY CORPORATION
AND CONCEPT AUTOMATION, INC. OF AMERICA
<TABLE>
<CAPTION>
Statement of Operations
Year ended December 31, 1996
============================================================================================
<S> <C>
Product revenue $ 30,809,861
Cost of product sales 26,343,356
- --------------------------------------------------------------------------------------------
4,466,505
Indirect, general, and administrative expenses 159,695
- --------------------------------------------------------------------------------------------
Operating income 4,306,810
Interest income 44,361
Interest expense 42,272
- --------------------------------------------------------------------------------------------
Net income $ 4,308,899
============================================================================================
</TABLE>
See accompanying notes to the financial statements.
3
<PAGE> 5
JOINT VENTURE BETWEEN INTELLISYS TECHNOLOGY CORPORATION
AND CONCEPT AUTOMATION, INC. OF AMERICA
<TABLE>
<CAPTION>
Statement of Members' Equity
Year ended December 31, 1996
=========================================================================================================================
ITC CAI, Inc. Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Members' equity, December 31, 1995 $ 222,688 $ 214,936 $ 437,624
Distributions (1,960,670) (1,883,781) (3,844,451)
Net income 2,197,538 2,111,361 4,308,899
- -------------------------------------------------------------------------------------------------------------------------
Members' equity, December 31, 1996 $ 459,556 $ 442,516 $ 902,072
=========================================================================================================================
</TABLE>
See accompanying notes to the financial statements.
4
<PAGE> 6
JOINT VENTURE BETWEEN INTELLISYS TECHNOLOGY CORPORATION
AND CONCEPT AUTOMATION, INC. OF AMERICA
<TABLE>
<CAPTION>
Statement of Cash Flows
Year ended December 31, 1996
======================================================================================================
<S> <C>
Operating activities:
Net income $ 4,308,899
Adjustments to reconcile net income to net cash provided by
operating activities:
Decrease in accounts receivable 890,165
Decrease in inventory 54,049
Increase in due from related party (115,876)
Decrease in accounts payable (1,500,317)
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,636,920
Cash flows from financing activities:
Net advances under line-of-credit 358,683
Distributions to members (3,791,321)
- ------------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,432,638)
- ------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 204,282
Cash and cash equivalents, beginning of the year 64,762
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year $ 269,044
======================================================================================================
</TABLE>
See accompanying notes to the financial statements.
5
<PAGE> 7
JOINT VENTURE BETWEEN INTELLISYS TECHNOLOGY CORPORATION AND
CONCEPT AUTOMATION, INC. OF AMERICA
Notes to Financial Statements
December 31, 1996
================================================================================
(1) ORGANIZATION AND NATURE OF OPERATIONS
In February 1994, IntelliSys Technology Corporation ("ITC") and
Concept Automation Inc. of America ("CAI") (together hereafter
referred to as the "Joint Venture") entered into a Joint Venture
Agreement (the "Agreement") to secure the contract for, and to perform
the work requirements under a contract for the United States
Department of Justice Federal Bureau of Prisons ("BOP"). Under this
contract, the Joint Venture provides Local Area Network (LAN)
equipment, computers, peripherals, and software. Subsequent to the
formation of the Joint Venture, BTG, Inc. acquired CAI.
ITC and CAI own 51 percent and 49 percent of the Joint Venture,
respectively. Earnings of the Joint Venture are distributed to ITC
and CAI in this proportion based upon the cash flow requirements of
the Joint Venture.
The Joint Venture will terminate upon completion of the BOP contract
or earlier for certain events as outlined in the Agreement. The
period of performance under the BOP contract is for a base
period of twelve months beginning May 1,1995, with two twelve month
option periods thereafter.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The Joint Venture maintains its records, and the accompanying
financial statements have been prepared, on the accrual basis of
accounting in accordance with generally accepted accounting
principles.
REVENUE RECOGNITION
The Joint Venture provides off-the-shelf hardware and software to the
BOP under a single contract. Revenue is recognized when the customers
have accepted the products.
6
<PAGE> 8
JOINT VENTURE BETWEEN INTELLISYS TECHNOLOGY CORPORATION AND
CONCEPT AUTOMATION, INC. OF AMERICA
Notes to Financial Statements
December 31, 1996
================================================================================
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Joint Venture
considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
INVENTORY
Inventory 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.
PRODUCT WARRANTY
The Joint Venture provides a warranty to its customer covering parts
and labor for one year from the date of purchase.
INCOME TAXES
Under the Agreement, federal and state income taxes are the direct
responsibility of ITC and CAI. Accordingly, no income taxes have been
recorded in the accompanying financial statements.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may
differ from those estimates.
CONCENTRATION OF CREDIT RISK
During 1996, the BOP contract accounted for all of the revenue of the
Joint Venture.
(3) RELATED PARTY TRANSACTIONS
ITC and CAI provided the services of its employees to work on a number
of the tasks required by the Joint Venture. ITC performs many of the
administrative requirements of the BOP contract including program
management, purchasing, and accounting. CAI performs inventory
management requirements such as storage, shipping, and receiving of
the products. These costs are absorbed directly by ITC and CAI and,
accordingly, are not included in the accompanying financial
statements.
CAI sold certain products to the Joint Venture in order to take
advantage of more favorable pricing arrangements. Liabilities of the
Joint Venture to CAI as of December 31, 1996 were approximately
$905,000, and are included in accounts payable in the accompanying
financial statements. Additionally, the Joint Venture has a
receivable from CAI for product purchase discounts of approximately
$121,000.
(4) LINE-OF-CREDIT
In July 1995, the Joint Venture entered into an agreement with a
separate financing organization that provides for borrowings to
finance inventory purchases under a wholesale financing agreement (the
"Inventory Financing Facility"). The Inventory Financing Facility is
secured by certain assets of the Joint Venture including inventory
and accounts receivable. Financial terms of any advance made under
the Inventory Financing Facility depend, in part, upon the
availability of approved vendor discounts, payment terms or other
incentives, prevailing economic conditions, product sales volume, and
other economic factors which may vary over time. In addition, the
Joint Venture is subject to certain restrictive covenants under this
facility. At December 31, 1996, the Joint Venture had approximately
$770,000 of outstanding borrowings under this facility. Under the
terms of the agreement, the Inventory Financing Facility has no
expiration date but can be terminated by either party at any time.
Interest expense under the Inventory Financing Facility was
approximately $42,000 for the year ended December 31, 1996.
(5) SUBSEQUENT EVENT
On April 30, 1997, the Joint Venture was approved for the second
twelve month option period of the BOP contract beginning May 1, 1997.
================================================================================
10
<PAGE> 9
JOINT VENTURE BETWEEN INTELLISYS TECHNOLOGY CORPORATION AND
CONCEPT AUTOMATION, INC. OF AMERICA
Notes to Financial Statements
================================================================================
11
