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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-25094
BTG, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
VIRGINIA 54-1194161
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
3877 FAIRFAX RIDGE ROAD, FAIRFAX, VIRGINIA 22030-7448
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(Address of principal executive offices) (Zip Code)
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 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 15, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $ 37,183,428*.
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 15, 1998: 8,782,496 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
PART II: PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR
ENDED MARCH 31, 1998.
PART III: PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING
OF SHAREHOLDERS TO BE HELD ON AUGUST 5, 1998.
- --------------------------
* 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 systems and
services company providing complete solutions to a broad range of the 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"). In addition, during fiscal 1998 and prior years, the
Company was significantly involved in the reselling of computer hardware and
software (the "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. During fiscal years 1998 and 1997, the Company's
revenues were $588.9 million and $399.9 million, respectively, and it recorded
a net loss from continuing operations in fiscal 1998 of $29.2 million and net
income from continuing operations of $5.0 million in fiscal 1997.
BTG was formed in 1982 to provide systems engineering and software
development services to the Government 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 1994 and
1995, the Company acquired several other companies involved in providing
information systems and services in order to further enhance the Company's
internal capabilities and product offerings. In June 1997, the Company
acquired Nations, Inc. ("Nations"), which was primarily involved in systems
engineering and software development for the Government. 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.
In recent years, the Company identified what it believed to be a dramatic
change in the federal product reselling market. The Government's product
purchasing strategy shifted its focus to contract vehicles such as General
Services Administration ("GSA") Schedules, which heavily weigh lowest price as
opposed to best value. As profit margins in the Product Reselling Business
began to shrink during fiscal 1998, it became increasingly clear to the Company
that only the largest product resellers could generate the volume of sales
required to compensate for the decreasing product margins. Accordingly, on
February 12, 1998, BTG completed the sale to Government Technology Services,
Inc. ("GTSI") of (i) certain of the assets, principally inventory and property
and equipment, and (ii) certain of the existing contracts and outstanding
customer orders of BTG's Product Reselling Business (the "GTSI Transaction").
In addition, GTSI hired a significant number of the individuals previously
employed by BTG in the Product Reselling Business. As consideration for the
sale, BTG received $8.0 million and 15,375 shares of a new series of preferred
stock of GTSI, designated Series C 8% cumulative redeemable convertible
preferred stock. Ten percent of the purchase price was placed in escrow for a
one-year period to serve as security for the Company's indemnification for
potential obligations under the acquisition agreement. Following approval by
the GTSI shareholders on May 12, 1998, the preferred stock received by the
Company converted into 3,000,000 shares of GTSI common stock. This investment
represents a 30.8% ownership interest in GTSI. Management of the Company
believes that BTG's relationship with GTSI will offer significant benefits to
both its customers and shareholders as the combined reselling operations of
GTSI and BTG's Product Reselling Business produce the high-volume, low per-unit
cost essential to profitability
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in the product reselling market. In addition, BTG believes it can continue to
offer high-quality, end-to-end solutions by combining its systems integration
and engineering services with GTSI's product fulfillment capabilities. Although
the Company will continue to have revenue from reselling computer hardware and
software, a significant decrease in future product sales, as compared to fiscal
1998, is anticipated as a result of the GTSI Transaction.
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
connect 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
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
During fiscal 1998 and 1997, the Company's business has been organized
into two principal areas: the Systems Business and the Product Reselling
Business. Overall, the Systems Business accounted for approximately 29.9% and
27.4% of revenues in fiscal 1998 and 1997, respectively, while the Product
Reselling Business accounted for approximately 70.1% and 72.6% of total
revenues during such periods. As a result of the GTSI Transaction, the Company
anticipates a significant reduction in future revenues generated from product
sales.
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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
design and development and electronic data interchange activities primarily for
civilian Government, state and local government, and commercial 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. 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, for rapid evaluation. 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 for tracking troop movements and other
intelligence functions in a variety of military settings, including operations
in the Middle East, Somalia, Bosnia, and Korea.
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. The Company uses its
specialized expertise to develop custom networks and Websites, and provides
development, maintenance, data base software, and operations support services
to several civilian Government agencies. The Company also designs and develops
network based applications software systems for large commercial organizations
that can benefit from the Company's experience with intelligence systems,
resource management systems and high volume electronic transaction processing
systems.
The Product Reselling Business
Technology Systems Business Unit. As a product reseller of computer
hardware and software, prior to the GTSI Transaction, the Company, through its
Technology Systems Business Unit, provided 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's product sales were directly to the Government
and to systems integrators and prime contractors selling to the Government
market.
A significant percentage of the Company's revenues (52.2% in fiscal
1998 and 52.0% in fiscal 1997) was derived from product sales to the Government
under a variety of agency-specific IDIQ contracts. Another significant
percentage (14.2% in fiscal 1998 and 13.1% in fiscal 1997) of the Company's
revenue was derived from sales to the Government under the GSA Schedule, either
directly from the Company's GSA Schedule contracts or from sales to other prime
contractors with GSA Schedule contracts. See "Government Contracts -- The GSA
Schedules." Although the Company will continue to have revenue from reselling
computer hardware and software, a significant decrease in future revenues from
such sales, as compared to fiscal 1998, is anticipated as a result of the GTSI
Transaction.
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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, Education,
State, and Justice. 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, 1998, the Company was performing on over 200 active Government
contracts, with a total contract capacity (including option periods) in excess
of $570 Million. See "Backlog".
In fiscal 1998 and 1997, the Company derived approximately 93% and 89%
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:
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FISCAL YEARS ENDED MARCH 31,
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1998 1997
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(% of total revenues)
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DoD -- armed forces . . . . . . . . . . . . . . . . . . . . . . . 42.3% 26.9%
DoD -- national security agencies . . . . . . . . . . . . . . . . 2.1 6.5
GSA (including BTG customers with GSA Schedule sales) . . . . . . 14.2 13.1
Other civilian agencies . . . . . . . . . . . . . . . . . . . . . 34.0 41.6
Commercial customers, and state and local governments . . . . . . 7.3 11.0
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 0.9
</TABLE>
The Company offers its customers a full range of support services for
the systems it develops and 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, for systems in
use throughout the world. A significant portion of the customer support
provided by the Company as a result of sales of the Product Reselling Business
is performed by third party contractors.
The Company's revenues are highly dependent on the Government's demand
for the products and services offered by the Company. Furthermore, legislation
is periodically introduced in Congress that, if enacted, may change the
Government's current procurement processes. The Company cannot predict whether
any such legislative or regulatory proposals will be adopted or, if adopted,
the impact upon its operating results. 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. and EDS Corporation, 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 during
the past several 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. Sales and marketing activities within
the Product Reselling Business were performed by a devoted sales and marketing
department.
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GOVERNMENT CONTRACTS
Approximately 93% and 89% of the Company's revenues in fiscal 1998 and
1997, 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 were 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. The extent of any impact on the Company's results of operations,
financial position, or liquidity resulting from these inherent risks 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 1998 and 1997
revenues derived under negotiated procurement contracts were as follows by
contract type:
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FISCAL YEARS ENDED MARCH 31,
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1998 1997
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(Dollars in Thousands)
Revenue Percent Revenue Percent
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Cost-reimbursement . . . . . . . . . . . . . . . . $ 41,228 8.9% $ 31,287 10.3%
Time and materials . . . . . . . . . . . . . . . . 29,177 6.3 18,410 6.1
Fixed-price . . . . . . . . . . . . . . . . . . . . 6,993 1.5 13,771 4.5
IDIQ * . . . . . . . . . . . . . . . . . . . . . . 385,081 83.3 239,988 79.1
--------- -------- --------- -------
$ 462,479 100.0% $ 303,456 100.0%
========= ======= ========= ======
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* Approximately $77.8 million and $31.9 million of revenues in fiscal 1998 and
1997, respectively, were generated under IDIQ-type, negotiated procurement
contracts which were primarily service-oriented. Approximately $307.3 million
and $208.1 million of revenues in fiscal 1998 and 1997, 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
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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 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 14.2% and 13.1% of the Company's revenues in fiscal 1998
and 1997, respectively, were derived from sales pursuant to 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 was one
of the ten largest GSA Schedule holders and held 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. These schedules
were combined into a single GSA IT Schedule in October 1997. 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.
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
contract 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 contract does 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.
As a result of the GTSI Transaction, the Company anticipates a
significant decrease in the revenues derived from future product sales under
its GSA Schedule.
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
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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.
SUPPLIERS
The Company devotes significant resources to establishing and
maintaining relationships with its suppliers, although the significance of
these relationships is expected to decline significantly as a result of the
GTSI Transaction. 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 and end-user
technical support programs.
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 specific 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.
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,
1998 and 1997 was $570 million and $1.0 billion, respectively. The Company
experienced a significant decrease in total contract backlog as a result of the
GTSI Transaction. 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 allocated for
payment by customers upon completion of specified work. The Company estimates
that as of March 31, 1998 and 1997, its funded contract backlog was $74.8
million and $48.2 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
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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 to the Company.
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, the inherent difficulty
of predicting future contract potential, 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 part of large, diversified companies that have
access to the financial resources of their parent companies. In the Product
Reselling Business, the Company was required to compete with certain computer
manufacturers which 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 the exercise of contract option years in its Systems Business,
which the Company believes is 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 the Systems
Business. As a result of the GTSI Transaction, the Company no longer
significantly competes in the Product Reselling Business.
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 Secured 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, 1998,
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approximately 51% of the Company's employees possessed secret or top secret
security clearances, which are required for the 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 1998 to have a material adverse effect on the Company's consolidated
financial position.
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, 1998 the Company employed 1,319 employees, 1065 of
whom were technical/managerial staff, 231 of whom were administrative staff and
23 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 as of June 16, 1998:
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. In addition, he currently serves as the Company's acting
Chief Financial Officer. 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 29 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, Government Technology Services, Inc, and
the American Electronics Association. He is the husband of Marilynn D.
Bersoff.
10
<PAGE> 11
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 both human resources and facility
functions within the Company. Ms. Bersoff has over 21 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 24 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 a Senior Vice President in the Company's Integration and
Network Systems Business Unit where he performs 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.
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 18 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.
Peter F. DiGiammarino joined BTG in October of 1997 as Senior
Vice President and General Manager of the Company's Integration and Network
Solutions Business Unit. Prior to joining BTG, Mr. DiGiammarino was President
and Chief Operating Officer of Hyperion Software Company and also served on
their Board of Directors. From 1977 until 1996, he was employed by American
Management Systems, a consulting and systems development firm, where he was
Vice President and Business Area Manager in the Finance Industry Group. He is
currently on the Board of Directors for New Vision Financial, Inc., an early
stage company that tracks pre-IPO companies and potential investors. Mr.
DiGiammarino brings to BTG over 21 years of systems development and management
experience.
Todd A. Stottlemyer joined BTG in May of 1998 as Senior Vice
President and Director of Corporate Development. Mr. Stottlemyer was
previously Corporate Vice President for BDM International, Inc., where for 12
years he was involved in corporate strategy and business planning, and most
recently was responsible for shareholder relations, mergers and acquisitions,
public affairs, media relations and government affairs. Mr. Stottlemyer is
currently serving on the board of directors of the Northern Virginia Technology
Council and is Chairman of the Fairfax County Chamber of Commerce, as well as
the Commissioner of the Fairfax County Economic Development Authority. Mr.
Stottlemyer has recently been appointed by the Governor of Virginia to be the
Vice-Chairman of the Blue Ribbon Commission on Information Technology. At BTG,
he is responsible for investor relations, media relations and government
affairs, as well as the company's legal, purchasing and contracts departments.
Linda Hill has served as a Vice President of BTG since 1995
and is currently a Senior Vice President in the Company's Integration and
Network Systems Business Unit where she is responsible for new business
opportunities in developing business systems and applications for major
corporations in the Washington, D.C. area. Ms. Hill has been with BTG since
1985 and has served in a
11
<PAGE> 12
variety of positions with the Company including Director of Advanced Programs
and Deputy General Manager of the Company's Systems Engineering Group, where
she oversaw strategic planning, development of new business opportunities, and
organizational planning of the business unit. She has over 16 years of
computer-based systems experience, including world-wide systems integration,
systems development, and program management of large-scale projects for the
defense intelligence community.
ITEM 2. PROPERTIES
The Company leases all of the offices and facilities used in
connection with its operations, which comprise approximately 390,000 square
feet at various sites located in 11 states and the District of Columbia. The
following table sets forth information relating to the significant offices and
facilities currently leased by the Company:
<TABLE>
<CAPTION>
Approximate
Location Square Footage Expiration of Lease(s)
-------- -------------- ----------------------
<S> <C> <C>
Fairfax, Virginia 210,000 June 2012
Largo, Maryland 30,000 October 2000
Tinton Falls, New Jersey 27,000(1) January 2007 and July 2008
Niceville, Florida 18,000(2) April and December 1998
and July 2000
</TABLE>
- -------------------
(1) This property is held under two leases.
(2) This property is held under three leases.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 1998, there were no material pending legal proceedings
to which the Company was a party or to which any of its properties was subject,
nor, to the Company's knowledge, is any material legal proceeding threatened.
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, 1998.
12
<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 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
FY 1998:
June 30, 1997 $ 20.000 $ 8.500
September 30, 1997 $ 16.000 $ 9.750
December 31, 1997 $ 14.750 $ 8.375
March 31, 1998 $ 11.000 $ 7.938
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
</TABLE>
The Company has never paid cash dividends and is currently prohibited
from doing so under its Credit Facility. 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 20,000,000 shares of common stock and
1,000,000 shares of preferred stock. At March 31, 1998, 8,634,451 shares of
common stock were outstanding. No preferred shares have been issued. The
Company had approximately 325 shareholders of record on March 31, 1998.
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, 1998, 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, 1998 and 1997, and for each of the years in the
three-year period ended March 31, 1998, and the report thereon, are included in
the BTG Incorporated 1998 Annual Report (the "1998 Annual Report") and are
incorporated herein by reference under Item 8. "Financial Statements and
Supplementary Data."
13
<PAGE> 14
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
--------------------------------------------------------------------
1998 (1) 1997 1996 (1) 1995 (1) 1994
------------- ----------- ------------ ----------- -------------
(In thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenue $ 175,987 $ 109,687 $ 67,014 $ 46,130 $ 35,509
Product sales 412,922 290,216 146,544 109,859 68,045
------------ ----------- ------------ ----------- ------------
588,909 399,903 213,558 155,989 103,554
Direct costs:
Contract costs 122,492 66,536 35,577 23,046 17,287
Cost of product sales 383,895 254,823 128,070 95,585 60,276
------------ ----------- ------------ ----------- ------------
506,387 321,359 163,647 118,631 77,563
Indirect, general and administrative expenses 88,020 63,406 40,827 29,388 20,858
Amortization and other operating costs, net 3,488 1,916 1,595 1,070 905
Restructuring charge 38,474 -- -- -- --
------------ ----------- ------------ ----------- ------------
636,369 386,681 206,069 149,089 99,326
Operating income (loss) (47,460) 13,222 7,489 6,900 4,228
Interest expense (8,448) (6,107) (3,045) (1,362) (817)
Equity in earnings of affiliate 589 1,887 792 -- --
Gain on sale of investments 20,228 63 -- -- --
Merger-related costs (2,466) -- -- -- --
------------ ----------- ------------ ----------- ------------
Income (loss) from continuing operations before income
taxes and extraordinary items (37,557) 9,065 5,236 5,538 3,411
Provision (benefit) for income taxes (8,364) 4,091 2,282 2,406 1,593
------------ ----------- ------------ ----------- ------------
Income (loss) from continuing operations (29,193) 4,974 2,954 3,132 1,818
Loss from discontinued operations, net of income
tax benefit (4,152) (703) -- -- --
------------ ----------- ------------ ----------- ------------
Net income (loss) before extraordinary items (33,345) 4,271 2,954 3,132 1,818
Extraordinary loss from early extinguishment of debt,
net of income tax benefit (1,878) -- -- -- --
------------ ----------- ------------ ----------- ------------
Net income (loss) $ (35,223) $ 4,271 $ 2,954 $ 3,132 $ 1,818
============ =========== ============ =========== ============
Basic earnings (loss) per share $ (4.12) $ 0.62 $ 0.49 $ 0.63 $ 0.39
============ =========== ============ =========== ============
Diluted earnings (loss) per share $ (4.12) $ 0.60 $ 0.47 $ 0.60 $ 0.38
============ =========== ============ =========== ============
Weighted average shares used for basic EPS 8,540 6,887 6,043 4,979 4,631
============ =========== ============ =========== ============
Weighted average shares used for diluited EPS 8,540 7,141 6,233 5,196 4,774
============ =========== ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
------------------------------------------------------------------
1998 (1) 1997 1996 (1) 1995 (1) 1994
------------ ----------- ----------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and equivalents $ -- $ -- $ 47 $ 1,267 $ 1,182
Receivables, net 135,050 99,017 69,146 44,677 35,331
Inventory, net 2,214 16,716 9,421 6,327 2,685
Working capital 43,812 83,551 47,949 13,125 4,441
Total assets 212,439 156,080 109,460 72,309 48,142
Line of credit 70,252 30,021 30,453 23,419 11,993
Shareholders' equity 33,060 66,245 27,745 23,039 10,877
</TABLE>
- ----------------------------------
(1) 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. of America. In
fiscal 1998, the company acquired all of the outstanding common stock
of Nations, 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 1998 Annual Report and
incorporated herein by reference under Item 8. "Financial Statements
and Supplementary Data" for information relating to the 1996 and 1998
acquisitions.
14
<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 1998 Annual
Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included on pages 20 through
35 of the 1998 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 to be 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 August
5, 1998 (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 to be set forth under the caption
"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 to be set forth under the caption
"Beneficial Ownership of Common Stock" 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 to be set forth under the caption
"Certain Relationships and Related Transactions" appearing in the Company's
Proxy Statement, which information is incorporated herein by reference.
15
<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 1998
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 19)
B. Consolidated Statements of Operations (Annual
Report page 20)
C. Consolidated Balance Sheets (Annual Report page
21)
D. Consolidated Statements of Shareholders' Equity
(Annual Report page 22)
E. Consolidated Statements of Cash Flows (Annual
Report page 23)
F. Notes to Consolidated Financial Statements
(Annual Report pages 24 through 35)
2. Financial Statement Schedules. The following additional
financial data should be read in conjunction with the
Consolidated Financial Statements in the 1998 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>
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company, and the
Amendment thereto (incorporated by reference to the Company's Form 10-Q
for the quarter ended September 30, 1997).
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 Amended and Restated Business Loan and Security Agreement, dated October 31, 1997, among BTG, Inc. and
its subsidiaries and NationsBank, N.A. (incorporated by reference to the Company's registration
statement on Form S-4 (File No. 333-40917))
10.2 First Modification to Amended and Restated Business Loan and Security
Agreement, dated February 24, 1998, by and among BTG, Inc. and its
subsidiaries and NationsBank, N.A.
10.3 Second Modification to Amended and Restated Business Loan and Security
Agreement, dated June 24, 1998, by and among BTG, Inc. and its subsidiaries
and NationsBank, N.A.
10.4 1995 Employee Stock Option Plan (incorporated by reference to the Company's registration statement on
Form S-8 (File No. 333-10473)).*
10.5 Employee Stock Purchase Plan (incorporated by reference to the Company's registration statement on Form
S-8 (File No. 333-10473)).*
10.6 Annual Leave Stock Plan (incorporated by reference to the Company's registration statement on Form S-8
(File No. 33-97302)).*
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
10.7 Directors Stock Option Plan (incorporated by reference to the Company's Form 10-K for the year ended
March 31, 1996).*
10.8 Non-Employee Director Stock Purchase Plan (incorporated by reference to the Company's registration
statement on Form S-1 (File No. 333-14767)).*
10.9 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)).*
10.10 Asset Purchase Agreement, dated February 12, 1998, among BTG, Inc., BTG Technology Systems, Inc.,
Concept Automation, Inc. of America and Government Technology Services, Inc. (incorporated by reference
to the Company's Form 10-Q for the quarter ended December 31, 1997).
10.11 Standstill Agreement, dated February 12, 1998, among BTG, Inc. and Government Technology Services, Inc.
(incorporated by reference to the Company's Form 10-Q for the quarter ended December 31, 1997).
10.12 Certificate of Designations, Preferences and Rights of Series C 8% Cumulative Redeemable Convertible
Preferred Stock (incorporated by reference to the Company's Form 10-Q for the quarter ended December
31, 1997).
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 14 through 20 of the 1998 Annual Report.
13.2 Financial Statements and Supplementary Data incorporated by reference to pages 21 through 36 of the
1998 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.
</TABLE>
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
January 9, 1998 BTG reported that the shareholders of
Micros-to-Mainframes, Inc. ("M-T-M") approved
BTG's planned acquisition of M-T-M and that
the parties agreed to extend the termination
date set forth in the Agreement and Plan of
Merger, dated August 29, 1997, as amended
among BTG, M-T-M and a wholly-owned
subsidiary of BTG.
February 6, 1998 BTG reported that BTG and M-T-M agreed to
extend the termination date set forth in the
Agreement and Plan of Merger, dated August
29, 1997, as amended among BTG, M-T-M and a
wholly-owned subsidiary of BTG.
(c) Exhibits to this Form 10-K are filed herewith, unless
incorporated by reference.
(d) Schedules to this Form 10-K are filed herewith.
17
<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 29th day
of June, 1998.
BTG, INC.
----------------------------------
Registrant
<TABLE>
<S> <C>
By: /s/ Edward H. Bersoff
---------------------------------------
Edward H. Bersoff
President and Chief Executive Officer
</TABLE>
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 29, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Edward H. Bersoff Chairman of the Board, President,
- ------------------------------------------- Chief Executive Officer and acting Chief
Edward H. Bersoff Financial Officer (Principal Executive
and Accounting Officer)
/s/ Ruth M. Davis Director
- -------------------------------------------
Ruth M. Davis
/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
/s/ Earle C. Williams Director
- -------------------------------------------
Earle C. Williams
</TABLE>
18
<PAGE> 19
SCHEDULE VIII
BTG, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(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, 1998
Allowances for doubtful
accounts receivable $ 1,002 $ 3,043 $ 862 $ -- $ 3,183
Allowances for
inventory obsolescence 950 2,090 1,365 -- 1,675
Allowances for
income tax valuations -- 550 -- -- 550
------------- ------------- --------------- ---------------- -----------
$ 1,952 $ 5,683 $ 2,227 $ -- $ 5,408
============= ============= =============== ================ ===========
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 (A) 488 925
Allowances for
income tax valuations 197 -- 92 -- 105
------------- ------------- --------------- ---------------- -----------
$ 916 $ 265 $ 418 $ 488 $ 1,251
============= ============= =============== ================ ===========
</TABLE>
(A) Relates to an estimated accrued expense in fiscal 1995 which was settled
in fiscal 1996 at a lesser amount.
<PAGE> 1
EXHIBIT 10.2
FIRST MODIFICATION TO AMENDED AND RESTATED BUSINESS LOAN AND
SECURITY AGREEMENT
THIS FIRST MODIFICATION TO AMENDED AND RESTATED BUSINESS LOAN AND
SECURITY AGREEMENT (this "Modification") is made as of the 24th day of February,
1998, by and among (i) NATIONSBANK, N.A., a national banking association
("NationsBank"), having an office at 8300 Greensboro Drive, Suite 550, McLean,
Virginia 22102; (ii) FLEET CAPITAL CORPORATION, a Rhode Island corporation
("Fleet"), having an office at 300 Galleria Parkway Northwest, Suite 800,
Atlanta, Georgia 30339; (iii) each other person or entity hereafter becoming a
"Lender" pursuant to the hereinafter defined Loan Agreement; (iv) NATIONSBANK,
N.A., a national banking association (acting in its capacity as Agent for the
Lenders), having an office at 8300 Greensboro Drive, Suite 550, McLean, Virginia
22102; (v) BTG, INC., a Virginia corporation ("BTG"); BTG TECHNOLOGY SYSTEMS,
INC., a Virginia corporation formerly known as BDS, Inc. ("Tech Systems"); DELTA
RESEARCH CORPORATION, a Virginia corporation ("Delta"); CONCEPT AUTOMATION, INC.
OF AMERICA, a Virginia corporation ("CAI"); and NATIONS, INC., a New Jersey
corporation ("Nations"); all having principal offices at 3877 Fairfax Ridge
Road, 4B, Fairfax, Virginia 22030-7448; and (vi) each other person or entity
hereafter executing a "Joinder Agreement" pursuant to the Loan Agreement.
Capitalized terms used but not defined herein shall have the meaning 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 that certain Amended
and Restated Business Loan and Security Agreement dated October 31, 1997 (as the
same may be hereafter amended or modified, the "Loan Agreement"), by and among
the Agent, Borrowers, Lenders and Crestar Bank (acting in its capacity as a
Lender), the Borrowers obtained a loan (the "Loan") from the Lenders in the
aggregate maximum principal amount of One Hundred Ten Million and No/100 Dollars
($110,000,000.00), evidenced by three (3) separate Replacement Revolving
Promissory Notes (as defined in EXHIBIT A), in the aggregate maximum principal
amount of One Hundred Ten Million and No/100 Dollars ($110,000,000.00), and
secured by, among other things, certain collateral more fully described in
Article III, Section 1 of the Loan Agreement; and
WHEREAS, the Borrowers have requested that the Agent and Lenders'
consent to the extension of a new term loan (the "Term Loan") to the Borrowers
by Blue Ridge Investments, L.L.C., a Delaware limited liability company ("Blue
Ridge") and Fleet (acting in such capacity, the "Term Loan Lenders"), in the
maximum principal amount of Fifteen Million Dollars ($15,000,000), the granting
of a second lien security interest in the Borrowers' assets to secure the same,
and a modification to the Loan Agreement to provide to the Term Loan Lenders the
right to cause advances to be made under the Loan to pay amounts not paid when
due under the Term Loan; and
<PAGE> 2
WHEREAS, the Lenders have agreed to grant such consent and the
Borrowers have agreed to proceed with the Term Loan, subject to the terms and
conditions set forth herein, provided that the Loan Agreement is modified (i) to
reduce the Commitment Amount (and in connection therewith, reallocate the
reduced Commitment Amount between NationsBank and Fleet), and amend the manner
in which the Borrowing Base is calculated; (ii) to delete, add and modify
certain definitions; (iii) to modify certain financial covenants; (iv) to
provide cross default provisions between the Loan and Term Loan; (v) to modify
the Additional Libor Percentage provisions; (vi) to make certain conforming
changes to various Exhibits and Schedules; and (vii) to provide for the payment
of a modification commitment fee.
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 Agent and Lenders hereby acknowledge and consent to the
Borrowers entering into the Term Loan and granting second lien security
interests to secure payment thereof, all in accordance with the terms of the
loan agreement and other loan documents executed in connection with the Term
Loan. The Agent and Lenders also consent to a sale of the WheelGroup Stock and
GTSI Stock, as contemplated by and in accordance with the provisions of Section
17 of Article VI of the Term Loan Agreement.
3. The definition of "Commitment Amount" set forth in the "Certain
Definitions" section of the Loan Agreement is hereby deleted in its entirety and
the following substituted in lieu thereof:
"COMMITMENT AMOUNT" shall mean (i) during the period from
the date of this Modification through March 31, 1998,
Ninety-five Million Dollars ($95,000,000.00), (ii) during
the period from April 1, 1998 through June 30, 1998,
Eighty-five Million Dollars ($85,000,000.00), (iii) during
the period from July 1, 1998 through September 30, 1998,
Seventy-five Million Dollars ($75,000,000.00), and (iv) from
and after October 1, 1998 through the Maturity Date, Sixty
Million Dollars ($60,000,000.00)."
4. The definition of "NATO" set forth in the "Certain Definitions"
section of the Loan Agreement is hereby deleted in its entirety.
2
<PAGE> 3
5. The following definitions of "Calculation Date" , "Quarterly
Period", "Term Loan" and "Term Loan Agreement" are hereby added to the "Certain
Definitions" section of the Loan Agreement:
""CALCULATION DATE" shall have the meaning attributed to
such term in Section 6 of Exhibit 7 to the Loan Agreement.
"QUARTERLY PERIOD" shall have the meaning attributed to such
term in Section 6 of Exhibit 7 to the Loan Agreement.
"TERM LOAN" shall mean that certain Term Loan in the
original principal amount of Fifteen Million and No/100
Dollars ($15,000,000), made by Blue Ridge and Fleet to the
Borrowers.
"TERM LOAN AGREEMENT" shall mean the Business Loan and
Security Agreement executed in connection with the Term
Loan.
6. Section 3(a) of Article I of the Loan Agreement is hereby
deleted in its entirety and the following substituted in lieu thereof:
"(a) Maximum Advances. Notwithstanding any term or provision
of this Agreement or any other Loan Document to the
contrary, it is understood and agreed that in no event
whatsoever shall the Lenders be obligated to advance any
amount or have Obligations outstanding pursuant hereto which
shall exceed the lesser of:
1. The Commitment Amount, or
2. The aggregate of (the "Maximum Borrowing Base"):
(i) ninety percent (90%) of the Borrowers' Eligible
Borrowing Base Receivables representing amounts due and
owing from the Government, which are outstanding less
than one hundred twenty-one (121) days from the date of
original invoice; plus
(ii) eight-five percent (85%) of the Borrowers'
Eligible Borrowing Base
3
<PAGE> 4
Receivables representing amounts due and owing from
domestic account debtors (other than the Government),
which are outstanding less than ninety-one (91) days
from the date of original invoice; plus
(iii) the lesser of (x) fifty percent (50%) of the
Borrower's Eligible Unbilled Costs; or (y) Ten Million
Dollars ($10,000,000);
All receivables included in the computation of the Maximum
Borrowing Base must be acceptable to the Agent in all
respects. Each request for an advance shall be deemed a
representation by the Borrowers that any Eligible Borrowing
Base Receivable or Eligible Unbilled Cost on which such
request is based satisfies the foregoing requirements."
7. The following new paragraph 4(c) is hereby added to Section 4 of
Article I of the Loan Agreement:
(c) In the event any payment is not made in connection with
the Loan when due, or in the event any payment is not made
under the Term Loan when due, the Agent and Lender shall
have the right, without further approval or authorization of
or from the Borrowers (i) to cause an advance to be made
under this Agreement and apply the proceeds thereof to
amounts due under the Loan; and (ii) upon the request of the
agent under the Term Loan Agreement, to cause an advance to
be made under this Agreement and disburse the proceeds
thereof to the agent under the Term Loan Agreement for
application against the Term Loan.
8. Section 15 of Article VI of the Loan Agreement is hereby modified
so that from and after the date of this Modification, the financial covenants
referenced therein shall be required to be complied with on March 31, 1998 and
thereafter (in accordance with the terms of the specific provisions thereof;
i.e., no financial covenants shall be tested prior to March 31, 1998).
9. Subsection 1(k) of Article IX of the Loan Agreement is hereby
deleted in its entirety and the following inserted in lieu thereof:
4
<PAGE> 5
"(k) If a default shall have occurred under the Term Loan
Agreement or any other agreement, document or instrument
entered into in connection with the Term Loan, and such
default remains uncured beyond the expiration of any
applicable notice and/or grace period."
10. Simultaneously with the effectiveness of the reductions in the
Commitment Amount referenced in Section 3 above, the Maximum Loan Amount set
forth in the computation section of Exhibit 5 to the Loan Agreement shall be
automatically reduced to the applicable Commitment Amount as of the date of the
particular computation.
11. Section 6 of Exhibit 7 to the Loan Agreement is hereby deleted in
its entirety and the following substituted in lieu thereof:
"The term Additional Libor Percentage shall mean two and
one-quarter percent (2.25%). From and after the first
Calculation Date (hereinafter defined), the term Additional
Libor Percentage shall mean the percentage which corresponds
to the Borrowers' "Leverage Ratio", as set forth below:
<TABLE>
<CAPTION>
Additional
Leverage Ratio Libor Percentage
-------------- ----------------
<S> <C>
greater than or equal to 6.0 to 1.0 2.25%
greater than or equal to 5.0 to 1.0,
but less than 6.0 to 1.0 2.00%
greater than or equal to 4.0 to 1.0,
but less than 5.0 to 1.0 1.75%
less than 4.0 to 1.0 1.50%
</TABLE>
For purposes hereof the Borrowers' "Leverage Ratio" shall
mean the ratio of Borrowers' Average Funded Debt to
Consolidated EBITDA, as calculated in accordance with
Section 15(c) of Article VI of the Loan Agreement.
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
5
<PAGE> 6
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 and one-quarter percent (2.25%). 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")."
12. The Lenders and Borrowers hereby acknowledge and confirm that the
Replacement Revolving Promissory Note made by the Borrowers and payable to the
order of Crestar Bank (the "Crestar Note"), in the maximum principal amount of
Fifteen Million Dollars ($15,000,000.00), is being paid and satisfied in full
contemporaneously with the execution and delivery of this Modification, and that
effective as of the date such promissory note is paid and satisfied in full, the
sole remaining Lenders will be NationsBank and Fleet; it being understood that
the percentage interests in the Loan and Loan Commitments of NationsBank and
Fleet shall be as set forth in Schedule 1 to this Modification. The Borrowers,
Agent and Lenders acknowledge and agree that the payment of the Crestar Note
shall be accomplished by Fleet and NationsBank advancing additional amounts
under the Loan and paying such amounts to Crestar. Fleet and NationsBank shall
fund this additional amount in accordance with their relative percentages set
forth in Schedule 1 attached hereto, and promptly following payment of the
Crestar Note, the Agent shall obtain the original Crestar Note, mark the same
paid and satisfied in full, and return the same to BTG.
13. MODIFICATION COMMITMENT FEE. The Borrowers shall pay to the
Agent, for the benefit of the Lenders (on a 50-50 basis), a modification
commitment Fee in the maximum amount of One Million Two Hundred Fifty Thousand
and No/100 Dollars ($1,250,000), which shall be payable as follows: (a) Seven
Hundred Fifty Thousand and No/100 Dollars ($750,000) of the modification
commitment fee shall be paid in cash on or before the date of this Modification;
the Agent hereby acknowledging that Two Hundred Fifty Thousand and No/100
Dollars ($250,000) of such amount has been previously received by the Agent; and
(b) Fifty Thousand and No/100 Dollars ($50,000) shall be payable on the first
day of April, 1998 and on the first day of each calendar month thereafter during
which all or any portion of the Term Loan remains outstanding; it being
understood that these monthly payments shall cease on the date the Term Loan is
paid and
6
<PAGE> 7
satisfied in full, and in no event shall the monthly payments required
by this clause (b) exceed, in the aggregate, Five Hundred Thousand and No/100
Dollars ($500,000).
14. Each Borrower hereby acknowledges, agrees, represents and
warrants that (i) there are no set-offs or defenses against 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 (v) 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.
15. 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.
16. 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.
17. The Borrowers shall be jointly and severally liable for the
payment and performance of all of their obligations hereunder.
18. 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.
7
<PAGE> 8
IN WITNESS WHEREOF, the undersigned have signed, sealed and delivered
this Modification on the day and year first above written.
<TABLE>
<S> <C>
BORROWERS:
---------
[Corporate Seal] BTG, INC.,
ATTEST: a Virginia corporation
By: /s/ MARILYNN D. BERSOFF By: /S/ EDWARD H. BERSOFF
---------------------------- ---------------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
Title: Secretary Title: President and CEO
[Corporate Seal] BTG TECHNOLOGY SYSTEMS, INC.,
ATTEST: a Virginia corporation
By: /s/ MARILYNN D. BERSOFF By: /S/ EDWARD H. BERSOFF
---------------------------- ---------------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
Title: Secretary Title: President
[Corporate Seal] DELTA RESEARCH CORPORATION,
ATTEST: a Virginia corporation
By: /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
By: /s/ MARILYNN D. BERSOFF By: /S/ EDWARD H. BERSOFF
---------------------------- ---------------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
Title: Secretary Title: CEO
</TABLE>
8
<PAGE> 9
<TABLE>
<S> <C>
Corporate Seal] NATIONS, INC.,
ATTEST: a New Jersey corporation
By: /s/ MARILYNN D. BERSOFF By: /S/ EDWARD H. BERSOFF
---------------------------- ---------------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
Title: Secretary Title: President and 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
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
</TABLE>
9
<PAGE> 1
EXHIBIT 10.3
SECOND MODIFICATION TO AMENDED AND RESTATED BUSINESS LOAN AND
SECURITY AGREEMENT
THIS SECOND MODIFICATION TO AMENDED AND RESTATED BUSINESS LOAN AND
SECURITY AGREEMENT (this "Modification") is made as of the 24th day of June,
1998, by and among (i) NATIONSBANK, N.A., a national banking association
("NationsBank"), having an office at 8300 Greensboro Drive, Suite 550, McLean,
Virginia 22102; (ii) FLEET CAPITAL CORPORATION, a Rhode Island corporation
("Fleet"), having an office at 300 Galleria Parkway Northwest, Suite 800,
Atlanta, Georgia 30339; (iii) each other person or entity hereafter becoming a
"Lender" pursuant to the hereinafter defined Loan Agreement; (iv) NATIONSBANK,
N.A., a national banking association (acting in its capacity as Agent for the
Lenders), having an office at 8300 Greensboro Drive, Suite 550, McLean, Virginia
22102; (v) BTG, INC., a Virginia corporation; BTG TECHNOLOGY SYSTEMS, INC., a
Virginia corporation formerly known as BDS, Inc.; DELTA RESEARCH CORPORATION, a
Virginia corporation; CONCEPT AUTOMATION, INC. OF AMERICA, a Virginia
corporation; and NATIONS, INC., a New Jersey corporation (collectively, the
"Borrowers"); all having principal offices at 3877 Fairfax Ridge Road, 4B,
Fairfax, Virginia 22030-7448; and (vi) each other person or entity hereafter
executing a "Joinder Agreement" pursuant to the Loan Agreement. Capitalized
terms used but not defined herein 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 that certain Amended
and Restated Business Loan and Security Agreement dated October 31, 1997 and as
modified by that certain First Modification to Amended and Restated Business
Loan and Security Agreement dated as of February 24, 1998 (as the same may be
hereafter amended or modified, the "Loan Agreement"), by and among the Agent,
Borrowers, Lenders and Crestar Bank (acting in its capacity as a Lender), the
Borrowers obtained a loan (the "Loan") from the Lenders in the original
aggregate maximum principal amount of One Hundred Ten Million and No/100 Dollars
($110,000,000.00), which aggregate maximum principal amount has been reduced to
Eighty-five Million Dollars ($85,000,000), but continues to be evidenced by two
(2) separate Replacement Revolving Promissory Notes (as defined in Exhibit A),
in the aggregate original maximum principal amount of Ninety-five Million
Dollars ($95,000,000), and which Loan is secured by, among other things, certain
collateral more fully described in Article III, Section 1 of the Loan Agreement;
and
WHEREAS, the Borrowers have requested that the Agent and the Lenders
consent to the modification of certain definitions and financial covenants
provisions set forth in the Loan Agreement; and
WHEREAS, subject to the terms of this Modification, the Agent and the
Lenders have agreed to such modifications, as hereinafter provided.
<PAGE> 2
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 "Average Funded Debt" set forth in the "Certain
Definitions" section of the Loan Agreement is hereby deleted in its entirety.
The following definition of "Funded Debt" is hereby added to the "Certain
Definitions" section:
""FUNDED DEBT" shall have the meaning assigned to such term
in Section 15(c) of Article VI of this Agreement."
3. The definitions of "Consolidated EBITDA" and "Consolidated Fixed
Charges" set forth in the "Certain Definitions" section of the Loan Agreement
are hereby deleted in their entirety and the following substituted in lieu
thereof:
""CONSOLIDATED EBITDA" shall have the meaning assigned to
such term in Section 15(c) of Article VI of this Agreement.
"CONSOLIDATED FIXED CHARGES" shall mean, as of the date of
the particular determination, interest expenses, plus
current maturities of long term debt, plus current
maturities of capitalized leases, plus cash payments for
taxes for the fiscal quarter of the Borrowers most recently
ended, calculated on a consolidated basis in accordance with
GAAP."
4. Section 15(a) of Article VI of the Loan Agreement is hereby
deleted in its entirety and the following substituted in lieu thereof:
"(a) Tangible Net Worth. The Borrowers, on a consolidated
basis, will maintain at all times during the following
periods, Tangible Net Worth of not less than the following
amounts:
2
<PAGE> 3
<TABLE>
<CAPTION>
Periods Required Tangible Net Worth
------- ---------------------------
<S> <C> <C>
From June 30, 1998 through $21,000,000.00
September 29, 1998
From September 30, 1998 $21,500,000.00
through December 30, 1998
From December 31, 1998 $23,750,000.00
through March 30, 1999
From March 31, 1999 through $25,750,000.00
the Maturity Date
</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 such amounts are part of the Borrowers' consolidated
net worth), investments in non-marketable securities, notes
receivable of affiliates (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."
5. Section 15(b) Article VI is hereby deleted in its entirety and
the following substituted in lieu thereof:
"(b) Current Ratio. The Borrowers, on a consolidated basis,
will at all times during the following periods, maintain a
Current Ratio of at least the following:
3
<PAGE> 4
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
From June 30, 1998 through 1.15 to 1.00
September 29, 1998
From September 30, 1998 1.25 to 1.00
through December 30, 1998
From December 31, 1998 1.25 to 1.00
through March 30, 1999
From March 31, 1999 through 1.50 to 1.00
the Maturity Date
</TABLE>
For the purposes of this Agreement, the Current Ratio shall
be calculated by dividing current assets by current
liabilities."
6. Section 15(c) of Article VI is hereby deleted in its entirety and
the following substituted in lieu thereof:
"(c) Funded Debt to Consolidated EBITDA Ratio. The Borrowers
will maintain on a consolidated basis, a ratio of Funded
Debt to Consolidated EBITDA as follows:
<TABLE>
<CAPTION>
For the Fiscal Quarter Ended Not Greater than:
---------------------------- -----------------
<S> <C>
June 30, 1998 14.10 to 1.00
September 30, 1998 6.50 to 1.00
December 31, 1998 4.25 to 1.00
March 31, 1999 and each fiscal 2.75 to 1.00
quarter end thereafter
</TABLE>
4
<PAGE> 5
For purposes hereof, "Funded Debt" shall mean the
outstanding principal balance of borrowed funds pursuant to
this Agreement (including, without limitation, the face
amount of outstanding Letters of Credit), plus all other
interest bearing obligations of the Borrowers as of the date
of determination.
For the purposes hereof, "Consolidated EBITDA" shall mean as
of the date of the particular determination, earnings before
interest, taxes, depreciation and amortization calculated on
a consolidated basis in accordance with GAAP, excluding all
non-operating results (including, but not limited to, the
results of Government Technology Services, Inc. as included
in the Borrowers' consolidated income statement and the
profit or loss from the sale of Cisco Systems, Inc. stock.)
Consolidated EBITDA shall be calculated for the periods
described below according to the corresponding method
described below:
<TABLE>
<CAPTION>
For Fiscal Quarter Ended Calculation
------------------------ -----------
<S> <C> <C>
June 30, 1998 EBITDA for the fiscal quarter
ending June 30, 1998 multiplied
by four (4)
September 30, 1998 the sum of EBITDA for the
fiscal quarters ending June 30,
1998 and September 30, 1998
multiplied by two (2)
December 31, 1998 the sum of EBITDA for the
fiscal quarters ending June 30,
1998, September 30, 1998 and
December 31, 1998 multiplied
by four-thirds (4/3)
March 31, 1999 and for EBITDA on a rolling four (4)
each fiscal quarter end quarter basis"
thereafter
</TABLE>
7. Section 15(d) of Article VI of the Loan Agreement is hereby
deleted in its entirety and the following substituted in lieu thereof:
5
<PAGE> 6
"(d) Maintenance of Fixed Charge Coverage. The Borrowers
shall not permit the ratio of (i) Consolidated EBITDA to
(ii) Consolidated Fixed Charges, measured as of each date
set forth below to be less than the ratio set forth below:
<TABLE>
<CAPTION>
For Fiscal Quarter Ended Ratio
------------------------ -----
<S> <C>
June 30, 1998 0.4 to 1.0
September 30, 1998 1.6 to 1.0
December 31, 1998 1.4 to 1.0
March 31, 1999 1.6 to 1.0"
and the last day of each fiscal
quarter thereafter
</TABLE>
8. Section 10 of Article VII of the Loan Agreement is hereby deleted
in its entirety and the following substituted in lieu thereof:
"10. CAPITAL EXPENDITURES. On a consolidated basis make
any cash investment or cash capital expenditure, including
but not limited to, expenditures for leasehold improvements
or the acquisition of the assets of any other firm, person,
company, corporation or enterprise, during any of the
Borrowers' fiscal year in excess of One Million Four Hundred
Thousand Dollars ($1,400,000.00);"
9. Section 11 of Article VII of the Loan Agreement is hereby
deleted in its entirety and the following substituted in lieu thereof:
"11. CONTINUED PROFITABILITY. Incur, on a consolidated
basis, a net loss for any fiscal quarter ending on or after
September 30, 1998; and/or"
6
<PAGE> 7
10. Line (c) iii of EXHIBIT 6 to the Loan Agreement is hereby deleted
in its entirety and the following is substituted in lieu thereof: ---------
"iii. Funded Debt to EBITDA: _____________ to 1.00."
11. Notwithstanding anything contained in the Loan Agreement, the
Libor Interest Election option shall not be available until and unless Borrowers
receive written notification from the Agent.
12. Each Borrower hereby acknowledges, agrees, represents and
warrants that, as of the date hereof (i) there are no set-offs or defenses
against the Notes, the Loan Agreement or any other Loan Document; (ii) except as
specifically amended hereby, 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 (as modified hereby) and
the other Loan Documents are hereby expressly approved, ratified and confirmed;
and (v) 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.
13. 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.
14. 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.
15. 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.
[remainder of page intentionally left blank - signature page follows]
7
<PAGE> 8
IN WITNESS WHEREOF, the undersigned have signed, sealed and delivered
this Modification on the day and year first above written.
<TABLE>
<S> <C>
BORROWERS:
---------
[Corporate Seal] BTG, INC.,
ATTEST: a Virginia corporation
By: /s/ MARILYNN D. BERSOFF By: /s/ EDWARD H. BERSOFF
---------------------------- ---------------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
Title: Secretary Title: President and CEO
[Corporate Seal] BTG TECHNOLOGY SYSTEMS, INC.,
ATTEST: a Virginia corporation
By: /s/ MARILYNN D. BERSOFF By: /s/ EDWARD H. BERSOFF
---------------------------- ---------------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
Title: Secretary Title: President
[Corporate Seal] DELTA RESEARCH CORPORATION,
ATTEST: a Virginia corporation
By: /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
By: /s/ MARILYNN D. BERSOFF By: /s/ EDWARD H. BERSOFF
---------------------------- ---------------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
Title: Secretary Title: CEO
</TABLE>
8
<PAGE> 9
<TABLE>
<S> <C>
Corporate Seal] NATIONS, INC.,
ATTEST: a New Jersey corporation
By: /s/ MARILYNN D. BERSOFF By: /s/ EDWARD H. BERSOFF
---------------------------- ---------------------------
Name: Marilynn D. Bersoff Name: Edward H. Bersoff
Title: Secretary Title: President and 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
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 J. SOLOMON
---------------------------
Name: Stuart J. Solomon
Title: Senior Vice President
</TABLE>
9
<PAGE> 1
EXHIBIT 11
BTG, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Net income (loss) $ (35,223) $ 4,271 $ 2,954
=========== ========== =========
Weighted average common stock
shares outstanding during the
period (used in the calculation of
basic per share results) 8,540 6,887 6,042
Dilutive effect of common stock
options and warrants -- 254 191
---------- ---------- ---------
Weighted average common stock
and potentially dilutive securities
outstanding during the period (used in
the calculation of diluted per share
results) 8,540 7,141 6,233
========== ========== =========
Basic earnings (loss) per share $ (4.12) $ 0.62 $ 0.49
=========== ========== =========
Diluted earnings (loss) per share $ (4.12) $ 0.60 $ 0.47
=========== ========== =========
</TABLE>
20
<PAGE> 1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
GENERAL
BTG, Inc. ("BTG" or the "Company") is an information systems and services
company providing complete solutions to a broad range of the 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"). In addition, during fiscal 1998 and prior years, the
Company was significantly involved in the reselling of computer hardware and
software (the "Product Reselling Business").
During fiscal 1998, the Company's revenues were 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 tend to
be 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.
Higher volumes as opposed to price increases have generally driven year-to-year
increases in product sales. The Company's operating performance is affected by
both the number and type of contracts held, the timing of the installation or
delivery of the Company's services and products, and the relative margins of
the services performed or products sold. In general, the Company recognizes its
highest margins on its most specialized systems engineering and software
development projects and lower margins on sales of commercial-off-the-shelf
products, whose sales tend to have lower services components and a more
competitive after-contract award environment.
In recent years, the Company identified what it believed to be a dramatic
change in the federal product reselling market. The Government's product
purchasing strategy shifted its focus to contract vehicles such as General
Services Administration ("GSA") Schedules, which heavily weigh lowest price as
opposed to best value. As profit margins in the Product Reselling Business
began to shrink during fiscal 1998, it became increasingly clear to the Company
that only the largest product resellers could generate the volume of sales
required to compensate for the decreasing product margins. Accordingly, on
February 12, 1998, BTG completed the sale to Government Technology Services,
Inc. ("GTSI") of (i) certain of the assets, principally inventory and property
and equipment, and (ii) certain of the existing contracts and outstanding
customer orders of BTG's Product Reselling Business (the "GTSI Transaction").
In addition, GTSI hired a significant number of the individuals previously
employed by BTG in the Product Reselling Business. As consideration for the
sale, BTG initially received $8 million in cash and 15,375 shares of a new
series of preferred stock of GTSI, designated Series C 8% cumulative redeemable
convertible preferred stock. Ten percent of the purchase price was placed in
escrow for a one-year period to serve as security for the Company's
indemnification for potential obligations under the acquisition agreement.
Pursuant to the acquisition agreement, the preferred stock received by the
Company converted into 3,000,000 shares of GTSI common stock upon approval by
the GTSI shareholders on May 12, 1998. This investment represents a 30.8%
ownership interest in GTSI. Management of the Company believes that BTG's
relationship with GTSI will offer significant benefits to both its customers
and shareholders as the combined reselling operations of GTSI and BTG's Product
Reselling Business produce the high-volume, low per-unit cost essential in the
product reselling market. In addition, BTG believes it can continue to offer
high-quality, end-to-end solutions by combining its systems integration and
engineering services with GTSI's product fulfillment capabilities. The Company
anticipates a significant decrease in the revenues derived from future product
sales as a result of the GTSI Transaction.
In June 1997, the Company acquired, for $10 million in cash, all of the
outstanding capital stock of Nations, Inc. ("Nations"), a systems engineering
and software development company headquartered in Tinton Falls, New Jersey. The
acquisition has been accounted for using the purchase method of accounting, and
accordingly, the results of operations of Nations have been included in the
Company's consolidated statement of operations since the date of acquisition,
June 12, 1997. The excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired of approximately $6.9
million has been recorded as goodwill and is being amortized on a straight-line
basis over the expected period of benefit, 30 years. In connection with the
acquisition, the Company also entered into both non-compete and employment
agreements with several members of Nations' senior management. During fiscal
1998, the Company integrated the operations of Nations with those of its
Systems Engineering business unit.
In August 1996, the Company formed Community Networks, Inc. ("CNI") to be a
total solutions provider to broadband network owners entering the Internet
access market. CNI's offerings were designed to allow network operators to sell
enhanced Internet services to residential consumers and businesses. CNI
provided households with data-over-cable, high-speed Internet access via local
cable television plants, focused on mid-sized and independent cable operators.
During fiscal 1998, it became evident to the Company that the subscriber base
was not growing as rapidly as was initially anticipated. As a result, the
Company made a decision to discontinue the operations of CNI rather than
continue its investment in this new venture. Accordingly, the operating results
of CNI have been segregated from BTG's continuing operations and reported as a
separate line item on the consolidated statement of operations. Prior year
reported results have been reclassified in order to provide for consistent
presentation.
<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>
Percentage of Revenues Period-to-Period
Fiscal Year Ended March 31, Increase (Decrease) of Dollars
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
compared with compared with
1998 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenue 29.9% 27.4% 31.4% 60.4% 63.7%
Product sales 70.1 72.6 68.6 42.3 98.0
Total revenues 100.0 100.0 100.0 47.3 87.3
Direct costs:
Contract costs
(as a % of contract revenue) 69.6 60.7 53.1 84.1 87.0
Cost of product sales
(as a % of product sales) 93.0 87.8 87.4 50.7 99.0
Total direct costs
(as a % of total revenues) 86.0 80.4 76.6 57.6 96.4
Indirect, general and
administrative expenses 14.9 15.9 19.1 38.8 55.3
Amortization and other
operating costs, net 0.6 0.5 0.7 82.0 20.1
Restructuring charge 6.5 -- -- (A) --
Operating income (loss) (8.1) 3.3 3.5 (458.9) 76.6
Interest expense (1.4) (1.5) (1.4) 38.3 100.6
Equity in earnings of affiliate 0.1 0.5 0.4 (68.8) 138.3
Gain on sale of investments 3.4 0.1 -- (B) (A)
Merger-related costs (0.4) -- -- (A) --
Income (loss) from continuing
operations before income taxes
and extraordinary items (6.4) 2.3 2.5 (514.3) 73.1
Provision (benefit) for income taxes (1.4) 1.0 1.1 (304.4) 79.3
Income (loss) from continuing
operations (5.0) 1.2 1.4 (686.9) 68.4
Loss from discontinued operations (0.7) (0.2) -- 490.6 (A)
Net income (loss) before
extraordinary items (5.7) 1.1 1.4 (880.7) 44.6
Extraordinary loss (0.3) -- -- (A) --
Net income (loss) (6.0) 1.1 1.4 (924.7) 44.6
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) There was no expense for this item in the prior year.
(B) The year-to-year increase is in excess of 1000%.
15
<PAGE> 3
FISCAL 1998 COMPARED WITH FISCAL 1997
Revenues for fiscal 1998 increased by $189.0 million, or 47.3%, from fiscal
1997. Of this increase, $66.3 million was attributable to contract revenue and
$122.7 million was attributable to product sales. The increase in contract
revenue was primarily due to $38.1 million of revenue recognized under
contracts acquired in connection with the acquisition of Nations and an
increase of $4.4 million in revenue recognized under the Company's Integration
for Command, Control, Communications, Computers and Intelligence ("IC4I")
contract. The remaining increase in contract revenue during fiscal 1998
resulted from a variety of federal and commercial contracts involving both
systems engineering and integration work. The increase in product sales was
primarily driven by shipments made under two new Government contracts: the U.S.
Army PC-2 ("PC-2") contract, which was awarded to the Company in October 1996
and first generated revenue in June 1997, and a U.S. Department of State
("State Department") contract, which was awarded to the Company in April 1997.
In addition, the Company experienced an increase in sales under GSA Schedule
contracts, either directly from the Company's GSA Schedule contracts or from
sales to other prime contractors with GSA Schedule contracts, and under the
Company's TDA-2 contract with the U.S. Department of Treasury. The overall
increase in product sales was offset, in part, by a reduction in orders
fulfilled under both the Systems Acquisition Support Services ("SASS") and
Tennessee Valley Authority ("TVA") contracts. In fiscal 1998, approximately 93%
of the Company's revenues were derived from contracts or subcontracts with and
product sales to the Government, as compared with 89% for fiscal 1997. As a
result of the GTSI Transaction, the Company anticipates a significant reduction
in future revenues derived from product sales.
Direct costs, expressed as a percentage of total revenues, increased from
80.4% in fiscal 1997 to 86.0% in fiscal 1998. Contract costs include labor
costs, subcontractor costs, material costs and other costs directly related to
contract revenue. Contract costs as a percentage of contract revenue increased
from 60.7% in fiscal 1997 to 69.6% in fiscal 1998, primarily as a result of
increased revenues generated from the IC4I contract; from contracts acquired in
connection with the acquisition of Nations; and from an increase in revenues
generated from systems integration and networking contracts. The IC4I contract,
the contracts acquired through the acquisition of Nations, and the Company's
systems integration and networking contracts require higher levels of
materials, subcontractor involvement and/or other direct costs than does BTG's
historical contract base, which has a more labor-intensive, higher gross margin
profile. Cost of product sales as a percentage of product sales increased from
87.8% in fiscal 1997 to 93.0% in fiscal 1998. This increase was due in large
part to both competitive market pressures in the product reselling environment
and to the startup costs associated with several large IDIQ (indefinite
delivery--indefinite quantity) Government contracts for which shipments began
during fiscal 1998. During fiscal 1998, the Company shipped a significant
number of products under the PC-2 and State Department contracts, which both
provided for extended warranty coverage. The estimated costs of this extended
warranty coverage have been included in cost of product sales during fiscal
1998.
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 1998 increased by $24.6 million, or 38.8%, from fiscal 1997. This
increase resulted primarily from an increase in the overall volume of business
as compared to the prior year. Expressed as a percentage of total revenues,
indirect, general and administrative expenses decreased in fiscal 1998 to
14.9%, from 15.9% in fiscal 1997.
Amortization and other operating costs, which include the amortization of
goodwill and other intangible assets as well as other operating expenses that
are nonreimbursable under Government contracts, increased by $1.6 million, or
82.0%, in fiscal 1998 as compared with the previous year. This increase was
primarily attributable to the amortization of goodwill associated with the
acquisition of Nations, financial advisory fees incurred during the period, and
certain financial statement reserves recorded in connection with outstanding
tax audits.
Restructuring charges totaling $38.5 million were incurred during fiscal
1998 primarily as the result of the Company's divestiture of its Product
Reselling Business. In fiscal 1998, the Company's Board of Directors approved a
restructuring plan designed to refocus the Company on its core business and
historical strengths in order to improve operating results. The total
restructuring charges recorded in fiscal 1998 included $13.7 million associated
with the write-down of goodwill recorded in connection with the past
acquisition of certain product reselling companies, $9.9 million associated
with the loss recorded on the sale and disposal of certain assets related to
the GTSI Transaction, $5.8 million in estimated reserves for certain prepaid
software licenses initially purchased for resale by the Product Reselling
Business, and $3.5 million in estimated reserves for future facility and
equipment lease commitments of the Product Reselling Business.
Interest expense for fiscal 1998 increased by $2.3 million, or 38.3%, from
fiscal 1997. This increase was due principally to the significant growth in
revenue in fiscal 1998 as compared with the prior year, which resulted in
higher receivable and inventory balances, 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 in fiscal 1998 due
to interest paid on borrowings related to the Company's acquisition of Nations
in June 1997. As a percentage of total revenues, interest expense decreased in
fiscal 1998 to 1.4% from 1.5% in fiscal 1997.
Equity in the earnings of unconsolidated affiliates was $589,000 in fiscal
1998, a decrease of $1.3 million from the prior year. This income resulted
from the Company's interest in an unincorporated joint venture entity, which
was formed for the purpose of performing under a specific Government contract.
Decreased income from this source was attributable to the lower demand for
products under the associated contract, which ended on April 30, 1998. The
Company does not anticipate
16
<PAGE> 4
significant income from this source in fiscal 1999.
The Company recorded a gain on the sale of investments in fiscal 1998 of
$20.2 million as a result of the sale of its ownership interests in the
WheelGroup Corporation. See "Liquidity and Capital Resources."
Merger-related costs of $2.5 million were incurred by the Company during
fiscal 1998. These costs were primarily attributable to the termination of the
Company's planned acquisition of Micros-To-Mainframes, Inc. ("M-T-M"). On
August 29, 1997, the Company entered into an Agreement and Plan of Merger (the
"Agreement") with M-T-M under which BTG agreed to acquire all of the
outstanding common stock of M-T-M for cash and common stock consideration
valued at approximately $25.0 million. On February 13, 1998, the Agreement, as
subsequently amended, was terminated. Pursuant to the Agreement, BTG paid M-T-M
a $500,000 termination fee. In addition, the Company paid M-T-M $1.25 million
for additional out-of-pocket expenses, and in exchange for a release from
future liability that may arise as a result of the termination of the
Agreement.
Income tax expense, as a percentage of income before income taxes, was
45.1% during fiscal 1997; however, due to the pre-tax loss experienced by the
Company during fiscal 1998, there was an income tax benefit, which, as a
percentage of the loss before income taxes, was 22.3%. The effective income tax
rate for fiscal 1998 was significantly and adversely affected by the write-down
of goodwill recorded in connection with the Company's divestiture of its
Product Reselling Business. The costs associated with such write-downs are not
deductible for income tax return purposes.
The Company recorded losses of $4.2 million and $703,000, net of income
taxes, in fiscal 1998 and 1997, respectively, from the discontinuance of the
operations of CNI. The Company formed CNI in August 1996 to be a total
solutions provider to broadband network owners entering the Internet access
market. CNI's offerings were designed to allow network operators to sell
enhanced Internet services to residential consumers and businesses. CNI's
market was data-over-cable, high-speed Internet access via cable television
plants, focused on households serviced by mid-sized and independent cable
operators. During fiscal 1998, it became evident to the Company that the
subscriber base was not growing as rapidly as was initially anticipated. As a
result, the Company made a decision to discontinue the operations of CNI rather
than continue its investment in this venture.
In fiscal 1998, the Company recorded an extraordinary loss of $1.9 million,
net of income taxes, from the early extinguishment of outstanding notes
payable. See "Liquidity and Capital Resources."
FISCAL 1997 COMPARED WITH FISCAL 1996
Revenues for fiscal 1997 increased by $186.3 million, or 87.3%, from fiscal
1996. Of this increase, $42.6 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 Concept Automation, Inc. of
America ("CAI"), an increase of $17.7 million of revenue recognized under the
Company's IC4I contract, and a net increase 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 and an increase of $95.3 million of revenue
resulting from sales under the Company's electronic computer store contract
with the National Institutes of Health. These increases were offset by a
decrease of $28.7 million in sales from purchase contracts under the Basic
Ordering Agreement with the North Atlantic Treaty Organization. In fiscal 1997,
approximately 89.0% of the Company's revenues were derived from contracts or
subcontracts with and product sales to the Government, as compared with 90.0%
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. As a percentage of product
revenues, cost of product sales in fiscal 1997 was relatively unchanged from
fiscal 1996.
Indirect, general and administrative expenses for fiscal 1997 increased by
$22.6 million, or 55.3%, 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 Company's consolidated fiscal 1996 results. 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 15.9%, 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 who 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 increased by $321,000 in fiscal 1997
as compared with the previous year. This increase was attributable to increased
amortization expense
17
<PAGE> 5
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 that 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, which were retired and replaced by $15.0 million in
new promissory notes in February 1998, accrued 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 49.0% 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 is 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 to
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.
INFLATION
Approximately 25.9% and 31.6% of the Company's contract revenue for fiscal 1998
and fiscal 1997, 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
The Company incurred a net loss of $35.2 million in fiscal 1998 and used cash
in operating activities of $32.1 million. Principally as a result of the
Company's significant growth in fiscal 1998, the net use of cash in operating
activities was primarily reflective of increases in receivables and inventory
of approximately $30.0 million and $20.4 million, respectively. These increases
were offset by certain restructuring charges, amounting to $38.3 million,
associated with the Company's divestiture of its Product Reselling Business and
an increase in accounts payable of approximately $40.5 million. In addition,
the Company recorded a gain of $20.2 million from the sale of its investment in
WheelGroup. Net cash of $27.6 million and $5.2 million was used by operating
activities during fiscal 1997 and fiscal 1996, respectively.
Cash flow related to investing activities during fiscal 1998 resulted in a
net use of cash of approximately $5.7 million and primarily resulted from the
Company's acquisition of Nations in June 1997, offset by $7.2 million in
proceeds received in connection with the GTSI Transaction.
In May 1996, the Company entered into an agreement with 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
$1.0 million, payable in various installments over fiscal years 1997 and 1998.
As the result of a significant investment in WheelGroup by a venture capital
fund, BTG was given the option, in March 1997, to purchase an additional 28,146
shares of WheelGroup for $9.87 per share. As a result, $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.
In March 1998, pursuant to a merger agreement entered into by WheelGroup
and Cisco Systems, Inc. ("Cisco"), a publicly traded technology company, BTG's
ownership interest in WheelGroup was converted into approximately 326,000
common shares of Cisco. The shares of Cisco initially received by BTG were
unregistered; however, in accordance with the merger agreement, the shares were
registered shortly after the merger was consummated. Of the Cisco shares
received by BTG, approximately 50,000 are required to remain in escrow for a
one-year period. In connection with the sale of its WheelGroup interests, the
Company recorded a gain in fiscal 1998 of approximately $20.2 million
calculated using the fair market value of Cisco common stock on the date of
closing of the merger. In April 1998, the Company sold approximately 276,000 of
its Cisco shares for $18.9 million and used the proceeds from this sale to
retire outstanding term promissory notes and reduce outstanding borrowings
under the Credit Facility.
In fiscal 1997 and fiscal 1996, approximately $5.3 million and $15.2
million, respectively, were used in investing activities. The cash used in
investing activities during these fiscal years
18
<PAGE> 6
was principally due to purchases of property and equipment, investment in
product development costs, and the acquisition of CAI in fiscal 1996.
During fiscal 1998, approximately $37.8 million was provided from financing
activities primarily as a result of $38.3 million in net advances under the
Credit Facility, $15.0 million in new promissory term notes, and $1.2 million
in proceeds from the issuance of common stock under certain employee benefit
plans. These financing sources were offset by $16.4 million in payments under
both outstanding debt and capital lease arrangements. The $15.0 million in new
promissory term notes was used to retire outstanding subordinated notes
payable. Subsequent to March 31, 1998, the promissory term notes were retired
with proceeds from the sale of investments. During fiscal 1997, $32.9 million
was provided from financing activities primarily as a result of $33.1 million
in net proceeds received from a follow-on public common stock offering. 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
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.
At March 31, 1998, working capital was approximately $43.8 million compared
with working capital of $83.6 million at March 31, 1997. This decrease is
attributable to several factors, including the classification of a significant
portion of the Credit Facility as a current liability and the current nature of
the outstanding promissory term notes payable, which were paid during April
1998. Outstanding borrowings under the Company's Credit Facility have
traditionally been classified as noncurrent liabilities in the Company's
consolidated balance sheets since the Company's anticipated borrowing base,
which is principally dependent on outstanding receivable levels, was expected
to be equal to or greater than outstanding Credit Facility borrowings at the
balance sheet date. With the GTSI Transaction and the Company's divestiture of
the Product Reselling Business, the Company anticipates requiring a lower level
of Credit Facility borrowings during the next accounting period than has been
needed during fiscal 1998. Accordingly, a portion of the Credit Facility at
March 31, 1998, was classified as a current liability.
At March 31, 1998, outstanding borrowings under the Credit Facility were in
excess of amounts available pursuant to the prescribed borrowing base formula
by approximately $15.1 million, and the Company obtained overadvance funding
authorization from the lending institutions to cover such excess borrowings.
Management believes that the overadvance funding became necessary principally
as a result of the Company's divestiture of its Product Reselling Business
during the fourth quarter of fiscal 1998. This transaction resulted in the
sale of a significant amount of the operating assets of the product reselling
division and for which the Company received a significant amount of its
consideration in the form of common stock. Although this adversely affected the
Company's cash flows in the short term, management believes that, with the
subsequent collection of the outstanding receivables of the product reselling
division, the Company should no longer require overadvance funding at the
beginning of its second quarter in fiscal 1999. Accordingly, the Company
believes that funds available under its Credit Facility, including the
overadvance funding levels approved by the lending institutions, will be
sufficient to fund the Company's cash requirements for at least the next 12
months.
CREDIT FACILITY. The Credit Facility is a secured revolving credit facility
consisting of two revolving promissory notes provided to the Company and its
subsidiaries by NationsBank, N.A. ("NationsBank") and Fleet Capital Corporation
in the principal amount of up to $85.0 million. In connection with the
divestiture of the Company's Product Reselling Business, the Credit Facility
was amended in February 1998 to reduce the ceiling for available borrowings to
$75.0 million from July 1, 1998, through September 30, 1998, and $60.0 million
from August 1, 1998, through the date of maturity, August 31, 1999. 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 50.0% of the commitment amount ($85.0 million
unless otherwise reduced), the Company must pay a commitment fee at the rate of
three-eighths of one percent per annum on the difference between the commitment
amount and the daily outstanding principal balance under the Credit Facility
during such quarter. 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 2.0% depending on
the Company's leverage ratio. However, during the period the Company is
utilizing the overadvance funding authorization, the NationsBank prime rate
must be used to calculate interest.
The Credit Facility is secured by substantially all assets of the Company
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, 1998, 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 "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 (the "Warrants") to the
holder of the Notes, entitling such holder to purchase up to
19
<PAGE> 7
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.
During fiscal 1998, the exercise price per share of the Warrants was adjusted
to $8.33 pursuant to the Nomura Agreement. In February 1998, the Company repaid
the Notes with proceeds received from two new promissory term notes entered
into with the Credit Facility lending institutions. These new notes were repaid
in April 1998 with the proceeds received from the Company's sale of certain of
its investments.
YEAR 2000 COMPLIANCE
The Company is currently in the process of reviewing its computer systems and
operations to determine the extent to which its systems will be vulnerable to
potential errors and failures as a result of the "Year 2000" problem. The Year
2000 problem is the result of prior computer programs being written using two
digits, rather than four digits, to define the applicable year. Any of the
Company's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in major
system failures or miscalculations.
Based on the Company's preliminary assessment of potential Year 2000
issues, an initial corrective action plan has been developed that includes
reprogramming affected software where appropriate and feasible, obtaining
vendor-provided software upgrades when available, and completely replacing
affected systems where necessary. The financial system currently utilized by
the Company is not Year 2000 compliant, and the Company is currently evaluating
the appropriate corrective action that should be taken. Such corrective action
will likely result in either vendor-provided software upgrades or a completely
new system. In recent months, the Company has been involved in evaluating
potential replacement systems and is currently involved in negotiating the
terms for such a system. Initial estimates indicate a cost to the Company
between $2.0 and $3.0 million for a replacement system. The Company believes
that the majority of such costs would be capitalized in its financial records
and depreciated over a useful life estimated at between five and 10 years.
The Company currently expects that identified Year 2000 affected systems
will be corrected by the end of fiscal 1999, although there can be no absolute
assurance that the Company has identified all Year 2000 affected systems or
that its corrective action plan will be timely and successful. The Company
believes that its Year 2000 corrective action plan and any residual Year 2000
problems will not materially affect its results of operations or its financial
condition. In addition, the Company has not received any indication to date
that the effect of Year 2000 issues on its customers and suppliers will have a
material adverse effect on the Company.
MARKET INFORMATION
The Company's common stock trades on the Nasdaq stock market's 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 1998 and fiscal 1997 are as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low
- -------------------------------------------------------
<S> <C> <C>
June 30, 1997 $ 20.000 $ 8.500
September 30, 1997 $ 16.000 $ 9.750
December 31, 1997 $ 14.750 $ 8.375
March 31, 1998 $ 11.000 $ 7.938
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
</TABLE>
The Company has never paid cash dividends and is currently prohibited from
doing so under its Credit Facility. 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.
20
<PAGE> 1
EXHIBIT 13.2
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1998, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
McLean, Virginia
May 29, 1998
21
<PAGE> 2
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Contract revenue $ 175,987 $ 109,687 $ 67,014
Product sales 412,922 290,216 146,544
- -----------------------------------------------------------------------------------------------------------------------------
$ 588,909 $ 399,903 $ 213,558
Direct costs:
Contract costs 122,492 66,536 35,577
Cost of product sales 383,895 254,823 128,070
- -----------------------------------------------------------------------------------------------------------------------------
$ 506,387 $ 321,359 $ 163,647
Indirect, general and administrative expenses 88,020 63,406 40,827
Amortization and other operating costs, net 3,488 1,916 1,595
Restructuring charge 38,474 -- --
- -----------------------------------------------------------------------------------------------------------------------------
$ 636,369 $ 386,681 $ 206,069
- -----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (47,460) $ 13,222 $ 7,489
Interest expense (8,448) (6,107) (3,045)
Equity in earnings of unconsolidated affiliates 589 1,887 792
Gain on sale of investments 20,228 63 --
Merger-related costs (2,466) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes and extraordinary items $ (37,557) $ 9,065 $ 5,236
Provision (benefit) for income taxes (8,364) 4,091 2,282
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ (29,193) $ 4,974 $ 2,954
Loss from discontinued operations of Community Networks, Inc.:
Loss from operations, net of income tax benefit of $1,254 (2,035) (,703) --
Loss on disposal, net of income tax benefit of $1,306 (2,117) -- --
- -----------------------------------------------------------------------------------------------------------------------------
(4,152) (703) --
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary items (33,345) 4,271 2,954
Extraordinary loss from early extinguishment of
debt, net of income tax benefit of $1,158 (1,878) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (35,223) $ 4,271 $ 2,954
=============================================================================================================================
Basic earnings (loss) per share:
Income (loss) from continuing operations $ (3.41) $ 0.72 $ 0.49
Loss from discontinued operations (0.49) (0.10) --
Loss from extraordinary item (0.22) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4.12) $ 0.62 $ 0.49
=============================================================================================================================
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (3.41) $ 0.70 $ 0.47
Loss from discontinued operations (0.49) (0.10) --
Loss from extraordinary item (0.22) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4.12) $ 0.60 $ 0.47
=============================================================================================================================
Weighted average shares outstanding
(used in calculation of basic earnings per share) 8,540 6,887 6,043
=============================================================================================================================
Weighted average shares outstanding
(used in calculation of diluted earnings per share) 8,540 7,141 6,233
=============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 3
BTG, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Investments, at fair value $ 22,286 $ --
Receivables, net 135,050 99,017
Inventory, net 2,214 16,716
Prepaid expenses 3,338 8,424
Income tax receivable 10,348 1,730
Deferred income taxes 3,820 --
Other 5,308 816
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets $ 182,364 $ 126,703
============================================================================================================================
Property and equipment:
Furniture and equipment 8,754 11,038
Leasehold improvements 2,332 2,246
- ----------------------------------------------------------------------------------------------------------------------------
$ 11,086 $ 13,284
Accumulated depreciation and amortization (6,578) (6,823)
============================================================================================================================
$ 4,508 $ 6,461
Other assets:
Goodwill, net of accumulated amortization of $499 and
$1,935 at March 31, 1998 and 1997, respectively $ 8,860 $ 16,267
Other intangible assets, net 874 4,199
Investments in unconsolidated affiliates 14,813 478
Deferred income taxes 228 --
Other 792 1,972
- ----------------------------------------------------------------------------------------------------------------------------
$ 212,439 $ 156,080
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 15,000 $ 100
Current maturities of line of credit 31,417 --
Accounts payable 74,573 30,902
Accrued expenses 13,483 9,894
Deferred revenue 803 1,111
Deferred income taxes -- 298
Other 3,276 847
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities $ 138,552 $ 43,152
============================================================================================================================
Line of credit, excluding current maturities 38,835 30,021
Long-term debt, excluding current maturities -- 14,225
Deferred income taxes -- 770
Other 1,992 1,667
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 179,379 $ 89,835
- ----------------------------------------------------------------------------------------------------------------------------
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;
8,634,451 and 8,443,844 shares outstanding at March 31,
1998 and 1997, respectively, net of 50,057 reacquired shares 53,384 52,079
Retained earnings (accumulated deficit) (20,530) 14,693
Treasury stock, at cost, 50,057 shares (527) (527)
Unrealized gains on investments, net of related tax effects 733 --
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 33,060 $ 66,245
- ----------------------------------------------------------------------------------------------------------------------------
$ 212,439 $ 156,080
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 4
BTG, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Retained
Earnings Unrealized Total
Common (Accumulated Treasury Investment Shareholders'
Stock Deficit) Stock Gains (Losses) Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Net loss -- (35,223) -- -- (35,223)
Sale of 190,607 common shares
under employee stock option
and stock purchase plans 1,290 -- -- -- 1,290
Tax benefits applicable to
stock option plans 15 -- -- -- 15
Change in unrealized
investment gains, net
of related tax effects -- -- -- 733 733
- ------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 $ 53,384 $ (20,530) $ (527) $ 733 $ 33,060
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 5
BTG, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (35,223) $ 4,271 $ 2,954
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Loss on discontinued operations 4,152 703 --
Depreciation and amortization 4,383 3,698 2,161
Deferred income taxes (3,572) 888 (513)
Reserves for accounts receivable and inventory 3,082 785 399
Loss on sales of property and equipment 375 61 20
Gain on sale of investments (20,228) (63) --
Restructuring charge 35,492 -- --
Extraordinary loss on extinguishment of debt 1,182 -- --
Changes in assets and liabilities, net of the effects from
purchases of subsidiaries
(Increase) decrease in restricted cash -- 47 (16)
(Increase) decrease in receivables (30,021) (30,500) (10,925)
(Increase) decrease in inventory (20,409) (7,319) (831)
(Increase) decrease in income tax receivable (6,542) (339) --
(Increase) decrease in prepaids and other (536) (5,068) 4,953
(Increase) decrease in other assets 1,028 (353) (723)
Increase (decrease) in accounts payable 40,519 6,782 (5,792)
Increase (decrease) in accrued expenses (1,243) 2,617 1,837
Increase (decrease) in other liabilities (657) (1,736) (41)
Increase (decrease) in income taxes currently payable -- (1,310) 1,310
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities of
continuing operations (28,218) (26,836) (5,207)
Net cash used in discontinued operations (3,862) (721) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (32,080) $ (27,557) $ (5,207)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of subsidiaries, net of cash acquired (10,153) -- (13,238)
Purchases of investments -- (593) (362)
Proceeds from sales of investments -- 425 --
Purchases of notes receivable -- (375) --
Purchases of property and equipment (1,918) (2,780) (1,570)
Proceeds from sales of property and equipment -- -- 18
Proceeds from sale of business 7,200 -- --
Product development costs (807) (2,003) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (5,678) $ (5,326) $ (15,152)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net advances (repayments) under line of credit 38,289 (432) 7,034
Principal payments on long-term debt (15,645) (140) (1,573)
Proceeds from the issuance of long-term debt 15,000 -- --
Principal payments on capital lease obligations (759) (220) --
Proceeds from the issuance of subordinated notes -- -- 15,000
Payment of debt issue costs (306) (215) (1,587)
Proceeds from the issuance of common stock 1,179 33,890 776
Purchase of treasury stock -- -- (527)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 37,758 $ 32,883 $ 19,123
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in unrestricted cash and equivalents -- -- (1,236)
Unrestricted cash and equivalents, beginning of year -- -- 1,236
- ----------------------------------------------------------------------------------------------------------------------------------
Unrestricted cash and equivalents, end of year $ -- $ -- $ --
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 6
BTG, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996
1. NATURE OF OPERATIONS
BTG, Inc. ("BTG" or the "Company") is an information systems and services
company providing complete solutions to a broad range of the complex systems
and product needs of its customers. During the majority of fiscal 1998, the
Company's business combined systems development, integration and engineering
with the reselling of computer hardware and software products.
On February 12, 1998, BTG and Government Technology Services, Inc. ("GTSI")
completed the sale from BTG to GTSI of (i) certain of the assets, principally
inventory and property and equipment, and (ii) certain of the existing
contracts and outstanding customer orders of the BTG operating division
responsible for reselling computer hardware and software products. In addition,
GTSI hired a significant number of the individuals previously employed by BTG
in the Product Reselling Business. As consideration for the sale, BTG initially
received $8.0 million and 15,375 shares of a new series of preferred stock of
GTSI, designated Series C 8% cumulative redeemable convertible preferred stock.
Ten percent of the purchase price was placed in escrow for a one-year period to
serve as security for the Company's indemnification for potential obligations
under the acquisition agreement. Pursuant to the acquisition agreement, the
preferred stock received by the Company converted into 3,000,000 shares of GTSI
common stock once approved by the GTSI shareholders on May 12, 1998. The equity
interest provides for the right to elect one member of the GTSI Board of
Directors. Pursuant to the standstill agreement executed at closing, the
Company has certain restrictions on its ability to transfer and vote its shares
of GTSI stock.
Approximately 93%, 89% and 90% in fiscal 1998, 1997 and 1996, 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.
During fiscal 1998, 1997 and 1996, the Company also provided 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 was
recognized when products were shipped or when customers had accepted the
products or services, depending on contractual terms. Estimated future costs of
providing customer support for products sold by the Company were recorded at
the time of revenue recognition.
CASH AND EQUIVALENTS
All highly liquid debt instruments with original maturities of three months or
less are classified as cash equivalents.
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, 1998, the Company's short-term investments consist solely
of marketable equity securities that were classified as "available for sale" in
accordance with the provisions of Statement 115. Accordingly, such investments
are carried at fair value in the accompanying consolidated financial
statements. Fair value was determined based on quoted market prices. Net
unrealized gains from these investments are 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 non-current investments
consisted solely of common stock ownership in a privately held company,
WheelGroup Corporation. Included in non-current investments at March 31, 1998,
is the preferred stock investment the Company received from GTSI in connection
with the sale and divestiture of the Company's product reselling division on
February 12, 1998.
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.
26
<PAGE> 7
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, 20 to 30 years, on a straight-line basis.
Intangible assets are amortized on a straight-line basis over the expected
periods of benefit, three 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.
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 the fiscal years ended March 31, 1998,
1997 and 1996 were not significant.
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, payables, 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 long-term debt is
determined based on current rates offered for debt of similar remaining
maturities. In April 1998, the Company repaid its outstanding term loans at
their face value. Accordingly, the carrying value for these debt instruments
approximated fair value at March 31, 1998. At March 31, 1997, the Company's
subordinated notes payable had a fair value of approximately $15.4 million on
an undiscounted basis.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("Statement 128").
Statement 128 simplified the earnings per share ("EPS") computations required
under Accounting Principles Board Opinion No. 15, Earnings Per Share, and
revised the related disclosure requirements. In simplifying the EPS
computations, the presentation of primary EPS is replaced with basic EPS, with
the principal difference being that common stock equivalents are not considered
in computing basic EPS. In addition, Statement 128 requires dual presentation
of basic and diluted EPS. The Company adopted Statement 128 beginning with its
interim financial statements issued for the period ended December 31, 1997 and,
accordingly, has restated previously reported data.
Basic earnings per share is computed by dividing net income for the year by
the weighted average number of shares of common stock outstanding during the
year. Diluted earnings per share is computed by dividing net income for the
year by the weighted average number of shares of common stock and potentially
dilutive securities outstanding during the year. Potentially dilutive
securities include all issued and outstanding options and warrants.
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 reported 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. The
Company uses the most current and best available information in preparing its
estimates. Significant estimates were used in the accompanying consolidated
financial statements to account for the deferred tax asset valuation allowance,
product warranties, excess facilities, and certain other reserves recorded in
connection with the restructuring charge recognized in fiscal 1998. Actual
results may differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"), and No. 131,
27
<PAGE> 8
Disclosures about Segments of an Enterprise and Related Information ("Statement
131").
Statement 130 establishes standards for reporting and presenting
comprehensive income and its components in consolidated financial statements.
The new disclosure requirements with respect to comprehensive income will
affect the manner of presentation of the Company's annual and interim
consolidated financial statements. The Company anticipates that adoption of
Statement 130 will not have a material effect on its consolidated financial
statements as the Company's only comprehensive income in fiscal 1998 relates to
the unrealized holding gains on available for sale securities.
Statement 131 establishes new procedures and requirements for the (i)
determination of business segments, (ii) presentation and disclosure of segment
information, and (iii) disclosure of selected segment information within
interim consolidated financial statements. The Company has not yet completed
the analyses required to determine the additional disclosures, if any, that may
be required upon adoption of Statement 131.
RECLASSIFICATION
Certain amounts in the prior years' financial statements have been reclassified
to conform to the fiscal 1998 presentation.
3. RECEIVABLES
The components of receivables are as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Amounts billed and billable $129,328 $94,471
Retainages billable upon contract
completion 2,040 1,572
Other unbilled amounts 4,244 2,960
Other receivables 2,621 1,016
Allowance for doubtful accounts (3,183) (1,002)
- ----------------------------------------------------------------------------
Total $135,050 $99,017
============================================================================
</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,
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Contract backlog $ 848 $ 848
Debt issue costs 1,222 1,802
Non-compete covenants 400 700
Favorable leasing arrangements 455 455
Product development costs -- 2,003
Other -- 300
- ----------------------------------------------------------------------------
2,925 6,108
Accumulated amortization (2,051) (1,909)
- ----------------------------------------------------------------------------
$ 874 $ 4,199
============================================================================
</TABLE>
During the year ended March 31, 1997, the Company capitalized
approximately $2 million of costs associated with the internal development of
certain software products. Of this amount, approximately $1.5 million was
related to products designed for use by the Company's subsidiary, Community
Networks, Inc. ("CNI"). CNI was formed for the purpose of providing local
communities with high-speed Internet access, specialized intranets, and
electronic commerce capability on a subscriber fee-based model. The subscriber
base did not grow as rapidly as was initially anticipated, and the Company
discontinued the operations of CNI during fiscal 1998. Accordingly, the
operating results of CNI, net of a provision for future operating lease
commitments of approximately $158,000, charges for the write-off of leasehold
improvements and other property and equipment of approximately $945,000 and
capitalized development costs of $2.3 million, have been segregated from
continuing operations and reported as a separate line item on the consolidated
statement of operations. Prior year reported results have been reclassified in
order to provide for consistent presentation.
Operating results from the discontinued operations of CNI are as
follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Years
Ended March 31,
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Operating revenues $ 1,088 $ 130
Loss before income taxes (3,289) (1,136)
Loss from discontinued operations,
net of income taxes (2,035) (703)
============================================================================
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Accrued salaries and related taxes $ 4,334 $ 4,704
Accrued leave 3,254 3,094
Other 5,895 2,096
- ----------------------------------------------------------------------------
$13,483 $ 9,894
============================================================================
</TABLE>
6. INCOME TAXES
The total income tax benefit for the year ended March 31, 1998, was allocated
as follows (in thousands):
<TABLE>
<S> <C>
Income from continuing operations $ (8,364)
Discontinued operations (2,560)
Extraordinary item (1,158)
- ----------------------------------------------------------------------------
$(12,082)
============================================================================
</TABLE>
28
<PAGE> 9
The provision (benefit) for income taxes attributable to income from
continuing operations includes the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
- -------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(5,225) $2,676 $2,334
State (667) 527 461
- -------------------------------------------------------------------------
(5,892) 3,203 2,795
- -------------------------------------------------------------------------
Deferred:
Federal (2,065) 741 (428)
State (407) 147 (85)
- -------------------------------------------------------------------------
(2,472) 888 (513)
- -------------------------------------------------------------------------
$(8,364) $4,091 $2,282
=========================================================================
</TABLE>
Income tax expense (benefit) differs from the amount of income taxes
determined by applying the U.S. federal income tax statutory rates to income
(loss) from continuing operations before income taxes and extraordinary items
as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal
income tax rate (35.0%) 35.0% 35.0%
State income tax, net
of federal income
tax benefit (1.9) 5.0 4.9
Phase-in tax rate differential 1.0 (1.0) (1.0)
Non-deductible
amortization expense 11.9 5.2 5.1
Change in the valuation
allowance 1.3 (1.2) (1.7)
Other permanent differences 0.4 2.1 1.3
- -------------------------------------------------------------------------
Effective tax rate (22.3%) 45.1% 43.6%
=========================================================================
</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,
1998 and 1997, are presented below (in thousands):
<TABLE>
<CAPTION>
March 31,
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,885 $ --
Financial reporting reserves 5,594 747
Employee benefits, accrued
for financial reporting purposes 1,165 943
Deferred revenue 369 499
Capital loss carryforwards 173 173
Other 383 414
- ------------------------------------------------------------------------------
Total deferred tax assets 13,569 2,776
Less: valuation allowance (550) --
- ------------------------------------------------------------------------------
Net deferred tax assets 13,019 2,776
==============================================================================
Deferred tax liabilities:
Gain on sale of investments (7,717) --
Revenues not contractually billable (1,183) (2,552)
Product development costs -- (764)
Other (71) (528)
- ------------------------------------------------------------------------------
Total deferred tax liabilities (8,971) (3,844)
- ------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 4,048 $ (1,068)
==============================================================================
</TABLE>
The valuation allowance for deferred tax assets as of April 1, 1996,
was $105,000. 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, historical and 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." Operating losses incurred in fiscal 1998 were primarily the result
of divested and discontinued operations for which no future losses are
anticipated. Management believes that, based principally on the past earnings
history of the Company's ongoing operations and the scheduled reversal of
significant deferred tax liabilities, the majority of its deferred tax assets
at March 31, 1998, are more likely than not realizable.
7. LINE OF CREDIT
In November 1995, the Company entered into a revolving line of credit facility
(the "Credit Facility") with a syndicate of financial institutions that
provided for borrowings up to $60.0 million based on specified percentages of
eligible accounts receivable (the "borrowing base"). In October 1996, and again
in October 1997, the Credit Facility was amended to increase the ceiling for
available borrowings to $85.0 million and $110.0 million, respectively. In
February 1998, in connection with the divestiture of the Company's product
reselling business, the Credit Facility was further amended to reduce the
ceiling for available borrowings to $95.0 million through March 31, 1998; $85.0
million from April 1, 1998, through June 30, 1998; $75.0 million from July 1,
1998, through September 30, 1998; and $60.0 million from October 1, 1998,
through the date of maturity, August 31, 1999. At March 31, 1998, outstanding
borrowings under the Credit Facility were in excess of the amounts available
under the prescribed borrowing base by approximately $15.1 million, and the
Company obtained approval from the lending financial institutions for
overadvance funding to cover such excess borrowings. 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 2.0%, depending on the Company's leverage ratio. During
the period the Company
29
<PAGE> 10
is utilizing overadvance funding, all outstanding borrowings bear interest at
the lender's prime rate.
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. 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, 1998 and 1997,
the Company obtained waivers from the lending financial institutions for
non-compliance with certain financial covenants. At March 31, 1998, a portion
of the balance outstanding under the Credit Facility has been classified as a
current liability in the accompanying consolidated balance sheet as the Company
does not anticipate that its borrowing base over the next fiscal year will
provide for a minimum availability equal to amounts outstanding on such date.
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
$1.0 million. At March 31, 1998 and 1997, 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):
<TABLE>
<CAPTION>
March 31,
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum line of credit available
during the period $110,000 $85,000
Balance outstanding at the end
of the period $ 70,252 $30,021
Total borrowing base at the
end of the period $ 55,170 $60,262
Interest rate at the end of the period:
At the lender's prime rate option 8.50% 8.50%
At the LIBOR option 7.69% 7.00%
Monthly average amount
outstanding during the period $ 67,524 $43,874
Monthly weighted average interest
rate outstanding during the period 7.96% 7.79%
===============================================================================
</TABLE>
In October 1996, the Company entered into an agreement with a separate
financing organization that provided for borrowings up to $15.0 million to
finance inventory purchases under a wholesale financing agreement (the
"Inventory Financing Facility"). The Inventory Financing Facility, which was
secured by all of the Company's inventory, provided 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 was 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 certain
financial covenants. At March 31, 1997, the Company had approximately $3.1
million in outstanding borrowings under this facility that are included in
accounts payable in the accompanying consolidated balance sheet. The Company
incurred no interest expense under this financing vehicle during fiscal 1998 or
1997. In connection with the sale of substantially all of the Company's
inventory to GTSI in February 1998, all outstanding borrowings under the
Inventory Financing Facility were repaid and the agreement was terminated.
8. LONG-TERM DEBT
The Company's long-term debt consists of the following
(in thousands):
<TABLE>
<CAPTION>
March 31,
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Term promissory notes, principal
due in quarterly installments
of $1.5 million beginning on
June 30, 1998, interest due
quarterly at 13.875% per annum $ 15,000 $ --
Senior subordinated notes payable,
due in February 2001, interest
due quarterly at 12.875% per annum -- 15,000
Unamortized discount on senior
subordinated notes payable -- (775)
Other -- 100
- -------------------------------------------------------------------------------
$ 15,000 $14,325
Less current maturities 15,000 100
- -------------------------------------------------------------------------------
$ -- $14,225
===============================================================================
</TABLE>
On February 24, 1998, the Company issued two term promissory notes,
each in the amount of $7.5 million, to the financial institutions that lend to
the Company under the Credit Facility. The proceeds from the term promissory
notes were used to retire the senior subordinated notes payable. In April 1998,
the Company repaid the term promissory notes with proceeds from the sale of
investments.
On February 16, 1996, the Company entered into a Note and Warrant
Purchase Agreement (the "Agreement") under which the Company issued $15.0
million of Senior Subordinated Notes (the "Notes"). The Notes, which bear
interest at 12.875% per annum, were due in February 2001. In connection with
the issuance of the Notes, the Company also issued common stock purchase
warrants (the "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. During fiscal 1998, the exercise price per share for
the Warrants was adjusted to $8.33. 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
30
<PAGE> 11
discount on the Notes and is being amortized into interest expense over the
term of the Notes. The Agreement also contains certain covenants, which, 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 March 31, 1997, the Company obtained a waiver from the
holder of the Notes for noncompliance with certain covenants. The Notes were
repaid in February 1998 with proceeds from the term promissory notes. In
connection with the early retirement of the Notes, the Company paid a
prepayment premium, as required by the Agreement, of $900,000 and expensed the
unamortized portion of the original issue discount and debt issue costs. Total
costs associated with the early retirement of the Notes amounted to
approximately $1.9 million, net of related income tax benefits of $1.1 million,
and is presented as an extraordinary item in the accompanying consolidated
statement of operations.
9. SHAREHOLDERS' EQUITY AND STOCK OPTIONS
PREFERRED STOCK
The Company's Amended Articles of Incorporation authorize the Company to issue
up to 1,000,000 shares of preferred stock, with no par value. No preferred
shares have been issued as of March 31, 1998.
COMMON STOCK
The Company has one class of voting common stock with 20,000,000 shares
authorized for issuance. 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 10 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.
During fiscal 1998, 7,000 options, with per share exercise prices ranging from
$10.13 to $13.13, were granted under the Directors Option Plan.
EMPLOYEE STOCK OPTION PLANS
Under the terms of the Company's qualified Employee Stock Option Plans (the
"Plans"), which were adopted in 1986 and 1990, 775,000 shares of common stock
were reserved for issuance. 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 stock 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. In August 1996, the
Company's shareholders approved an amendment to the New Plan that increased the
total number of shares of common stock reserved for issuance to 750,000. During
fiscal 1998, options to acquire 189,000 shares of common stock were granted
under the New Plan. During fiscal 1997, options to acquire 87,500 shares of
common stock were granted under the New Plan. At March 31, 1998, 440,251 shares
of common stock were reserved for options still to be granted under the New
Plan.
Additional information with respect to all options under the Company's
employee stock option plans is 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 granted 189,000 $14.88
Options exercised (96,741) $ 3.44
Options forfeited (37,603) $12.73
- --------------------------------------------------------------------------------------
Shares under option,
March 31, 1998 327,877 $11.39
- --------------------------------------------------------------------------------------
Options exercisable,
March 31, 1998 64,351 $ 5.98
=====================================================================================
</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 1998, 11,944 shares of common stock, valued at approximately $111,000,
were issued under the Annual Leave Plan. During fiscal 1997, 11,355 shares
31
<PAGE> 12
of common stock, valued at approximately $202,000, 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 to the lower of 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 75,854
and 55,080 common stock shares were issued under the ESPP during fiscal 1998
and 1997, 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. The Company's shareholders approved the Directors
Purchase Plan in August 1997. During fiscal 1998, 6,068 shares of common stock,
valued at approximately $85,000, were issued under the Directors Purchase Plan.
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.
A subsidiary of the Company maintains a separate 401(k) savings plan under
which substantially all full-time employees are eligible to participate. Under
the plan, employees may participate by contributing between 1% and 20% of
earnings, subject to IRS limitations. The plan also provides for a
discretionary matching contribution by the subsidiary.
Company and subsidiary contributions to the 401(k) plans were approximately
$2.0 million, $1.6 million and $1.1 million in fiscal 1998, 1997 and 1996,
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>
Fiscal Years Ended
March 31,
- ----------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $(35,223) $4,271 $2,954
(loss) Pro forma $(35,463) $4,181 $2,939
Diluted earnings
(loss) per share As reported $ (4.12) $ 0.60 $ 0.47
Pro forma $ (4.15) $ 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:
<TABLE>
<CAPTION>
Fiscal Years Ended
March 31,
- ----------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 50.0% 46.0% 46.0%
Risk-free interest rate 6.0% 6.0% 6.0%
Forfeiture rate 6.0% 6.0% 6.0%
Expected life 3-7 years 3-7 years 3-7 years
==================================================================================
</TABLE>
32
<PAGE> 13
The following table summarizes information about fixed stock options
outstanding at March 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 3/31/98 Contractual Life Exercise Price at 3/31/98 Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$2.22 - $3.80 28,293 4.41 years $3.55 28,293 $3.55
$7.75 - $10.32 175,084 7.58 $9.10 36,058 $7.89
$10.88 - $13.38 37,500 9.52 $11.38 -- --
$18.25 - $20.08 87,000 8.14 $18.57 -- --
- -------------------------------------------------------------------------------------------------------------------------
$2.22 - $20.08 327,877 7.68 years $11.39 64,351 $5.98
=========================================================================================================================
</TABLE>
The per share weighted average fair value of stock options granted during
fiscal 1998 and 1997 was $7.22 and $4.49, respectively.
10. EARNINGS PER SHARE
The following table illustrates the calculation of basic and diluted earnings
per share results for fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss) $ (35,223) $4,271 $2,954
================================================================================
Weighted average
common stock shares
outstanding during the
period (used in the
calculation of basic
per share results) 8,540 6,887 6,043
Dilutive effect of common
stock options and
common stock
purchase warrants -- 254 190
- -------------------------------------------------------------------------------
Weighted average common
stock and potentially dilutive
securities outstanding
during the period (used in
the calculation of diluted
per share results) 8,540 7,141 6,233
================================================================================
Basic earnings (loss)
per share $ (4.12) $ 0.62 $ 0.49
================================================================================
Diluted earnings (loss)
per share $ (4.12) $ 0.60 $ 0.47
================================================================================
</TABLE>
Outstanding common stock options and common stock purchase warrants were
not included in the calculation of diluted per share results for fiscal 1998,
since the effect of which would result in antidilutive per-share results given
the Company's reported net loss during that period.
11. RESTRUCTURING CHARGE
In fiscal 1998, the Company's Board of Directors approved a restructuring plan
designed to refocus the Company on its core business and historical strengths
in order to improve operating results. Pursuant to this plan, the Company
consummated, in February 1998, the divestiture of the BTG operating division
(the "Division") responsible for the reselling of computer hardware and
software products. In connection with the restructuring plan, the Company
consummated the sale from BTG to GTSI of (i) certain of the assets, principally
inventory and property and equipment, and (ii) certain of the existing
contracts and outstanding customer orders of the Division. Further, the Company
recorded a restructuring charge of approximately $38.5 million associated with
such divestiture.
The major components of the restructuring charge are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31, 1998
- --------------------------------------------------------------------------
<S> <C>
Impairment of goodwill $13,694
Loss on sale and disposal
of Division assets 9,943
Impairment of retained Division assets 9,282
Reserve for future facility and
operating lease commitments 3,504
Accrued employee compensation
and severance costs 1,622
Other accrued reserves and costs 429
- --------------------------------------------------------------------------
$38,474
==========================================================================
</TABLE>
12. 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. As the
33
<PAGE> 14
result of a significant investment in WheelGroup by a venture capital fund, BTG
was given the option, in March 1997, to purchase an additional 28,146 shares of
WheelGroup for $9.87 per share. As a result, $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 at March 31, 1997.
In March 1998, pursuant to a merger agreement entered into by WheelGroup
and Cisco Systems, Inc. ("Cisco"), a publicly traded technology company, the
Company's ownership interests in WheelGroup were converted into approximately
326,000 common shares of Cisco. The shares of Cisco initially received by BTG
were unregistered; however, in accordance with the merger agreement, the shares
were registered shortly after the merger was consummated. Of the Cisco shares
received by BTG, approximately 50,000 are required to remain in escrow for a
one-year period. In connection with the sale of its WheelGroup interests, the
Company recorded a gain in fiscal 1998 of approximately $20.2 million calculated
using the fair market value of Cisco common stock on the date of closing of the
merger. At March 31, 1998, the Company has classified its Cisco investment as
"available for sale" in accordance with the provisions of Statement 115.
Accordingly, such investment is carried at fair value, determined on quoted
market prices, in the accompanying consolidated financial statements. The net
unrealized gain from this investment is carried as a separate component of
shareholders' equity, net of the related tax effects. In April 1998, the Company
sold approximately 276,000 of its Cisco shares for $18.9 million and used the
proceeds from this sale to retire the outstanding term promissory notes and
reduce outstanding borrowings under the Credit Facility.
Through the date of liquidation, the Company's investment in WheelGroup
was accounted for using the cost method of accounting.
13. BUSINESS COMBINATIONS
In October 1995, the Company acquired, for $13.0 million in cash, 50,057 shares
of common stock valued at approximately $463,000, and $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 have 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 1998 and 1997, no amounts have been
paid to the former shareholders of CAI as a result of this arrangement.
In June 1997, the Company acquired, for $10.0 million in cash, all of
the outstanding capital stock of Nations, Inc. ("Nations"), a systems
engineering and software development company headquartered in Tinton Falls, New
Jersey. The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of operations of Nations have been
included in the Company's consolidated statement of operations since the date of
acquisition, June 12, 1997. The excess of the purchase price over the fair value
of the net tangible and identifiable intangible assets acquired of approximately
$6.9 million has been recorded as goodwill and is being amortized on a
straight-line basis over the expected period of benefit, 30 years. In connection
with the acquisition, the Company also entered into both non-compete and
employment agreements with several members of Nations' senior management.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Nations as if the acquisition
had occurred as of the beginning of the fiscal years ended March 31, 1998 and
1997. The pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the Company and Nations
constituted a single entity during such periods.
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
- ----------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C>
Revenues $597,299 $445,325
Net income (loss) before
extraordinary items $(33,157) $ 5,160
Net income (loss) $(35,035) $ 5,160
Earnings (loss) per common share $ (4.10) $ 0.72
==================================================================================
</TABLE>
On August 29, 1997, the Company entered into an Agreement and Plan of
Merger (the "Agreement") with Micros-To-Mainframes, Inc. ("M-T-M") under which
BTG agreed to acquire all of the outstanding common stock of M-T-M for cash and
common stock consideration valued at approximately $25.0 million. On February
13, 1998, the Agreement, as subsequently amended, was terminated. Pursuant to
the Agreement, BTG paid M-T-M a $500,000 termination fee. In addition, the
Company has paid M-T-M $1.25 million for additional out-of-pocket expenses, and
in exchange for a release from future liability that may arise as a result of
the termination of the Agreement. Total costs incurred in connection with this
merger and acquisition transaction during fiscal 1998 were approximately $2.4
million.
34
<PAGE> 15
14. COMMITMENTS AND CONTINGENCIES
AUDIT REVIEW
Substantially all payments to the Company under cost-reimbursable Government
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 fiscal 1995 and subsequent years are not expected to result in a material
adverse effect on the Company's consolidated financial position.
LITIGATION AND CLAIMS
The Company is a party to various legal actions and claims resulting from the
normal course of business. Although the total amount of liability, if any, with
respect to these matters cannot be ascertained, management of the Company
believes that any resulting liability should not have a material effect on the
Company's consolidated financial position or future results of operations.
LEASES
The Company leases office space and equipment under certain operating lease
agreements expiring at various dates through June 2012. Most leases include
provisions for periodic rent escalations based on changes in various economic
indices. Rent expense in fiscal 1998, 1997 and 1996 was $8.9 million, $5.9
million, and $4.8 million, respectively.
Future minimum lease payments on non-cancelable operating leases, including
sublease commitments, were as follows on March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Gross Sublease Net
Ending March 31, Commitments Commitments Commitments
- ---------------------------------------------------------------------
<S> <C> <C> <C>
1999 $ 8,434 $460 $ 7,974
2000 8,083 301 7,782
2001 6,795 -- 6,795
2002 5,174 -- 5,174
2003 3,914 -- 3,914
Thereafter 34,739 -- 34,739
- ---------------------------------------------------------------------
$67,139 $761 $66,378
=====================================================================
</TABLE>
15. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow disclosures are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
- ------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year
for (in thousands):
Interest $ 7,605 $ 5,075 $ 2,934
Income taxes $ 1,449 $ 5,806 $ 1,468
==================================================================
</TABLE>
During fiscal 1998, the Company's ownership interest in WheelGroup was
converted into approximately 326,000 common shares of Cisco resulting in a gain
of approximately $20.2 million.
During fiscal 1998, 1997 and 1996, the Company issued common shares of
11,944, 11,355 and 10,840, respectively, to employees in exchange for $111,000,
$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 1998 and
1996, liabilities were assumed as follows (in thousands):
<TABLE>
<CAPTION>
1998 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Fair value of tangible and
intangible assets acquired $ 15,612 $ 30,120
Cash paid and notes payable issued (11,743) (14,488)
Common stock issued -- (463)
- ------------------------------------------------------------------------------
Liabilities assumed $ 3,869 $ 15,169
==============================================================================
</TABLE>
35
<PAGE> 16
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited summarized financial data by quarter for fiscal 1998 and 1997 are as
follows (in thousands, except per share data). Quarterly revenues and
operating income (loss) exclude the revenues and operating losses of Community
Networks, Inc., which business the Company classified as discontinued
operations.
<TABLE>
<CAPTION>
Fiscal 1998: Quarter Ended
- ----------------------------------------------------------------------------------------------------------------------
June 30 Sept 30 Dec 31 March 31
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 119,717 $189,189 $186,294 $ 93,709
Operating income (loss) $ 2,874 $ (286) $ 2,112 $ (52,160)
Net income (loss) $ 235 $ (2,335) $ (798) $ (32,325)
Basic earnings (loss) per share $ 0.03 $ (0.27) $ (0.09) $ (3.76)
Diluted earnings (loss) per share $ 0.03 $ (0.27) $ (0.09) $ (3.76)
Weighted average shares
outstanding for basic EPS 8,476 8,525 8,563 8,597
Weighted average shares
outstanding for diluted EPS 8,758 8,525 8,563 8,597
</TABLE>
<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 $ 89,880
Operating income $ 2,196 $ 4,580 $ 5,387 $ 1,059
Net income (loss) $ 757 $ 1,994 $ 2,001 $ (481)
Basic earnings (loss) per share $ 0.12 $ 0.32 $ 0.29 $ (0.06)
Diluted earnings (loss) per share $ 0.12 $ 0.31 $ 0.28 $ (0.06)
Weighted average shares
outstanding for basic EPS 6,132 6,160 6,868 8,413
Weighted average shares
outstanding for diluted EPS 6,336 6,418 7,201 8,413
</TABLE>
FORWARD-LOOKING STATEMENTS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995:
The Chairman's Letter, Management's Discussion and Analysis, and other sections
of this Annual Report may contain forward-looking statements based on current
expectations, estimates and projections. Words such as "expects," "predicts,"
"plans," "achieves," "anticipates," and other variations of such words are
intended to identify such forward-looking statements. These statements and
others contained in this report which are not historical facts are
forward-looking statements and are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth or implied
by forward-looking statements. These risks and uncertainties include the
Company's entry into new commercial businesses, dependence on continued funding
of the U.S. government programs, government contract procurement, and
termination risks. In addition, such statements could be affected by general
market and industry conditions and growth rates, general domestic and
international economic conditions including interest rate fluctuations, and
other factors. BTG, Inc. undertakes no obligation to update publicly any
forward-looking statements, whether as a result of future events, new
information, or otherwise.
36
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION BUSINESS NAME
- ------------------ ------------- -------------
<S> <C> <C>
BTG Technology Systems, Inc. * Virginia Technology Systems
BTG Products, Inc. Virginia N/A (not operational)
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>
- -----------------
* A wholly-owned subsidiary of BTG Technology Resources, Inc.
21
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
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 29, 1998, relating to the consolidated
balance sheets of BTG, Inc. and subsidiaries as of March 31, 1998 and 1997, 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, 1998,
and related schedule, which reports appear in the March 31, 1998 annual report
on Form 10-K of BTG, Inc. and subsidiaries.
KPMG Peat Marwick LLP
McLean, Virginia
June 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 138,233
<ALLOWANCES> 3,183
<INVENTORY> 2,214
<CURRENT-ASSETS> 182,364
<PP&E> 11,086
<DEPRECIATION> 6,578
<TOTAL-ASSETS> 212,439
<CURRENT-LIABILITIES> 138,552
<BONDS> 85,252
0
0
<COMMON> 53,384
<OTHER-SE> (20,324)
<TOTAL-LIABILITY-AND-EQUITY> 212,439
<SALES> 412,922
<TOTAL-REVENUES> 588,909
<CGS> 383,895
<TOTAL-COSTS> 506,387
<OTHER-EXPENSES> 126,900
<LOSS-PROVISION> 3,082
<INTEREST-EXPENSE> 8,448
<INCOME-PRETAX> (37,557)
<INCOME-TAX> 8,364
<INCOME-CONTINUING> (29,193)
<DISCONTINUED> (4,152)
<EXTRAORDINARY> (1,878)
<CHANGES> 0
<NET-INCOME> (35,223)
<EPS-PRIMARY> (4.12)
<EPS-DILUTED> (4.12)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
BTG, Inc.:
Under date of May 29, 1998, we reported on the consolidated
balance sheets of BTG, Inc. and subsidiaries (the "Company") as of March 31,
1998 and 1997, 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, 1998, as contained in the 1998 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 1998. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule in the Company's Form 10-K. 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.
KPMG Peat Marwick LLP
McLean, Virginia
May 29, 1998
