EXHIBIT 13.1
FINANCIAL SECTION OF 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company recorded earnings of $9.8 million for the year ended December 31,
1998, compared with $8.7 million for the year ended December 31, 1997, and $4.8
million for the year ended December 31, 1996. Pre-tax earnings for 1998
increased by 77%, to $14.0 million, compared to the $7.9 million recorded in
1997. The 1997 results include a tax benefit of $2.0 million as described
below. Basic earnings per share were $1.49 in 1998, compared with $1.37 in
1997, and $.76 in 1996. On a diluted basis, earnings per share increased to
$1.26 per share in 1998, from $1.16 achieved in 1997 and $.67 recorded in 1996.
Improved business mix and increased volume in the Company's information
technology ("IT") services operation, Butler Technology Solutions ("BTS"), lead
the way to the increased earnings in 1998. These increases were generated by
recent acquisitions, as well as strong internal growth. Also contributing
strongly to the improved earnings was substantial growth in the Company's
Telecommunications Services ("BTI") operation. As a result of the improved
business mix, as well as an overall increase in billing rates, gross margins
increased to 19.3% in 1998, versus 15.8% in 1997 and 14.6% in 1996.
Net sales were $444.1 million for the year ended December 31, 1998, compared
with $425.0 million recorded in 1997, and $409.4 million for the year ended
December 31, 1996. In 1998, sales from the BTS unit increased by 134%, which
was the result of volume provided by companies acquired in 1998, as well as
strong internal growth. The Company's BTI operation grew by 16%, while the lower
margin Technical Group ("BTG") business decreased as had been expected, with
revenues declining by 12% from 1997. Revenues from the Fleet Services ("BFS")
unit also declined as had been anticipated due to a restructuring of a major
contract, which did not negatively impact profitability. The growth in 1997 as
compared to 1996, was attributable to a 16% increase in the BTS operation and a
15% increase in the BTI unit, which more than offset an anticipated decrease of
1% in the Contract Technical Services portion of the BTG business. One client
accounted for approximately 11.7% of the Company's net sales in 1998. This BTG
client accounted for approximately 13% of net sales in 1997 and 6.4% of net
sales in 1996. Sales from this client are expected to decrease considerably in
1999. However, this decrease is expected to be more than offset by increased
net sales in the higher margin BTS and BTI units.
Selling, general and administrative ("SG&A") expenses increased to $62.9
million for the year ended December 31, 1998, compared with $52.1 million and
$46.0 million for the years ended December 31, 1997 and 1996, respectively.
The 1998 increase is a direct result of acquisitions and the Company's efforts
to grow its higher margin business units and further develop its internal
systems. Management continues to closely monitor its overhead expenses.
For the year ended December 31, 1998, interest expense was $4.7 million,
compared with $4.2 million and $5.2 million for the years ended December 31,
1997 and December 31, 1996, respectively. The increase in 1998 was due to
higher borrowings primarily to fund acquisitions, partially offset by lower
interest rates. The $1.0 million interest reduction in 1997 was principally due
to reduced borrowings.
In 1998 and 1997, the Company recorded income tax benefits of $.7 million and
$2.0 million, respectively, which resulted from the recording of deferred tax
assets related to the expected future tax benefit of certain loss
carryforwards and temporary differences in accordance with the provisions of
Financial Accounting Standards Board ("FASB") SFAS 109. By December 31, 1998 the
Company had substantially realized the benefits of its U.S. loss and credit
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are generated from operations and
borrowings under its revolving credit facility and acquisition line of credit.
(See "Financing Activities"). Availability under the revolving credit facility
is based upon the amount of eligible receivables. As of December 31, 1998,
$27.3 million was outstanding under the revolving credit facility, and an
additional $5.5 million was used to collateralize letters of credit. Proceeds
from the revolving credit facility are used by the Company to finance its
internal business growth, working capital and capital expenditures. The credit
facility excludes the U.K. operation, which has its own (Pounds)1.5 million
facility. As of December 31, 1998, (Pounds)955,647 was outstanding under the
U.K. facility. The acquisition line of credit provides the Company with up to
$35.0 million to finance its acquisition program. As of December 31, 1998,
$25.4 million was outstanding under the acquisition facility.
Cash and cash equivalents remained constant at $0.9 million as of December 31,
1998 as compared to December 31, 1997. The major components of cash inflows
during 1998 were from increased borrowings of $32.4 million, primarily for the
funding of acquisitions, net income before depreciation and amortization of
$14.2 million, and an increase in accrued liabilities of $2.9 million. Cash
outflows consisted of $35.2 million related to acquisitions, an increase in
accounts receivable and other assets totaling $11.2 million, and capital
expenditures of $3.4 million.
During the year ended December 31, 1998, the Company realized $0.3 million of
net proceeds from the exercise of outstanding common stock purchase warrants and
options. As a result, 128,166 common shares were issued by the Company during
the year.
The Company has a seven year mortgage for its corporate office facility in
Montvale, New Jersey. The mortgage consists of a $6.4 million loan that is
repayable based on a 15 year amortization schedule and a $375,000 loan that is
repayable based on a 4 year schedule. The variable interest rate on these loans
is one month Libor plus 225 basis points. The outstanding balance of the loans
at December 31, 1998 was $6.4 million.
The Company entered into an interest rate swap arrangement with its mortgage
holder on its $6.75 million mortgage notes. The Company makes monthly interest
payments at the fixed rates of 8.6% and 8.42% on the $6.4 million loan and the
$375,000 loan, respectively. The Company receives payments based upon Libor
plus 225 basis points. The net loss from the exchange of interest rate payments
was approximately $6,600 and was included in interest expense. The fair value
of the Company's interest rate swap agreement as of December 31, 1998 would
require a payment by the Company of approximately $331,000 if the agreement were
terminated. The Company does not anticipate terminating the interest rate swap
agreement prior to its current expiration date of November 1, 2004.
Management believes that cash flows from operations and availability under the
Credit Facility will be sufficient to meet the Company's foreseeable cash
requirements.
Financing Activities
The Company has a credit agreement with General Electric Capital Corporation
("GECC"), which was amended in August, 1998, that provides a revolving credit
facility for loans up to $50.0 million, including $9.0
million for letters of credit and an additional acquisition facility for up to
$35.0 million. The sum of the aggregate amount of loans outstanding under the
revolving credit facility plus the aggregate amount available for letters of
credit may not exceed the lesser of (i) $50.0 million or (ii) an amount equal to
85% of eligible receivables plus 75% of eligible pending receivables (which
percentages are subject to adjustment from time to time by GECC). The interest
rate in effect at December 31, 1998, was 6.55%, or 125 basis points above the 30
day commercial paper rate. Interest reductions are available based upon the
Company achieving certain financial results. The average interest rate during
1998 was 7.26%. The acquisition facility bears interest at 250 basis points
above the 30 day commercial paper rate, the interest rate in effect at December
31, 1998 was 7.8% and the average rate in effect for 1998 was 8.25%. The Company
has guaranteed all obligations incurred or created under the credit agreement.
The Company is in compliance with the required affirmative and financial
covenants.
ACQUISITIONS
On March 3, 1998, the Company acquired the operations of Argos Adriatic
Corporation ("Argos"), a Silicon Valley information technology ("IT") company
headquartered in Fremont, CA. The purchase price includes $5.1 million paid in
cash ($4.1 million charged against the Company's acquisition line and $1.0
million against the revolving credit facility), plus a contingent payout to be
paid over three years based on the future earnings of Argos in excess of certain
annual thresholds. Argos provides a variety of IT support services to a wide
range of clients in Northern California, and generates approximately $10 million
in annual revenues with a staff of approximately 90 full-time employees.
On April 1, 1998, the Company acquired the operations of Norwood Computer
Services, Inc. ("Norwood") an IT services company headquartered in Hicksville,
NY. The purchase price includes $8.4 million paid in cash ($6.7 million drawn
down on the acquisition line and $1.7 charged to the revolving credit facility),
plus a contingent payout of $1.3 million that was paid in March 1999. Norwood
has been serving a wide range of mid-sized and Fortune 500 companies in the New
York metropolitan area since 1978 and generates approximately $17 million in
annual revenues through a staff of approximately 120 consultants.
On June 2, 1998, the Company's Telecommunication Services operation
acquired WCC Telephone Services, Inc. ("WCC") a California based
telecommunications services company. WCC specializes in central office services
for customers such as Pacific Bell and Northern Telecom. It generates annual
sales of approximately $2 million. This business has been merged with the
existing Butler Telecom business in Southern California. The purchase price
includes $1.9 million paid in cash ($1.5 million drawn down on the acquisition
line and $0.4 million charged to the revolving credit facility), plus a
contingent payout based on the earnings of WCC for the next year.
Also, on June 2, 1998, the Company's Technology Solutions operation
acquired certain assets of the Reston, VA branch operations of Automated
Concepts, Inc. This business generates annual sales of approximately $3
million. Employees and consultants of this operation have been merged with the
existing Butler office in McLean, VA. The purchase price was $550,000 of which
$440,000 was drawn down on the acquisition line and $110,000 was charged to the
revolving credit facility plus a contingent payout based on earnings for one
year.
On July 1, 1998, the Company acquired Data Performance, Inc. ("DPI") a
Chicago area IT services business. The purchase price was $10.3 million ($8.2
charged to the acquisition line and $2.1 charged against the revolving credit
facility). DPI has provided a variety of IT support services to a wide range
of customers in the Chicago marketplace for the past eleven years. Its offerings
include contract programming, software consulting, IT staffing and Year 2000
project work. DPI currently generates approximately $10 million in annual
revenues through its staff of 80 consultants.
On August 5, 1998, the Company completed the acquisition of ISL
International, Inc. ("ISL"), an IT services company headquartered in Iselin, NJ.
The purchase price includes $7.4 million paid in cash ($5.9 charged was drawn
down on acquisition line and $1.5 charged to the revolving credit facility),
plus a multi-year contingent payout based on the future earnings of ISL. ISL
has provided services to a wide range of companies in the metropolitan New York
area since 1978. It generates approximately $20 million in annual revenues
through a staff of approximately 150 consultants.
In connection with these 1998 acquisitions, the Company acquired
substantially all of the operating assets and assumed certain liabilities of the
acquired businesses. The transactions were recorded using the purchase method
of accounting. Excess cost over net assets of businesses acquired has been
recorded as goodwill and is being amortized over forty years. Sales included in
the Company's financial statements from the businesses acquired for the year
ended December 31, 1998 were $39.2 million. In 1999, the Company estimates
payments of approximately $4.3 million in conjunction with contingent earn-out
provisions of businesses acquired in 1997 and 1998.
The Company continues to review potential acquisition candidates in the
information technology and telecommunications service industries. There are no
acquisition transactions currently pending.
YEAR 2000 COMPLIANCE
Description:
At midnight on December 31, 1999, many computer systems may not be able to
distinguish the Year 2000 from the Year 1900. This is because computer software
has, until recently, been written utilizing two digits rather than four to
express years. This programming flaw may debilitate computer systems worldwide,
because date-sensitive applications may recognize the Year 2000 as 1900, or not
at all. This may cause miscalculations or system failures. This situation has
become known as the Y2K problem, or the Millennium Bug.
Compliance:
The Company has established a Y2K Oversight Committee to ensure compliance
of all internal systems.
Beginning in 1995, the Company began the strategic process of upgrading and
replacing all of its financial systems. The new systems are all Y2K-compliant,
server driven operating systems. With regard to computerized systems, the
Company has nearly completed its Y2K compliance, and is currently testing its
ability to correctly identify and process the Year 2000. This process is
expected to be complete by the end of the second quarter of 1999. All desktop
and laptop computers have been, or are in the process of being checked for Y2K
readiness. Computers that are not compliant are being replaced. This process
will be completed in the second quarter of 1999. All PC operating systems are
being upgraded. All telecommunications and PBX systems have been evaluated and
are expected to be compliant in early 1999. All building systems (e.g.,
elevators, HVAC) were also reviewed. The majority of these systems are day-
dependent, not date-dependent, so they should not be impacted by Y2K. The
Company has been contacting major clients and vendors to evaluate their Y2K
compliance plans and readiness, to determine whether a Y2K event will have a
significant impact on the Company.
Costs:
Due to the scheduled conversion of the Company's financial systems there are
no specific Y2K costs related to those areas. The costs incurred to date to
upgrade non-compliant PCs is approximately $137,000, of which $24,000 has been
expensed and $113,000 has been recorded to property and equipment. The
estimated cost to complete the PC upgrade is approximately $50,000. The cost to
upgrade or replace non-compliant telecommunication systems to date has been
approximately $28,000.
Worst-Case Scenarios:
The following worst-case scenarios could have an impact on the Company if
they were to occur: The Company could be negatively impacted if several of its
larger clients were affected by either their inability to retain contract
employees supplied by the Company or by their inability to process payables
promptly. This may become a benefit to the Company because it has the ability
to provide Y2K solutions to the affected customers. The Company would incur
additional financing costs during any extended receivable period. The Company
could also be adversely affected if financial institutions were unable to wire
payroll funds. Such an occurrence would require the Company to issue paper
checks which may not be well received by its contract employees.
Contingency Planning:
The Company has developed a contingency plan that would enable it to print
checks manually and mail them to all employees in the event of a bank problem.
Appropriate contingency plans are being developed to deal with potential client
or vendor Y2K events.
Summary:
Based on the activities reviewed above, the Company expects all internal
systems to be Y2K compliant by June 30, 1999. The Company does not believe that
the Y2K issues will have a material adverse effect on its financial condition or
results of operations. It is anticipated that the Y2K issue is not substantial
with respect to the Company's property and equipment, though the Company is
continuing to assess and modify computer systems, facilities and business
processes to provide for their continuing functionality.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This standard shall be effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. The Company
is currently evaluating the impact, if any, of this standard on its financial
reporting.
Information contained in this Management's Discussion and Analysis of
Results of Operations and Financial Condition, other than historical
information, may be considered forward-looking in nature. As such, it is based
upon certain assumptions and is subject to various risks and uncertainties,
which may not be controllable by the Company. To the extent that these
assumptions prove to be incorrect, or should any of these risks or uncertainties
materialize, the actual results may vary materially from those which were
anticipated.
BUTLER INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
December 31,
---------------------------------
1998 1997
------------- --------------
ASSETS
Current assets:
Cash $ 910 $ 914
Accounts receivable, net of allowance for
uncollectible accounts of $3,309 and $1,465 65,349 54,827
Inventories 441 2,196
Other current assets 6,193 4,687
------------- --------------
Total current assets 72,893 62,624
Property and equipment, net 16,527 15,613
Other assets 2,711 1,907
Excess cost over net assets of businesses
acquired, net of accumulated amortization
of $10,805 and $9,004 57,981 24,572
------------- --------------
Total assets $ 150,112 $ 104,716
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 30,163 $ 28,153
Current portion of long-term debt 5,895 920
------------- --------------
Total current liabilities 36,058 29,073
------------- --------------
Revolving credit facility 27,251 20,985
Other long-term debt 27,684 6,517
Other long-term liabilities 3,920 3,052
Commitments and contingencies
Stockholders' equity:
Preferred stock: par value $.001 per share, authorized
5,000,000: Series B 7% Cumulative Convertible
Preferred Shares, authorized 3,500,000; issued
3,014,564 in 1998 and 2,814,133 in 1997 (Aggregate
liquidation preference $3,015 in 1998 and $2,814 in 1997) 3 3
Common stock: par value $.001 per share,
authorized 83,333,333; issued 6,506,043 in 1998
and 6,380,023 in 1997 7 6
Additional paid-in capital 95,244 94,710
Accumulated deficit (39,922) (49,566)
Cumulative foreign currency translation adjustment (133) (64)
------------- --------------
Total stockholders' equity 55,199 45,089
------------- --------------
Total liabilities and
stockholders' equity $ 150,112 $ 104,716
============= ==============
The accompanying notes are an integral part of these consolidated financial
statements.
BUTLER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
------------- ------------ -------------
Net sales $ 444,146 $ 424,964 $ 409,353
Cost of sales 358,254 357,852 349,762
------------- ------------ -------------
Gross margin 85,892 67,112 59,591
Depreciation and amortization 4,278 2,881 3,001
Selling, general and administrative expenses 62,872 52,142 45,991
------------- ------------ -------------
Operating income 18,742 12,089 10,599
Interest expense (4,717) (4,168) (5,215)
------------- ------------ -------------
Income before income taxes 14,025 7,921 5,384
Income tax expense (benefit) 4,181 (812) 593
------------- ------------ -------------
Net income $ 9,844 $ 8,733 $ 4,791
============= ============ =============
Net income per share:
Basic $ 1.49 $ 1.37 $ 0.76
Diluted $ 1.26 $ 1.16 $ 0.67
Average number of common shares and dilutive
common share equivalents outstanding
Basic 6,454 6,253 6,087
Diluted 7,794 7,511 7,166
The accompanying notes are an integral part of these consolidated financial
statements.
BUTLER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,844 $ 8,733 $ 4,791
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and excess purchase
price amortization 4,278 2,881 3,001
Amortization of deferred financing
and employee stock purchase
plan loans 106 82 681
Foreign currency translation (69) (73) 116
(Increase) decrease in assets,
increase (decrease) in liabilities:
Accounts receivable (10,522) 1,444 8,242
Inventories 1,755 96 (1,931)
Other current assets (1,506) (3,524) 824
Other assets (910) (851) (1,166)
Current liabilities 2,057 7,097 (8,420)
Other long term liabilities 868 (296) (329)
------------ ------------ ------------
Net cash provided by operating activities 5,901 15,589 5,809
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,391) (2,989) (1,399)
Cost of businesses acquired (35,210) (1,990) (512)
Expenses paid in conjunction with
discontinued operations (47) (89) (117)
Proceeds from sale of certain UK operations - - 5,454
------------ ------------ ------------
Net cash (used in) provided by investing activities (38,648) (5,068) 3,426
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under
financing agreements 32,408 (10,667) (10,650)
Net proceeds from the exercise of
common stock warrants and options 359 831 709
Repurchase common stock (24) - (162)
------------ ------------ ------------
Net cash provided by (used in) financing activities 32,743 (9,836) (10,103)
------------ ------------ ------------
Net (decrease) increase in cash (4) 685 (868)
Cash at beginning of period 914 229 1,097
------------ ------------ ------------
Cash at end of period $ 910 $ 914 $ 229
============ ============ ============
The accompanying notes are an intregal part of these consolidated financial
statements.
BUTLER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share data)
CUMULATIVE
SERIES B ADDITIONAL FOREIGN TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN EXCHANGE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY
Balance at December 31, 1995 2,451,898 $ 2 5,993,783 $ 6 $ 92,882 $ (107) $(62,727) $ 30,056
Comprehensive income:
Net income - - - - - - 4,791 4,791
Current Year Foreign Currency
Adjustments - - - - - 116 - 116
--------
Total comprehensive income 4,907
--------
Forgive employee loans - - - - 69 - - 69
Issuances of Common Stock - - 174,964 - 709 - - 709
Repurchase and retire shares - - (24,579) - (162) - - (162)
Dividends Paid 175,127 1 - - 175 - (176) -
---------- ------ ------------ ------- ----------- ------------ ----------- ------------
Balance at December 31, 1996 2,627,025 3 6,144,168 6 93,673 9 (58,112) 35,579
Comprehensive income:
Net income - - - - - - 8,733 8,733
Current Year Foreign Currency
Adjustments - - - - - (73) - (73)
--------
Total comprehensive income 8,660
--------
Forgive employee loans - - - - 19 - - 19
Loans issued for exercise
of options - - - - (196) - - (196)
Issuances of Common Stock - - 235,855 - 1,027 - - 1,027
Dividends Paid 187,108 - - - 187 - (187) -
---------- ------ ------------ ------- ----------- ------------ ----------- ------------
Balance at December 31, 1997 2,814,133 3 6,380,023 6 94,710 (64) (49,566) 45,089
Comprehensive income:
Net income - - - - - - 9,844 9,844
Current Year Foreign Currency
Adjustments - - - - - (69) - (69)
--------
Total comprehensive income 9,775
--------
Repurchase and retire shares - - (2,146) - (24) - - (24)
Loans issued for exercise
of options - - - - (349) - - (349)
Issuances of Common Stock - - 128,166 1 707 - - 708
Dividends Paid 200,431 - - - 200 - (200) -
---------- ------ ------------ ------- ----------- ------------ ----------- ------------
Balance at December 31, 1998 3,014,564 $ 3 6,506,043 $ 7 $ 95,244 $ (133) $(39,922) $ 55,199
========== ====== ============ ======= =========== ============ =========== ============
The accompanying notes are an intregal part of these consolidated financial
statements.
BUTLER INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
Consolidation and Presentation
The consolidated financial statements include the accounts of Butler
International, Inc. ("the Company") and all its wholly-owned subsidiaries.
Significant intercompany balances and transactions have been eliminated.
Certain amounts from prior years' consolidated financial statements have been
reclassified in the accompanying consolidated financial statements to conform
with the current year presentation.
Business
The Company is a leading provider of strategic outsourcing, project management
and staff augmentation services. These services are provided through four ISO
9002 certified business segments, Technology Solutions, Telecom Services, Fleet
Services and the Technical Group.
Technology Solutions provides a complete and broad range of information
technology ("IT") expertise. Utilizing established resources, technology
practice areas, quality systems and its award winning proprietary Butler
Recruiting and Sales System (BRASS) database, it provides customers with the
best possible solutions to meet and exceed their IT objectives.
Telecom Services provides technical personnel and management services to
communications companies worldwide. Services range from basic copper and voice
networks to the latest optical fiber and broadband technologies. It also offers
customers extensive central office, CATV, wireless and cellular services.
Training, orientation and skills upgrading is provided to meet the individual
needs of each customer. Additionally, Telecom Services specializes in CAD and
manual record conversions, averaging over 350,000 drawings per year.
Fleet Services provides customized fleet operations services to major ground
fleet-holders nationwide. Services range from vehicle maintenance to total
fleet management services.
The Technical Group provides skilled technical and engineering personnel,
project management as well as total outsourcing solutions. Serving a wide range
of industries from aerospace to pharmaceuticals to energy and electronics, the
Company offers client companies candidates in approximately 2,000 job
classifications including engineers, designers and technical writers.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Property and Equipment
Property and equipment are recorded at cost, which, for assets acquired
through the Company's corporate acquisitions, represents the fair value at date
of acquisition. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, which generally range between one
and ten years except for the Company's headquarters building which has a thirty
year life.
Excess Cost Over Net Assets of Businesses Acquired
Excess cost over net assets of businesses acquired is being amortized using
the straight-line method generally over forty years from the date of
acquisition. Management routinely evaluates the recoverability of goodwill with
reference to estimates of future profitability and operating cash flow. Such
estimates, on an undiscounted basis, are compared to the unamortized balance of
goodwill. Should the results of this analysis indicate that impairment is
likely, the Company will recognize a charge to operations at that time.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and accrued
expenses approximates fair value because of the short term maturity of these
instruments. The carrying amount of current and long-term debt approximates
fair values based on the fact that the related interest rates fluctuate with
market rates.
Revenue Recognition
The Company's net sales relate to net service revenues of its wholly-owned
subsidiaries. Service revenues are recognized upon performance of such services
at amounts expected to be ultimately realized.
Inventory
Inventory is valued at the lower of cost or market. Cost is determined by using
an average cost per unit.
Foreign Currency Translation
For foreign operations, the assets and liabilities are translated at the
current exchange rates, while income and expenses are translated at the average
exchange rates for the period. Resulting translation gains and losses are
reported as a component of comprehensive income.
Earnings Per Common Share
The following table represents the computation of basic and diluted earnings
per common share as required by SFAS No. 128 (in thousands, except per share
data).
1998 1997 1996
------ ------ ------
Basic Earnings per Share:
Income available to
common shareholders $9,644 $8,546 $4,615
------ ------ ------
Weighted average common
shares outstanding 6,454 6,253 6,087
------ ------ ------
Basic earnings per
common share $ 1.49 $ 1.37 $ .76
====== ====== ======
Diluted Earnings per Share:
Income available to
common shareholders
assuming conversion $9,844 $8,733 $4,791
------ ------ ------
Weighted average common
shares outstanding 6,454 6,253 6,087
Common stock equivalents 524 456 330
Assumed conversion of
preferred stock 816 802 749
------ ------ ------
Total weighted average
common shares 7,794 7,511 7,166
------ ------ ------
Diluted earnings per
common share $ 1.26 $ 1.16 $ 0.67
====== ====== ======
NOTE 2 - PROPERTY AND EQUIPMENT:
Property and equipment is summarized as follows (in thousands):
1998 1997
--------- ---------
Land $ 5,662 $ 5,662
Buildings 4,168 4,168
Motor vehicles and equipment 7,750 7,123
Computer hardware and software 12,378 10,269
Leasehold improvements 2,011 1,716
-------- --------
31,969 28,938
Less accumulated depreciation (15,442) (13,325)
-------- --------
Property and equipment, net $ 16,527 $ 15,613
======== ========
Depreciation expense for the years ended December 31, 1998, 1997, and 1996 was
$2,477, $1,721, and $1,944, respectively.
NOTE 3 - CURRENT LIABILITIES:
Accounts payable and accrued liabilities are summarized as follows (in
thousands):
1998 1997
------- -------
Insurance-related payables $ 7,313 $ 5,029
Accounts payable 5,677 7,146
Accrued compensation 3,893 3,656
Taxes other than income taxes 3,610 2,967
Accrued pension and 401(k)
contributions 3,075 2,378
Income taxes payable 1,021 948
Deferred compensation 416 546
Accrued acquisition payouts 455 600
Other 4,703 4,883
------- -------
Accounts payable and
accrued liabilities $30,163 $28,153
======= =======
NOTE 4 - LONG-TERM DEBT:
Long-term debt is summarized as follows (in thousands):
1998 1997
------- -------
Credit Facility, due July, 2001 $27,251 $20,985
Acquisition Facility, due, July, 2002 25,436 0
UK Credit Facility 1,598 611
Notes payable related to headquarters
facility 6,545 6,826
------- -------
60,830 28,422
Less current portion (5,895) (920)
------- -------
Long-term debt $54,935 $27,502
======= =======
Credit Facility
The Company has a credit agreement with General Electric Capital
Corporation ("GECC") which provides a revolving credit facility for loans up to
$50.0 million, including $9.0 million for letters of credit, and an acquisition
facility for up to $35.0 million. The Company has guaranteed all obligations
incurred or created under the credit agreement. The Company is in compliance
with the required affirmative and financial covenants.
As of December 31, 1998, $27.3 million was outstanding under the revolving
credit facility and an additional $5.5 million was used to collateralize letters
of credit. The interest rate in effect at December 31, 1998, was 6.55% or 125
basis points above the 30 day commercial paper rate. The average interest rate
during 1998 was 7.26%. Interest reductions are available based upon the Company
achieving certain financial results.
At December 31, 1998, $25.4 million was outstanding under the acquisition
facility with an effective interest rate of 7.8%, or 250 basis points above the
30 day commercial paper rate. The average interest rate in 1998 was 8.25%.
U.K. Credit Facility
The Company's U.K. operation has a credit facility with TSB Commercial
Finance Ltd. which provides up to (Pounds)1.5 million in loans. The total
amount of loans outstanding under this facility may not exceed 80% of eligible
receivables. The interest rate chargeable to the Company is currently 8%. The
balance outstanding as of December 31, 1998 was (Pounds)955,647 or approximately
$1.6 million.
Facility Mortgage
The Company issued an unsecured promissory note in the amount of $510,000
payable to North American Investment Realty of New Jersey, Inc. with an interest
rate of 9 7/8% per annum. Principal payments were made in 1994 through 1996
bringing the balance down to $127,000. In 1996, the Company exercised its
options to extend the term of the note for a period not to exceed three years.
The Company has a seven year mortgage for its corporate office facility.
The mortgage consists of a $6.4 million loan, that is repayable based on a 15
year amortization schedule and a $375,000 loan that is repayable based on a 4
year schedule. The variable interest rate on these loans is one month Libor
plus 225 basis points. The outstanding balance of the loans was $6.4 million at
December 31, 1998.
The Company entered into an interest rate swap arrangement with its mortgage
holder on its $6.75 million mortgage notes. The Company makes
monthly interest payments at the fixed rates of 8.6% and 8.42% on the $6.4
million loan and the $375,000 loan, respectively. The Company receives payments
based upon Libor plus 225 basis points. In 1998, the net loss from the exchange
of interest rate payments was approximately $6,600 and was included in interest
expense. The fair value of the Company's interest rate swap agreement as of
December 31, 1998, would require a payment by the Company of approximately
$331,000 if the agreement were terminated. The Company does not anticipate
terminating the interest rate swap agreement prior to its current expiration
date of November 1, 2004.
NOTE 5 - COMMON STOCK:
In 1998, 1997 and 1996, the Company received proceeds of $298,400, $561,704
and $618,588, respectively, from the exercise of 80,000, 155,008 and 143,714
common stock purchase warrants. At December 31, 1998, the Company had 65,000
common stock purchase warrants outstanding with exercise prices ranging from
$3.62 to $6.00 per share and expiration dates from April, 2000 to July, 2003.
The Company received proceeds of $293,799, $465,598 and $123,750 in 1998,
1997 and 1996, respectively, from the exercise of 48,166, 80,847 and 37,500
options granted under various stock option plans.
NOTE 6 - CUMULATIVE CONVERTIBLE PREFERRED STOCK:
The Company's Series B Cumulative Convertible Preferred Stock ("Series B
Preferred Shares") accrues dividends at the rate of 7% per annum, based upon a
liquidation value of $1.00 per share, payable in cash or in-kind at the option
of the holder. In 1998, 1997 and 1996, dividends in-kind amounting to $200,431,
$187,108, and $175,127, respectively, were paid to the holders of Series B
Preferred Shares. Series B Preferred Shares are convertible at a ratio of one
Series B Preferred Share to .285 Common Shares.
NOTE 7 - STOCK OPTIONS
The Company has in effect a number of stock-based incentive and benefit
programs designed to attract and retain qualified directors, executives and
management personnel. To accomplish these objectives, the Company has adopted a
1985 Incentive Stock Option Plan (the "ISOP"), a 1985 non-qualified Stock Option
Plan (the "Non-qualified Plan"), a 1989 Directors Stock Option Plan ("Directors
Plan"), a 1992 Stock Option Plan ("1992 Non-qualified Plan"), a 1992 Incentive
Stock Option Plan ("1992 ISOP"), a 1992 Stock Bonus Plan ("1992 Bonus Plan"),
and a 1992 Stock Option Plan for Non-employee Directors ("1992 Directors Plan").
In addition, the Company has encouraged its directors to subscribe for shares of
common stock from time to time at a price equal to the market price of the
common stock at the time of their subscription.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and other related interpretations in accounting
for its stock option plans. No compensation expense has been recognized for
these plans. Had compensation cost been determined based upon the fair value at
grant date consistent with the accounting methodology prescribed under Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation", the Company's net income would have been reduced by approximately
$512,000, $421,000 and $311,000 for 1998, 1997 and 1996, respectively. Basic
earnings per share would have been reduced by approximately $.08, $.07, and $.05
for 1998, 1997 and 1996, respectively. Diluted earnings per share would have
been reduced by $.07 for 1998, $.06 for 1997 and $.04 for 1996. The weighted
average fair value of options granted during 1998, 1997 and 1996 are estimated
to be $11.53, $5.13 and $3.71,
respectively, on the date of grant using the Black-Scholes option-pricing model
with the following assumptions for 1998, 1997 and 1996, respectively: volatility
of 45%, 35%, and 43%; risk free interest rates of 5.33%, 6.43%, and 6.76%;
assumed forfeiture rates of 14.8%, 15.8% and 13.2%; and, expected lives of 6.70,
6.72 and 6.76 years for 1998, 1997 and 1996, respectively.
Changes in stock options outstanding are as follows:
1998 1997 1996
------------- ------------- --------------
Avg. Avg. Avg.
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding balance
at beginning of
year 682,066 $6.79 694,913 $5.95 582,246 $5.09
Granted 70,500 25.02 88,000 12.50 195,000 7.74
Exercised (48,166) 6.10 (80,847) 5.76 (37,500) 3.30
Canceled (3,000) 9.63 (20,000) 7.00 (44,833) 4.85
------- ------- -------
Outstanding at
end of year 701,400 $8.66 682,066 $6.79 694,913 $5.95
======= ======= =======
Options exercisable
at end of year 584,484 $8.10 501,316 $6.20 483,000 $5.62
======= ======= =======
The following table summarizes information about stock options at December 31,
1998:
Options Outstanding Options Exercisable
--------------------------------- -----------------------
Weighted Weighted Weighted
Range of average average Number average
Exercise Outstanding remaining exercise exercisable exercise
Prices at 12/31/98 life Price at 12/31/98 Price
- ------------- ----------- ---------- -------- ----------- --------
$3.13 - $7.00 342,000 4.3 years $4.78 328,250 $4.77
7.13 - 10.02 215,900 7.3 years $7.97 151,900 $8.08
11.00 - 26.50 143,500 9.1 years $18.91 104,334 $18.60
----------- -----------
Total 701,400 6.2 years $8.66 584,484 $8.10
=========== ===========
During 1998, the Company purchased 6,986 shares of its common stock on the
open market and awarded such shares to certain employees in conjunction with
their employment agreements. These awards have a vesting period of
approximately two to four years. Compensation expense is being recorded over
the vesting period. The expense recorded in 1998 was approximately $22,000.
NOTE 8 - EMPLOYEE STOCK PURCHASE PLAN:
The Butler International, Inc. 1990 Employee Stock Purchase Plan (the
"Plan") made available $2.5 million for loans to officers, directors, and other
key employees to purchase Company stock. Except for the loans to outside
directors, the Company, subject to the Plan provisions, may reduce the amount
due with respect to each loan by twenty-five percent of the original principal
balance on successive anniversary dates of the loan, provided that the employee
remains employed by the Company or one of its subsidiaries on such anniversary
dates, or has not terminated his employment for other than a reason permitted by
the Plan. The shares acquired by the outside directors pursuant to the Plan
were subject to forfeiture ratably under certain conditions. During 1997 and
1996, plan loans totaling $18,734 and $68,726, respectively, previously granted
to employees who have been terminated, were forgiven and charged to expense. No
loans were forgiven during 1998.
NOTE 9 - EMPLOYEE BENEFIT PLANS:
Defined Benefit Plan
The Company has a defined benefit pension plan ("DBP"). Benefits under the
DBP are determined based on earnings and period of service. The Company funds
the DBP in accordance with the minimum funding requirements of the Employees
Retirement Income Security Act of 1974. Benefits payable under the plan are
reduced by a participant's Employee Stock Option Plan ("ESOP") credits.
Effective June 1997, retroactive to December 31, 1996, the Company froze
future benefit accruals under the DBP and ESOP and approved a matching program
under its 401(k) plan, in lieu of benefits which said participants would
otherwise have accrued under the DBP. The effect of freezing the DBP resulted
in a gain, which was not material.
Change in pension benefit obligation (in thousands):
1998 1997
------- -------
Benefit obligations at
beginning of year $ 1,907 $ 2,924
Interest cost 128 212
Change in assumptions - (1,115)
Benefits paid (13) (114)
------- -------
Benefit obligation at
end of year 2,022 1,907
------- -------
Change in plan assets (in thousands):
Fair value of plan assets
beginning of year 3,225 2,891
Return on plan assets 289 475
Plan expenses - (27)
Benefits paid (13) (114)
------- -------
Fair value of plan assets at
end of year 3,501 3,225
------- -------
Funded status 1,479 1,318
Unrecognized net gain (1,263) (1,330)
------- -------
Prepaid (accrued) benefit cost $ 216 $ (12)
======= =======
Assumptions used in determining net pension expense were:
1998 1997 1996
------- ------- -----
Discount rate 6.75% 7.25% 7.25%
Rates of increase in
compensation levels N/A N/A 4.00%
Expected long-term rate
of return on assets 9.00% 9.00% 9.00%
Components of net periodic benefit cost (in thousands):
1998 1997 1996
------- ------- -----
Service cost $ - $ - $ 432
Interest cost 128 212 250
Return on assets (290) (233) (194)
Recognized net actuarial gain (67) - 99
------- ------- -----
Net periodic benefit cost $ (229) $ (21) $ 587
======= ======= =====
At December 31, 1998, approximately 38% of plan ass ets were held in fixed
income investments and 62% in equity investments compared to 25% in fixed
investments and 75% in equity investments at December 31, 1997.
Postemployment and Postretirement Benefits
The Company currently does not provide postemployment and postretirement
benefits other than pensions.
401(K) Plan
The Company provides a 401(k) savings plan. Effective December 31, 1996,
the Company froze its DBP and ESOP and approved a matching program under the
401(k) plan. The Company made matching contributions of approximately $357,000
and $315,000 in 1998 and 1997, respectively. No contributions were made to the
plan in 1996.
NOTE 10 - INCOME TAXES:
The components of income tax expense (benefit) were as follows
(in thousands):
1998 1997 1996
------ ------ -----
Current taxes:
Federal $ 3,387 $ 234 $ 130
State 1,502 913 463
Foreign - - -
------- ------ -------
Total Current 4,889 1,147 593
Deferred tax benefit (708) (1,959) -
------- ------ -------
Total income tax
expense (benefit) $ 4,181 $ (812) $ 593
======= ====== =======
Significant components of the Company's deferred tax assets as of December
31, 1998 and 1997 are as follows (in thousands):
Current Deferred Tax Assets: 1998 1997
------- --------
Reserves for doubtful accounts $ 356 $ 461
Accruals not currently deductible 3,152 2,477
Net operating loss carryforwards 1,369 3,166
Tax credit carryforwards 0 968
Other 2,059 1,375
Valuation allowance (1,369) ( 4,588)
------- --------
Net current deferred tax asset
(included in other current assets) $ 5,567 $ 3,859
======= ========
As of December 31, 1997, the Company believed that it was more likely than
not that a portion of the U.S. net operating loss and other carryforwards would
be realized. Therefore, the estimated future tax benefit of carryforwards as
reflected in the Company's December 31, 1997 deferred tax assets of $8.4 million
was partially recognized. By December 31, 1998, the Company has had three
consecutive years of financial profitability and has substantially realized the
benefits of the U.S. operating loss and other carryforwards. As the Company now
believes that it is more likely than not that most of the December 31, 1998
deferred assets will be realized, the valuation allowance has been further
reduced and income tax benefits have been recorded for these changes.
U.K. net operating loss carryforwards of approximately $4.5 million from
1996 and 1995 are available to reduce future U.K. taxable income. U.K.
tax law provides an unlimited life for net operating loss carryforwards.
However, the benefit of the U.K. net operating losses have not been recognized
for financial reporting purposes because realization is not currently believed
to be likely in the foreseeable future.
A reconciliation between the income tax expense (benefit) computed by
applying the federal statutory rate to income from operations before income
taxes to the actual expense (benefit) is as follows (in thousands):
1998 1997 1996
------- ------- -------
Income tax expense at
statutory rate $ 4,909 $ 2,693 $ 1,831
Amortization of excess of
cost over net assets of
businesses acquired 294 227 214
Utilization of net operating
loss and credit carryforwards (2,067) (2,960) (2,025)
Net changes in deferred taxes,
including reduction in
valuation allowance (708) (1,959) -
State income tax expense, net
of federal tax benefit 1,472 895 454
Other, including foreign rate
differential 281 292 119
------- ------- -------
Provision (benefit)
for income taxes $ 4,181 $ (812) $ 593
======= ======= =======
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
The Company has operating leases for office space and various computer
equipment. Estimated minimum future rental commitments under non-cancelable
leases at December 31, 1998 are as follows (in thousands):
1999 $4,254
2000 1,887
2001 967
2002 466
2003 152
Thereafter 0
------
Total $7,726
======
Substantially all of the leases provide for increases based upon use of
utilities and lessors' operating expenses. Net rent expense for the years ended
December 31, 1998, 1997 and 1996 was approximately $4.5 million, $4.0 million
and $3.9 million, respectively.
In 1995, the Company filed a complaint against CIGNA Property and Casualty
Insurance Company regarding CIGNA's and other defendants' acts and omissions in
the processing, handling and investigation of claims against the Company under
general liability and workmen's compensation insurance contracts. In 1997, the
Company entered into an agreement with CIGNA which, in the absence of a
settlement, would result in the respective parties undertaking binding
arbitration in late 1998. In accordance with the terms of the agreement the
Company paid $2.1 million to CIGNA. In August 1998, the Company exercised its
option to settle the remaining disputed amounts with CIGNA for $1.5 million plus
interest of $255,000. This settlement had no impact on current year operating
results.
The Company and its subsidiaries are parties to various legal proceedings
and claims incidental to its normal business operations for which no material
liability is expected beyond which is recorded. While the
ultimate resolution of the above matters is not known, management does not
expect that the resolution of such matters will have a material adverse effect
on the Company's financial statements and results of operations.
NOTE 12 - RELATED PARTY TRANSACTIONS:
Under various approved stockholder option plans and other stock purchase
agreements, certain directors have executed primarily non-interest bearing notes
payable to the Company to purchase common stock. As of December 31, 1998,
approximately $2.9 million was outstanding under such notes, which included
notes totaling $349,279 executed by two non-employee directors in 1998 for the
purchase 88,333 shares of the Company's common stock.
During 1998, 1997 and 1996, the Company paid or accrued $732,000, $745,000
and $519,000, respectively, in fees and expenses to McBreen, McBreen & Kopko,
its outside counsel.
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
During 1998, 1997 and 1996, the Company received approximately $11,000,
$168,000 and $62,000, respectively, in federal, state and foreign income tax
refunds.
Cash paid for interest and federal, state and foreign income taxes for the
years ended December 31, 1998, 1997 and 1996 is as follows (in thousands):
1998 1997 1996
------ ------ ------
Interest $3,868 $3,635 $4,767
Income taxes $4,757 $719 $144
NOTE 14 - SEGMENTS:
Sales and operating profits by segment (in thousands):
Sales:
1998 1997 1996
--------- --------- ---------
Technology Solutions $ 85,029 $ 36,361 $ 31,293
Telecom Services 79,654 68,908 60,349
Fleet Services 61,735 73,072 60,054
Technical Group 217,728 246,623 257,657
-------- -------- --------
Consolidated total $444,146 $424,964 $409,353
======== ======== ========
Operating Profits:
1998 1997 1996
-------- -------- --------
Technology Solutions $ 10,011 $ 4,253 $ 3,705
Telecom Services 12,917 10,221 7,529
Fleet Services 3,245 818 326
Technical Group 12,918 13,371 13,045
Unallocated amounts (20,349) (16,574) (14,006)
-------- -------- --------
Consolidated total $ 18,742 $ 12,089 $ 10,599
======== ======== ========
The Company primarily operates in the United States. The Technical Group
operations does include the results of its United Kingdom ("UK") subsidiary.
Net sales from the UK operation were $16.1 million, $11.9 million and $21.3
million in 1998, 1997 and 1996, respectively. Operating profits (loss) from the
UK subsidiary were $506,000, $331,000 and ($793,000) in 1998, 1997 and 1996,
respectively.
The Company provides services to over 1,600 clients. In 1998 one client
accounted for 11.7% of the Company's net sales. This client, which is included
in the Technical Group segment, accounted for approximately 13.0% of net sales
in 1997 and 6.4% of net sales in 1996.
The Company's assets are reviewed by management on a consolidated basis
because it is not meaningful to allocate assets to the various segments.
Unallocated amounts of operating profits consist of corporate expenses,
certain general and administrative expenses from field operations and goodwill
amortization.
NOTE 15 - ACQUISITIONS:
On March 3, 1998, the Company acquired the operations of Argos Adriatic
Corporation ("Argos"), a Silicon Valley information technology ("IT") company
headquartered in Fremont, CA. The purchase price includes $5.1 million paid in
cash ($4.1 million charged against the Company's acquisition line and $1.0
million against the revolving credit facility), plus a contingent payout to be
paid over three years based on the future earnings of Argos in excess of certain
annual thresholds. Argos provides a variety of IT support services to a wide
range of clients in Northern California, and generates approximately $10 million
in annual revenues with a staff of approximately 90 full-time employees.
On April 1, 1998, the Company acquired the operations of Norwood Computer
Services, Inc. ("Norwood") an IT services company headquartered in Hicksville,
NY. The purchase price includes $8.4 million paid in cash ($6.7 million drawn
down on the acquisition line and $1.7 charged to the revolving credit facility),
plus a contingent payout of $1.3 million that was paid in March 1999. Norwood
has been serving a wide range of mid-sized and Fortune 500 companies in the New
York metropolitan area since 1978 and generates approximately $17 million in
annual revenues through a staff of approximately 120 consultants.
On June 2, 1998, the Company's Telecommunication Services operation
acquired WCC Telephone Services, Inc. ("WCC") a California based
telecommunications services company. WCC specializes in central office services
for customers such as Pacific Bell and Northern Telecom. It generates annual
sales of approximately $2 million. This business has been merged with the
existing Butler Telecom business in Southern California. The purchase price
includes $1.9 million paid in cash ($1.5 million drawn down on the acquisition
line and $0.4 million charged to the revolving credit facility), plus a
contingent payout based on the earnings of WCC for the next year.
Also, on June 2, 1998, the Company's Technology Solutions operation
acquired certain assets of the Reston, VA branch operations of Automated
Concepts, Inc. This business generates annual sales of approximately $3
million. Employees and consultants of this operation have been merged with the
existing Butler office in McLean, VA. The purchase price was $550,000 of which
$440,000 was drawn down on the acquisition line and $110,000 was charged to the
revolving credit facility plus a contingent payout based on earnings for one
year.
On July 1, 1998, the Company acquired Data Performance, Inc. ("DPI") a
Chicago area IT services business. The purchase price was $10.3 million ($8.2
charged to the acquisition line and $2.1 charged against the revolving credit
facility). DPI has provided a variety of IT support services to a wide range of
customers in the Chicago marketplace for the past eleven years. Its offerings
include contract programming, software consulting, IT staffing and
Year 2000 project work. DPI currently generates approximately $10 million in
annual revenues through its staff of 80 consultants.
On August 5, 1998, the Company completed the acquisition of ISL
International, Inc. ("ISL"), an IT services company headquartered in Iselin, NJ.
The purchase price includes $7.4 million paid in cash ($5.9 charged was drawn
down on acquisition line and $1.5 charged to the revolving credit facility),
plus a multi-year contingent payout based on the future earnings of ISL. ISL
has provided services to a wide range of companies in the metropolitan New York
area since 1978. It generates approximately $20 million in annual revenues
through a staff of approximately 150 consultants.
In connection with these 1998 acquisitions, the Company acquired
substantially all of the operating assets and assumed certain liabilities of the
acquired businesses. The transactions were recorded using the purchase method
of accounting. Excess cost over net assets of businesses acquired has been
recorded as goodwill and is being amortized over forty years. Sales included in
the Company's financial statements from the businesses acquired for the year
ended December 31, 1998 were $39.2 million.
The accompanying consolidated statements of income reflect the operating
results of the acquisitions since the effective date of their respective
acquisitions. Pro forma unaudited results of the Company and the acquisitions
for the years ended December 31, 1998 and 1997, assuming the acquisitions had
been made as of January 1, 1998 and 1997, are summarized below (in thousands
except per share amounts):
1998 1997
-------- --------
Net sales $471,374 $476,172
Pre-tax income 14,938 8,073
Net income 10,485 8,862
Diluted earnings per share $1.35 $1.18
These pro forma results have been prepared for comparative purposes only and
include certain adjustments such as goodwill amortization resulting from the
acquisitions and increased interest expense on the acquisition related debt.
They do not purport to be indicative of the results of operations which would
have resulted had the combinations been in effect on January 1, 1998 and 1997 or
of future results of operations of the consolidated entities.
NOTE 16 - INTERIM FINANCIAL INFORMATION:
(in thousands, except per share data) (unaudited)
1998 QUARTERS FIRST SECOND THIRD FOURTH
Operations:
Net Sales $106,723 $112,948 $112,755 $111,720
Gross Margin 18,208 20,962 22,644 24,078
Net income 1,229 2,709 2,909 2,997
======== ======== ======== ========
Per share data:
Basic earnings
per share $ 0.18 $ 0.41 $ 0.44 $ 0.45
======== ======== ======== ========
Diluted earnings
per share $ 0.16 $ 0.35 $ 0.37 $ 0.38
======== ======== ======== ========
1997 QUARTERS FIRST SECOND THIRD FOURTH
Operations:
Net Sales $104,697 $108,419 $106,465 $105,383
Gross margin 15,584 16,557 17,178 17,793
Net income 841 1,803 2,098 3,991 (a)
======== ======== ======== ========
Per share data:
Basic earnings
per share $ 0.13 $ 0.29 $ 0.32 $ 0.62
======== ======== ======== ========
Diluted earnings
per share $ 0.11 $ 0.24 $ 0.28 $ 0.52
======== ======== ======== ========
(a) Includes a tax benefit of $1,959.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Butler International, Inc.:
We have audited the accompanying consolidated balance sheets of Butler
International, Inc. as of December 31, 1998 and December 31, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Butler International, Inc. as of
December 31, 1998 and December 31, 1997, and the results of their operations and
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
- ------------------------
Parsippany, New Jersey
February 26, 1999
SELECTED CONSOLIDATED FINANCIAL INFORMATION:
(in thousands, except per share data) (unaudited)
1998 1997 1996 1995 1994
-------- -------- -------- ---------- --------
Operations Data:
Net sales $444,146 $424,964 $409,353 $433,564 $393,250
Gross margin $ 85,892 $ 67,112 $ 59,591 $ 56,495 $ 53,617
Net income (loss) $ 9,844 $ 8,733a $ 4,791 $ (7,914)b $ 1,659
Per Share Data:
Net income (loss) per share:
Basic $ 1.49 $ 1.37 $ 0.76 $(1.36) $ 0.26
Diluted $ 1.26 $ 1.16 $ 0.67 N/A $ 0.25
Weighted average number of
Shares outstanding:
Basic 6,454 6,253 6,087 5,943 5,430
Diluted 7,794 7,511 7,166 N/A 6,639
Balance Sheet Data:
Working capital $ 36,835 $ 33,551 $ 32,041 $ 34,103 $ 48,155
Total assets $150,112 $104,716 $ 99,180 $110,572 $107,810
Long-term debt $ 54,935 $ 27,502 $ 31,342 $ 40,480 $ 45,746
Total liabilities $ 94,913 $ 59,627 $ 63,601 $ 80,516 $ 70,412
Stockholders'
Equity $ 55,199 $ 45,089 $ 35,579 $ 30,056 $ 37,398
(a) 1997 includes a tax benefit of $1,959.
(b) 1995 includes $2,680 of non-recurring charges.
MARKET INFORMATION ON BUTLER'S COMMON STOCK:
The Common Stock is quoted under the symbol "BUTL" and is listed on the
NASDAQ National Market System. As of March 5, 1999, there were approximately
1,800 holders of record of Common Stock. Not reflected in the number of record
holders are persons who beneficially own shares of Common Stock held in nominee
or street name.
HIGH LOW
1997
First Quarter $13.75 $10.00
Second Quarter 14.13 9.38
Third Quarter 17.25 11.50
Fourth Quarter 19.38 16.00
1998
First Quarter $22.88 $16.38
Second Quarter 27.38 21.13
Third Quarter 26.50 17.25
Fourth Quarter 26.50 15.00
1999
First Quarter (Through March 5, 1999) $26.44 $19.13
No cash dividends were declared on the Company's Common Stock during the
years ended December 31, 1998 and 1997. The Company has no present intention of
paying cash dividends during the year ending December 31, 1999.