1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q / X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO _____________ COMMISSION FILE NUMBER: 0-25094 BTG, INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) VIRGINIA 54-1194161 - ------------------------------- ------------------------------------ (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 1945 OLD GALLOWS ROAD, VIENNA, VIRGINIA 22182 - -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 556-6518 --------------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / / INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: CLASS OUTSTANDING AT AUGUST 1 , 1996 - ---------------------------- ----------------------------------------- COMMON STOCK 6,160,521 2 BTG, INC. INDEX TO FORM 10-Q PAGE NUMBER --------------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets, June 30, 1996 and March 31, 1996 3 Consolidated Statements of Operations for the three months ended June 30, 1996 and 1995 4 Consolidated Statements of Cash Flows for the three months ended June 30, 1996 and 1995 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 11 Item 2. Changes in Securities 11 Item 3. Defaults Upon Senior Securities 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 EXHIBIT INDEX 13 - 2 - 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BTG, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, MARCH 31, 1996 1996 ------------ ------------ ASSETS (unaudited) Current assets: Restricted cash and equivalents . . . . . . . . . . . . . . . . . . . . . $ 60 $ 47 Investments, at fair value . . . . . . . . . . . . . . . . . . . . . . . 306 250 Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,146 69,146 Inventory, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,755 9,421 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,527 5,163 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 588 466 ---------- ---------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 104,382 $ 84,493 ---------- ---------- Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . 3,437 3,579 Other assets: Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,922 17,140 Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . 2,857 3,119 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,424 1,129 ---------- ---------- $ 129,022 $ 109,460 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt . . . . . . . . . . . . . . . . . . $ 220 $ 230 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,716 24,120 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,814 7,516 Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,857 1,534 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 896 3,144 ---------- ---------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . . $ 47,503 $ 36,544 ---------- ---------- Line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,978 30,453 Long-term debt, excluding current maturities . . . . . . . . . . . . . . . 14,373 14,341 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495 377 ---------- ---------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,349 $ 81,715 ---------- ---------- Stockholders' 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, 6,150,022 and 6,128,102 shares outstanding at June 30, 1996 and March 31, 1996, respectively, net of 50,057 reacquired shares . . . . . . . . . . . . . 18,053 17,915 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,179 10,422 Treasury stock, at cost, 50,057 shares . . . . . . . . . . . . . . . . . (527) (527) Unrealized losses on investments, net of related tax effects . . . . . . (32) (65) ---------- ---------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . $ 28,673 $ 27,745 ---------- ---------- $ 129,022 $ 109,460 ========== ========== See notes to consolidated financial statements. - 3 - 4 BTG, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED JUNE 30, --------------------------- 1996 1995 ---------- ----------- Revenues: Contract revenue . . . . . . . . . . . . . . . . . . . $ 20,529 $ 14,473 Product sales . . . . . . . . . . . . . . . . . . . . . 54,913 25,116 ---------- --------- 75,442 39,589 Direct costs: Contract costs . . . . . . . . . . . . . . . . . . . . 10,948 7,570 Cost of product sales . . . . . . . . . . . . . . . . . 47,779 21,063 ---------- --------- 58,727 28,633 Indirect, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 14,071 9,027 Amortization and other operating costs . . . . . . . . . 448 211 ---------- --------- 73,246 37,871 ---------- --------- Operating income . . . . . . . . . . . . . . . . . . . . 2,196 1,718 Interest expense . . . . . . . . . . . . . . . . . . . . (1,266) (553) Equity in earnings of affiliate . . . . . . . . . . . . . 397 -- ---------- --------- Income before income taxes . . . . . . . . . . . . . . . 1,327 1,165 Provision for income taxes . . . . . . . . . . . . . . . 570 494 ---------- --------- Net income . . . . . . . . . . . . . . . . . . . . . . . $ 757 $ 671 ========== ========= Earnings per common and common equivalent share . . . . . . . . . . . . . . . . . . . $ 0.12 $ 0.11 ========== ========= Weighted average shares of common stock and common stock equivalents . . . . . . . . . . . . . 6,336 6,191 ========== ========= See notes to consolidated financial statements. - 4 - 5 BTG, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) THREE MONTHS ENDED JUNE 30, -------------------------- 1996 1995 ----------- ----------- Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 757 $ 671 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 852 351 Reserves for accounts receivable and inventory . . . . . . . . . . . . . . . 190 (146) Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 39 Loss on sale of property and equipment . . . . . . . . . . . . . . . . . . . 11 8 Changes in assets and liabilities: (Increase) decrease in restricted cash . . . . . . . . . . . . . . . . . . . (13) -- (Increase) decrease in receivables . . . . . . . . . . . . . . . . . . . . . (11,000) (3,755) (Increase) decrease in inventory . . . . . . . . . . . . . . . . . . . . . . (3,524) (2,805) (Increase) decrease in prepaids and other . . . . . . . . . . . . . . . . . . (5,486) (947) (Increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . 205 (722) Increase (decrease) in accounts payable . . . . . . . . . . . . . . . . . . . 9,596 1,789 Increase (decrease) in accrued expenses . . . . . . . . . . . . . . . . . . . 3,298 44 Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . (1,828) 387 ----------- ---------- Net cash used in operating activities . . . . . . . . . . . . . . . . . . . $ (6,942) $ (5,086) ----------- ---------- Cash flows from investing activities: Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . (166) (212) Purchase of note receivable from related party . . . . . . . . . . . . . . . (300) -- Purchase of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . (200) -- ----------- ---------- Net cash used in investing activities . . . . . . . . . . . . . . . . . . . $ (666) $ (212) ----------- ---------- Cash flows from financing activities: Net advances under line of credit . . . . . . . . . . . . . . . . . . . . . . 7,525 6,025 Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . . (55) (574) Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . 138 15 ----------- ---------- Net cash provided by financing activities . . . . . . . . . . . . . . . . . $ 7,608 $ 5,466 ----------- ---------- Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . -- 9 ----------- ---------- Increase in unrestricted cash and equivalents . . . . . . . . . . . . . . . . . -- 177 Unrestricted cash and equivalents, beginning of period . . . . . . . . . . . . -- 1,236 ----------- ---------- Unrestricted cash and equivalents, end of period . . . . . . . . . . . . . . . $ -- $ 1,413 =========== ========== See notes to consolidated financial statements. - 5 - 6 BTG, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 (Unaudited) 1. BASIS OF PRESENTATION The consolidated interim financial statements included herein have been prepared by BTG, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of interim period results. Certain information and footnote disclosures normally included in financial statements in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The Company believes, however, that its disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report to Stockholders for the fiscal year ended March 31, 1996. The results of operations for the three-month period ended June 30, 1996, are not necessarily indicative of the results to be expected for the full fiscal year ending March 31, 1997. - 6 - 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL BTG, Inc. and subsidiaries (the "Company") is an information technology company providing complete solutions to the specific systems and product needs of the United States Government and its agencies and departments (the "Government") and other commercial and state and local government clients in enterprise networking, Internet/intranet applications, data correlation, and information management. The Company's operations are conducted by its three strategic business units: Systems Engineering, Technology Systems, and Integration and Network Systems. The Company's common stock is quoted on the NASDAQ National Market under the symbol "BTGI". The Company's revenues are comprised of both contract revenue 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 3-4% 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. Year-to-year increases in product sales have generally been driven by higher volumes as opposed to price increases, because hardware and software product prices tend to decline over time as the technology ages and some segments of the Company's products business are subject to intense price competition. In October 1995, the Company acquired Concept Automation, Inc. of America ("CAI"), which was primarily involved in the integration, sale and maintenance of electronic data processing equipment and related support services, principally to civilian agencies of the Government. Effective April 1, 1996, the Company integrated CAI's operations with those of both its Technology Systems and Integration and Network Systems business units. - 7 - 8 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 in such items. % PERIOD-TO-PERIOD PERCENTAGE OF REVENUE INCREASE OF DOLLARS --------------------- ------------------- THREE MONTHS ENDED JUNE 30, 1996 THREE MONTHS ENDED COMPARED TO JUNE 30, THREE MONTHS ENDED 1996 1995 JUNE 30, 1995 ---- ---- -------------- Revenues: Contract revenue . . . . . . . . . . . . . . . . . . . . . 27.2% 36.6% 41.8% Product sales . . . . . . . . . . . . . . . . . . . . . . . 72.8 63.4 118.6 Total revenues . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 90.6 Direct costs: Contract costs (as a % of contract revenue) . . . . . . . . 53.3 52.3 44.6 Cost of product sales (as a % of product sales) . . . . . . 87.0 83.9 126.8 Total direct costs (as a % of total revenues) . . . . . . . . . . . . . . . . . 77.8 72.3 105.1 Indirect, general and administrative expenses . . . . . . . . . 18.7 22.8 55.9 Amortization and other operating costs . . . . . . . . . . . . 0.6 0.5 112.3 Operating income . . . . . . . . . . . . . . . . . . . . . . . 2.9 4.3 27.8 Interest expense . . . . . . . . . . . . . . . . . . . . . . . 1.7 1.4 128.9 Equity in earnings of affiliate . . . . . . . . . . . . . . . . 0.5 -- 100.0 Income before provision for income taxes . . . . . . . . . . . 1.8 2.9 13.9 Provision for income taxes . . . . . . . . . . . . . . . . . . 0.8 1.2 15.4 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1.7 12.8 RESULTS OF OPERATIONS Three Months Ended June 30, 1996 Compared With Three Months Ended June 30, 1995 Revenues for the three months ended June 30, 1996 increased by $35.9 million, or 90.6%, from the three months ended June 30, 1995. Of this increase, $6.1 million was attributable to contract revenue and $29.8 million was attributable to product sales. The increase in contract revenue during the three months ended June 30, 1996 was primarily due to revenue recognized under contracts acquired in connection with the acquisition of CAI in October 1995. The increase in product sales was primarily due to approximately $17.1 million of revenue generated under a variety of sales vehicles acquired in connection with the acquisition of CAI; $12.5 million in increased sales under General Services Administration ("GSA") Schedule contracts, either directly from the Company's GSA Schedule contracts or from sales to other prime contractors with GSA Schedule contracts; $8.2 million in increased sales from open market Government orders, including orders received from both the U.S. Department of Defense and various civilian Government agencies; and $4.0 million in net increased revenues under a variety of other sales vehicles. Included in these increases is approximately $3.5 million in increased sales of Internet-related products. These increases were offset by a decrease of approximately $12.0 million in sales from purchase contracts under the Company's Basic Ordering Agreement with the North Atlantic Treaty Organization. In the three months ended June 30, 1996, approximately 88.1% of the Company's revenues were derived from contracts or subcontracts with and product sales to the Government, as compared with 90.7% for the three months ended June 30, 1995. Direct costs, expressed as a percentage of total revenue, increased from 72.3% for the three months ended June 30, 1995 to 77.8% for the three months ended June 30, 1996. Contract costs as a percentage of contract revenue increased from 52.3% in the three months ended June 30, 1995 to 53.3% in the three months ended June 30, 1996, primarily as a result of revenues generated from CAI's contracts, which typically require higher levels of material purchases than BTG's historical contract base, which has a more labor intensive, higher gross margin profile. Contract costs include labor costs, subcontract costs, material costs and other costs directly related to contract revenue. Cost of product sales as a percentage of product sales increased from 83.9% in the three months ended June 30, 1995 to 87.0% in the three months ended June 30, 1996. This increase is largely attributable to the inclusion of CAI's product sales. - 8 - 9 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 the three months ended June 30, 1996 increased by $5.0 million, or 55.9%, from the same period in 1995. The increase was due primarily to indirect expenses incurred by CAI, which were not included in the three months ended June 30, 1995 since CAI was not acquired until October 1995, as well as from an increase in the overall volume of business as compared to the comparable period of the prior year. Expressed as a percentage of total revenues, indirect, general and administrative expenses decreased for the three months ended June 30, 1996 to 18.7% from 22.8% in the three months ended June 30, 1995. This decrease is reflective of both the significant growth in revenue generated from product sales, which typically requires less infrastructure support than does contract revenue, and the acquisition of CAI, which has historically required a relatively lower level of indirect costs to support its revenues. Amortization and other operating costs, which include both amortization expense associated with goodwill and other intangible assets and other operating expenses which are non-reimbursable under Government contracts, increased by $237,000 in the three months ended June 30, 1996 as compared with the comparable period of the prior year. This increase is primarily attributable to the amortization expense associated with the goodwill and other intangible assets created as a result of the acquisition of CAI in October 1995. Interest expense for the three months ended June 30, 1996 increased by $713,000, or 128.9%, from the comparable period of the prior year. This increase was due in large part to interest paid on borrowings related to the Company's acquisition of CAI. In addition, the growth in revenue in the three months ended June 30, 1996, as well as the higher volume of product orders projected for the quarterly period ending September 30, 1996, resulted in higher receivable, inventory and prepaid expense balances, thereby resulting in higher levels of required financing under the Company's line of credit. Equity in earnings of affiliate was $397,000 during the three months ended June 30, 1996, and resulted from the Company's interest in an unincorporated joint venture. The joint venture entity, which is with an unrelated company, was created for the purpose of performing under a specific contract and was acquired by the Company in connection with its acquisition of CAI. The Company's effective tax rate increased from 42.4% in the three months ended June 30, 1995 to 43.0% in the three months ended June 30, 1996. This increase is primarily attributable to the additional goodwill and intangible asset amortization expense, which is not deductible for income tax purposes. Net income for the three months ended June 30, 1996 increased by $86,000, or 12.8%, from the three months ended June 30, 1995, due to the reasons discussed above. - 9 - 10 LIQUIDITY AND CAPITAL RESOURCES Net cash of approximately $6.9 million was used in operating activities during the three months ended June 30, 1996. This net use of cash largely resulted from a significant increase in accounts receivable, which was due to the revenue growth experienced by the Company during the three months ended June 30, 1996. In addition, increases in both inventory and prepaid expenses offset by increases in accounts payable and accrued expenses contributed to the net use of cash in the three months ended June 30, 1996. Investing activities used cash of approximately $666,000 during the three months ended June 30, 1996. This was largely the result of a $200,000 investment made in a privately-held company primarily involved in Internet/intranet information protection products and services, and a $300,000 convertible note purchased from the same company. In addition, the Company invested cash of approximately $166,000 in the purchase of office and computer-related equipment for use in the performance of contracts and for increased efficiency in the Company's administration. During the three months ended June 30, 1996, the Company's financing activities provided cash of approximately $7.6 million, resulting primarily from $7.5 million in increased borrowings under the Company's revolving line of credit used to fund working capital needs. As of June 30, 1996, working capital was $56.9 million, compared to $47.9 million at March 31, 1996. This increase is primarily due to an increase in the volume of business in the three months ended June 30, 1996, which resulted in significantly higher accounts receivable balances. At June 30, 1996, the Company had approximately $11.7 million available for borrowing under its revolving line of credit facility. The Company believes that its revolving line of credit facility and cash generated from operations will be sufficient to fund the Company's activities for the foreseeable future. - 10 - 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or any subsidiary is a party or to which any of their property is subject, other than ordinary routine litigation incidental to the business of the Company or any subsidiary. ITEM 2. CHANGES IN SECURITIES No changes in security holders' rights have taken place. ITEM 3. DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities have taken place. ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS No matters were submitted to a vote of security holders during the period. ITEM 5. OTHER INFORMATION No information to report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS The following exhibits are either filed with this Report or are incorporated herein by reference: 3.1 Amended and Restated Articles of Incorporation of the Company * 3.2 Amended and Restated Bylaws of the Company * 4.1 Specimen certificate of share of Common Stock * 11 Statement regarding computation of per share earnings 27 Financial Data Schedule -------------------------------------------------------------------- * Incorporated by reference to the Company's registration statement on Form S-1 (File No. 33-85854). B. REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the quarter ended June 30, 1996. - 11 - 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 13, 1996 BTG, INC. /s/ John M. Hughes --------------------------------- John M. Hughes Duly Authorized Signatory and Chief Financial Officer - 12 - 13 EXHIBIT INDEX Exhibit No. Exhibit - ----------- ------- 3.1 Amended and Restated Articles of Incorporation of the Company. * 3.2 Amended and Restated Bylaws of the Company. * 4.1 Specimen certificate of share of Common Stock. * 11 Statement regarding computation of per share earnings. 27 Financial Data Schedule - ------------------------------------------- * Incorporated by reference to the Company's registration statement on Form S-1 (File No. 33-85854). - 13 -