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, 1999 [ ] 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) 3877 FAIRFAX RIDGE ROAD, FAIRFAX, VIRGINIA 22030-7448 - ------------------------------------------------------------------------------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 383-8000 --------------------------------- 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 4, 1999 - ------------------------------------ ----------------------------- COMMON STOCK 8,865,281 2 BTG, INC. INDEX TO FORM 10-Q PAGE NUMBER PART I. FINANCIAL INFORMATION ------------ Item 1. Financial Statements Consolidated Interim Balance Sheets, June 30, 1999 (unaudited) and March 31, 1999 3 Consolidated Interim Statements of Operations for the three months ended June 30, 1999 and 1998 (unaudited) 4 Consolidated Interim Statements of Cash Flows for the three months ended June 30, 1999 and 1998 (unaudited) 5 Notes to Consolidated Interim Financial Statements (unaudited) 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14-15 SIGNATURES 16 EXHIBIT INDEX 17 - 2 - 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BTG, INC. AND SUBSIDIARIES CONSOLIDATED INTERIM BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, MARCH 31, 1999 1999 ------------ ----------- ASSETS (unaudited) Current assets: Receivables, net..................................................... $ 63,843 $ 53,281 Inventory, net....................................................... 431 378 Prepaid expenses..................................................... 3,128 2,786 Deferred income taxes................................................ 3,360 3,360 Other................................................................ 1,522 1,486 ------------ ----------- Total current assets............................................... $ 72,284 $ 61,291 ------------ ----------- Property and equipment, net............................................ 6,018 5,202 Goodwill, net.......................................................... 15,035 15,211 Investments in unconsolidated affiliates............................... 6,429 6,429 Deferred income taxes.................................................. 462 462 Other.................................................................. 1,775 1,782 ------------ ----------- $ 102,003 $ 90,377 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt................................. $ 1,700 $ 1,700 Accounts payable..................................................... 23,491 18,203 Accrued expenses..................................................... 11,820 11,050 Other................................................................ 3,535 3,443 ------------ ----------- Total current liabilities.......................................... $ 40,546 $ 34,396 Line of credit, excluding current maturities........................... 22,334 17,666 Other liabilities...................................................... 2,284 2,304 ------------ ----------- Total liabilities.................................................... $ 65,164 $ 54,366 ------------ ----------- Shareholders' equity: Preferred stock, no par value, 1,000,000 shares authorized; no shares issued or outstanding....................................... $ -- $ -- Common stock, no par value, 20,000,000 shares authorized; 8,821,467 and 8,852,205 shares issued and outstanding at June 30, 1999 and March 31, 1999, respectively................................... 54,952 54,860 Accumulated deficit.................................................. (17,569) (18,534) Treasury stock, at cost, 88,000 and 53,000 shares outstanding at June 30, 1999 and March 31, 1999, respectively .................... (544) (315) ------------ ----------- Total shareholders' equity........................................... $ 36,839 $ 36,011 ------------ ----------- $ 102,003 $ 90,377 ============ =========== See notes to consolidated interim financial statements. - 3 - 4 BTG, INC. AND SUBSIDIARIES CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED JUNE 30, -------------------------------------- 1999 1998 Revenue: -------- ----------- Contract revenue................................ $ 48,564 $ 39,693 Product sales................................... 17,781 44,386 ------------ ----------- 66,345 84,079 Direct costs: Contract costs.................................. 31,528 25,652 Cost of product sales........................... 17,297 42,677 ------------ ----------- 48,825 68,329 Indirect, general and administrative expenses........................................ 15,209 14,719 Amortization expense............................. 174 173 ------------ ----------- 64,208 83,221 ------------ ----------- Operating income................................. 2,137 858 Interest expense, net............................ (429) (1,682) Gain on sale of investments...................... -- 1,051 ------------ ----------- Income from continuing operations before income taxes................................... 1,708 227 Provision for income taxes....................... 743 90 ------------ ----------- Income from continuing operations................ 965 137 Loss from discontinued operations, net of income taxes.......................................... -- (55) ------------ ----------- Net income....................................... $ 965 $ 82 ============ =========== Basic earnings (loss) per share: Income from continuing operations.............. $ 0.11 $ 0.02 Loss from discontinued operations.............. -- (0.01) ------------ ----------- Net income..................................... $ 0.11 $ 0.01 ============ =========== Diluted earnings (loss) per share: Income from continuing operations.............. $ 0.11 $ 0.02 Loss from discontinued operations.............. -- (0.01) ------------ ----------- Net income..................................... $ 0.11 $ 0.01 ============ =========== Weighted average shares outstanding (used in the calculation of basic per share results)......... 8,840 8,679 ============ =========== Weighted average shares outstanding (used in the calculation of diluted per share results)....... 8,846 8,743 ============ =========== See notes to consolidated interim financial statements. - 4 - 5 BTG, INC. AND SUBSIDIARIES CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) THREE MONTHS ENDED JUNE 30, ------------------------------------ 1999 1998 ------------ ------------- Cash flows from operating activities: Net income...................................................................... $ 965 $ 82 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Loss on discontinued operations................................................ -- 55 Depreciation and amortization.................................................. 654 632 Reserves for accounts receivable and inventory 90 30 Deferred income taxes.......................................................... -- 102 Gain on sale of investments.................................................... -- (1,051) Changes in assets and liabilities, net of the effects from purchases of subsidiaries: (Increase) decrease in receivables............................................ (10,622) 59,110 (Increase) decrease in inventory.............................................. (83) 227 (Increase) decrease in prepaids and other..................................... (482) 5,199 (Increase) decrease in other assets........................................... (5) 718 Increase (decrease) in accounts payable....................................... 5,288 (37,177) Increase (decrease) in accrued expenses....................................... 770 (1,849) Increase (decrease) in other liabilities...................................... 101 (753) ------------ ------------- Net cash provided by (used in) operating activities of continuing operations.................................................. $ (3,324) 25,325 Net cash used in discontinued operations.................................... -- (55) ------------ ------------- Net cash provided by (used in) operating activities.................... $ (3,324) $ 25,270 ------------ ------------- Cash flows from investing activities: Purchases of property and equipment............................................ (1,177) (145) Proceeds from sale of investments.............................................. -- 18,906 ------------ ------------- Net cash provided by (used in) investing activities.................... $ (1,177) $ 18,761 ------------ ------------- Cash flows from financing activities: Net advances (repayments) under line of credit................................. 4,668 (30,431) Principal payments on long-term debt and capital lease obligations............. (30) (15,029) Purchases of treasury stock.................................................... (229) -- Proceeds from the issuance of common stock..................................... 92 1,429 ------------ ------------- Net cash provided by (used in) financing activities....................... $ 4,501 $ (44,031) ------------ ------------- Increase (decrease) in unrestricted cash and equivalents........................ -- -- Unrestricted cash and equivalents, beginning of period.......................... -- -- ------------ ------------- Unrestricted cash and equivalents, end of period................................ $ -- $ -- ============ ============= See notes to consolidated interim financial statements. - 5 - 6 BTG, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS JUNE 30, 1999 (Unaudited) 1. BASIS OF PRESENTATION The consolidated interim financial statements included herein have been prepared by BTG, Inc. and Subsidiaries (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 prepared 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, 1999. The results of operations for the three-month period ended June 30, 1999, are not necessarily indicative of the results to be expected for the full fiscal year ending March 31, 2000. 2. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130") during its fiscal 1999. Statement 130 established standards for reporting and presenting comprehensive income and its components in consolidated financial statements. Comprehensive income is defined as net income plus the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. For the three-month period ended June 30, 1999, the Company had no other comprehensive income. The Company had other comprehensive income resulting from unrealized holding gains on available-for-sale investments for the three-month period ended June 30, 1998 as follows (in thousands): Net income . . . . . . . . . . . . . . . . . . $ 82 Other comprehensive income: Unrealized gains on investments, net of income taxes of $445 . . . . . . . . . . . . . . . . 722 ----------- Comprehensive income . . . . . . . . . . . . . $ 804 =========== 3. SEGMENT REPORTING The Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131") during its fiscal 1999. Statement 131 established 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. Business segments, as defined in Statement 131, are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance. The financial information - 6 - 7 is required to be reported on the basis that it is used internally for evaluating the segment performance. Under Statement 131, the Company had two reportable segments in its prior fiscal year. The segment which resulted from the Company's product reselling division, however, had no operating activity in the fiscal quarter ended June 30, 1999 and, due to the divestiture of this division in February 1998, the Company anticipates no future operating activity. Accordingly, there are no interim period disclosure requirements relevant to the financial reporting period ended June 30, 1999. 4. PROPERTY AND EQUIPMENT In March 1999, the Company began implementing an enterprise-wide financial information system. External direct costs of materials and services and payroll-related costs of employees working on development of the software system portion of the project are being capitalized. During the three-month period ended June 30, 1999, approximately $870,000 of costs associated with the acquisition and development of the system have been capitalized. Once the system is made available for its intended use, the related capitalized costs will be amortized over the estimated useful life of the asset. Training costs and costs to reengineer business processes are being expensed as incurred. 5. RECLASSIFICATION Certain amounts in the prior period's interim financial statements have been reclassified to conform to the fiscal 2000 presentation. - 7 - 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE MATTERS DISCUSSED IN THIS FORM 10-Q INCLUDE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS OR UNCERTAINTIES. WHILE FORWARD-LOOKING STATEMENTS ARE SOMETIMES PRESENTED WITH NUMERICAL SPECIFICITY, THEY ARE BASED ON VARIOUS ASSUMPTIONS MADE BY MANAGEMENT REGARDING FUTURE CIRCUMSTANCES OVER MANY OF WHICH THE COMPANY HAS LITTLE OR NO CONTROL. FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY WORDS INCLUDING "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT" AND SIMILAR EXPRESSIONS. THE COMPANY CAUTIONS READERS THAT FORWARD-LOOKING STATEMENTS, INCLUDING WITHOUT LIMITATION, THOSE RELATING TO THE COMPANY'S FUTURE BUSINESS PROSPECTS, REVENUES, WORKING CAPITAL, LIQUIDITY, AND INCOME, ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT WOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM FORWARD-LOOKING STATEMENTS INCLUDE THE CONCENTRATION OF THE COMPANY'S REVENUES FROM GOVERNMENT CLIENTS, RISKS INVOLVED IN CONTRACTING WITH THE GOVERNMENT, DIFFICULTIES THE COMPANY MAY HAVE IN ATTRACTING, RETAINING AND MANAGING PROFESSIONAL AND ADMINISTRATIVE STAFF, FLUCTUATIONS IN QUARTERLY RESULTS, RISKS RELATED TO ACQUISITIONS, RISKS RELATED TO COMPETITION AND THE COMPANY'S ABILITY TO CONTINUE TO WIN AND PERFORM EFFICIENTLY ON GOVERNMENT CONTRACTS, AND OTHER RISKS AND FACTORS IDENTIFIED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SEC, INCLUDING THOSE IDENTIFIED UNDER THE CAPTION "RISK FACTORS" IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 (SEC FILE NO. 333-16899) WHICH HEREBY IS INCORPORATED BY REFERENCE. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED. GENERAL BTG, Inc. ("BTG" or the "Company") is an information systems and technical services company providing complete solutions to a broad range of the complex systems needs of the United States Government and its agencies and departments (the "Government") and other commercial and state and local government customers. Currently, the Company provides systems development, integration, engineering and network design, implementation and security information services (the "Systems Business"). Prior to fiscal 1999, the Company operated a division which was responsible for reselling computer hardware and software products (the "Product Reselling Business"), principally to the Government. The Company's revenue has historically been 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 typically 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. Product sales tend to be seasonal, with the Company's second and third fiscal quarters typically accounting for the greatest proportion of revenue 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. 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. On January 26, 1999, BTG completed the acquisition of STAC, Inc. ("STAC") an analysis and software development company headquartered in Fairfax, Virginia. The Company purchased all of the common stock of STAC for approximately $6.4 million, $1.5 million of - 8 - 9 which was contingent on certain stock market indices which were subsequently satisfied. The Company has accounted for this acquisition using the purchase method of accounting, and accordingly, the results of operations of STAC have been included in the Company's consolidated statement of operations since the date of the acquisition. 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: % PERIOD-TO-PERIOD INCREASE (DECREASE) PERCENTAGE OF REVENUE OF DOLLARS --------------------- -------------------- THREE MONTHS ENDED JUNE 30, 1999 THREE MONTHS ENDED COMPARED TO JUNE 30, THREE MONTHS ENDED 1999 1998 JUNE 30, 1998 ---- ---- ------------- Revenue: Contract revenue....................................... 73.2% 47.2% 22.3% Product sales.......................................... 26.8 52.8 (59.9) Total revenue......................................... 100.0 100.0 (21.1) Direct costs: Contract costs (as a % of contract revenue)............ 64.9 64.6 22.9 Cost of product sales (as a % of product sales)........ 97.3 96.2 (59.5) Total direct costs (as a % of total revenues)......... 73.6 81.3 (28.5) Indirect, general and administrative expenses........... 22.9 17.5 3.3 Amortization expense.................................... 0.3 0.2 0.6 Operating income........................................ 3.2 1.0 149.1 Interest expense, net................................... 0.6 2.0 (74.5) Gain on sale of investments............................. -- 1.3 (A) Income from continuing operations before income taxes... 2.6 0.3 652.4 Provision for income taxes.............................. 1.1 0.1 723.3 Income from continuing operations....................... 1.5 0.2 605.7 Loss from discontinued operations, net of income taxes.. -- 0.1 (A) Net income.............................................. 1.5 0.1 1,076.8 (A) There was no expense or income in the comparison year. Three Months Ended June 30, 1999 Compared With Three Months Ended June 30, 1998 During the three months ended June 30, 1999, there was a net decrease in revenue of $17.7 million, or 21.1%, from the three months ended June 30, 1998. Contract revenue increased $8.9 million and was offset by a decrease of $26.6 million attributable to product sales. The increase in contract revenue during the three months ended June 30, 1999 was primarily due to $5.4 million in revenue generated by new contracts of the Company's Delta Research division and $2.9 million of revenue recognized under contracts acquired in connection with the acquisition of STAC. The decrease in product sales was primarily due to the sale to Government Technology Services, Inc. ("GTSI") of substantially all of BTG's product reselling operating division (the "GTSI Transaction"). Included in product sales during the three months ended June 30, 1998 was $34.1 million of revenue resulting from certain contracts awarded to BTG's product reselling division in a prior year which were subcontracted to GTSI as part of the GTSI Transaction. The Company entered into an agreement to novate these contracts to GTSI during fiscal 1999. In the three months ended June 30, 1999, approximately 94.4% of the Company's revenue was derived from contracts or subcontracts with and product sales to the Government, as compared with 94.2% for the three months ended June 30, 1998. Direct costs, expressed as a percentage of total revenue, decreased from 81.3% for the three months ended June 30, 1998 to 73.6% for the three months ended June 30, 1999, primarily due to the higher percentage of contract-related business. Contract costs include labor costs, subcontract costs, material costs and other costs directly related to contract revenue. Contract costs as a percentage of contract revenue increased slightly from 64.6% in - 9 - 10 the three months ended June 30, 1998 to 64.9% in the three months ended June 30, 1999. Cost of product sales as a percentage of product sales increased from 96.2% in the three months ended June 30, 1998 to 97.3% in the three months ended June 30, 1999, primarily due to higher than anticipated warranty costs associated with products sold by the Company prior to the GTSI Transaction. 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, 1999 increased by $490,000, or 3.3%, from the same period in 1998. This increase was due primarily to incremental expenses associated with the ongoing operations of the STAC acquisition. Expressed as a percentage of total revenues, indirect, general and administrative expenses increased for the three months ended June 30, 1999 to 22.9% from 17.5% in the three months ended June 30, 1998, principally due to the decreased proportion of total revenue derived from product sales. Amortization expense, which includes the amortization of goodwill and other intangible assets, remained consistent in the three months ended June 30, 1999 as compared with the comparable period of the prior year. Interest expense for the three months ended June 30, 1999 decreased by $1.3 million, or 74.5%, from the comparable period of the prior year. This decrease was due to a significantly lower average balance outstanding under the Company's line of credit facility. Cash used to reduce outstanding debt was primarily generated from the collection of outstanding receivables. Principally as the result of the divestiture of its product reselling division, the Company's working capital requirements have been significantly reduced when compared to the prior year. Income tax expense, as a percentage of income from continuing operations before income taxes, increased to 43.5% in the three months ended June 30, 1999, from 39.6% in the comparable period of the prior year. The Company recognized a loss of $55,000, net of income tax benefits, during the three-month period ended June 30, 1998 as a result of the discontinuance of the non-strategic operations of a retail computer store outlet. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is hereby incorporated by reference to the Company's annual report on Form 10-K for the year ended March 31, 1999, filed with the Securities and Exchange Commission on June 28, 1999. There have been no material changes in the Company's market risk from that disclosed in the Company's 1999 Form 10-K. LIQUIDITY AND CAPITAL RESOURCES Net cash of approximately $3.3 million was used in operating activities during the three months ended June 30, 1999. This largely resulted from a $10.6 million increase in outstanding receivables offset by a $6.1 million increase in payables and accrued expenses, both of which are reflective of the Company's increased business volume. Investing activities used $1.2 million during the three months ended June 30, 1999. This was primarily due to the Company's ongoing development and implementation of an enterprise-wide financial and project management software system. During the three months ended June 30, 1999, the Company's financing activities provided cash of approximately $4.5 million. This resulted primarily from $4.7 million in - 10 - 11 borrowings made under the Company's revolving line of credit facility offset by $229,000 used for the purchase of treasury stock. As of June 30, 1999, working capital was $31.7 million, compared to $26.9 million at March 31, 1999. At June 30, 1999, the Company had approximately $13.1 million available for borrowing under its revolving line of credit facility. YEAR 2000 COMPLIANCE The Year 2000 (or "Y2K") problem arises from the standard use of two digit fields to hold the (four digit) year in a date. The scope of the Y2K problem goes beyond simply "fixing" the calendar so that it rolls over correctly on December 31, 1999. In many systems, the two-digit year field with the characters "99" triggers special logic. This was a standard and accepted practice for decades. The problem also includes leap year calculations, specialized clock functions (i.e., Global Positioning System), and embedded systems. Embedded systems can be looked at as computer chips or automated devices involving software, microcode, firmware, and EPROM program code. These automated devices typically perform their intended functions over long periods of time without error, unless there is a physical defect in the code. Typical systems that contain embedded software are fire suppression systems, security systems, elevator control, lighting management systems, and telephone systems. Virtually every item that uses electricity is a possible candidate for a Year 2000 problem. Systems that do not properly recognize date-related information could, among other things, fail to operate, operate incorrectly, or fail to exchange data properly with other systems. This could result in major system failures and the disruption of business operations. Assessments of the global impact of this problem vary, and it is therefore not possible to predict what the impact on the Company may be. The Company has established a Year 2000 Committee to conduct this analysis, to lead the Company's efforts to achieve Y2K compliance, and to advise senior management on risks and solutions. The Committee has initiated a number of assessments, gathered information, conducted tests, and prepared plans to address the Year 2000 problem. The Company expects this process to continue throughout calendar 1999 and into the first quarter of calendar 2000. However, there can be no assurances that corrective action will be completed before any Year 2000 problems occur, or that costs will not be greater than anticipated. The Company has reviewed its internal operations, including the physical plant, computer programs, and other systems on which its operations rely. Based on this assessment, an action plan has been developed. It includes obtaining supplier certifications, obtaining and installing vendor-provided software upgrades, and replacing affected systems where necessary. Specifically, the core financial system utilized by the Company was not Y2K compliant. During December 1998, the system was upgraded to a Y2K compliant version. This upgrade included vendor supplied applications, new versions of operating systems, and new hardware. Full end-to-end system tests were conducted and discrepancies corrected. It should be noted that the Company's fiscal 2000 began on April 1, 1999 and the upgraded accounting system has had no Y2K related problems. The cost of this upgrade was included in the normal, annual maintenance expenses for the system. Other corporate systems have been evaluated to determine appropriate courses of action. Embedded systems (principally security systems) have been examined and upgraded to Y2K compliant versions. The Company expects to complete remediation of all critical internal systems by September 1999. In the ordinary course of its business, the Company spends a portion of its information technology budget on maintenance and upgrades to its corporate information technology infrastructure. During fiscal 1999, the Company incurred an additional $126,000 for specific Year 2000 remediation, out of a total information technology budget of $5.2 million. These costs were expensed as incurred. The estimate for Year 2000 remediation, in addition to ordinary information technology expenses, for fiscal 2000 is $470,000, out of a total information - 11 - 12 technology budget of $6.2 million. A portion of this amount will be used to acquire capital equipment which would not otherwise have been purchased until a future period. The Company believes there is a risk that other parties with whom it deals may be relying on systems that could experience Year 2000 problems. This includes the Company's largest customer, the Government, whose Year 2000 remediation efforts are known to be underway. Based on information currently available, the Company does not believe it will suffer a materially adverse affect by the Year 2000 problems of the Government or its other customers. It should be noted that should Y2K noncompliance by the Government or any other customer disrupt the Company's receipt of payments, the Company would expect to increase its short-term borrowings, which could materially increase the Company's interest expenses. In addition, there is a risk that customers will reduce funding on contracts awarded to the Company in order to fund Year 2000 remediation. To the extent the Company is not the provider of that remediation, this would affect the Company's revenues. The Company has taken steps to assure itself that the financial institutions, utilities, and service providers with whom it deals will not experience Year 2000 problems that would materially and adversely affect the Company. In addition, the Company has obtained commitments from suppliers of products for resale that such products will be Y2K compliant. Although the Company believes that essential operations and services will not be affected, any failures or delays could disrupt the Company's business and cause it to incur substantial expense. The Company has undertaken an assessment of the extent to which products it has developed and resold are Y2K compliant. The Company is aware that the distribution of non-Y2K compliant products could give rise to customer claims against the Company. With respect to BTG-branded products, which it stopped manufacturing in 1998, the Company will provide, when and where appropriate, BIOS upgrades and software utilities, to bring such products to a level of Year 2000 compliance, when possible. The Company cannot estimate the outcome of such claims or their effect on the Company, but believes that most such claims, if any, would be without merit. There can be no assurances that the Company will not experience delay in, or increased cost associated with, the implementation of its Year 2000 remediation plan, and the Company's inability to implement such plan could have an adverse effect on future results of operations. In addition, there can be no assurance that the Company will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in the technology used in its internal systems, which are comprised of third party software, third party hardware that contains embedded software, and the Company's own branded-products. The most reasonably likely worst case scenarios would include: (i) corruption of data contained in the Company's internal information systems, (ii) hardware failure, (iii) the failure of infrastructure services provided by government agencies and other third parties (e.g., providers of electricity, phone service, water transport, etc.), and (iv) the inability of the Government or any other customer to make timely payments on Company invoices. The Company is continuing to prepare its contingency planning, which will include among other things, manual "work-arounds" for software and hardware failures, as well as substitution of systems, if necessary. The statements above describing the Company's plans and objectives for handling Year 2000 issues and the expected impact of the Year 2000 issue on the Company are forward-looking statements. Those statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed above. Factors that might cause such a difference include, but are not limited to, delays in executing the plan outlined above and increased or unforeseen costs associated with the implementation of the plan and any necessary changes to the Company's systems - 12 - 13 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 None 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 None 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 Amendment to the Amended and Restated Articles of Incorporation of BTG, Inc. (incorporated by reference to BTG, Inc.'s Form 10-Q for the quarter ended September 30, 1997). 3.2 Amended and Restated Articles of Incorporation of BTG, Inc. (incorporated by reference to BTG, Inc.'s Form 10-Q for the quarter ended September 30, 1997). 3.3 Amended and Restated By-laws of BTG, Inc. (incorporated by reference to exhibit 3.4 to BTG, Inc.'s registration statement on Form S-1 (File No. 33-85854)). 4.1 Specimen certificate of share of Common Stock (incorporated by reference to exhibit 4.3 to BTG, Inc.'s registration statement on Form S-8 (File No. 33-97302)). 11 Statement regarding computation of per share earnings. 27 Financial data schedule. - 13 - 14 B. REPORTS ON FORM 8-K August 4, 1999 BTG reported that KPMG LLP's appointment as certifying accountants was terminated and Deloitte & Touche LLP was engaged as certifying accountants - 14 - 15 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 16, 1999 BTG, INC. /s/ Todd A. Stottlemyer ----------------------- Todd A. Stottlemyer Duly Authorized Signatory and Chief Financial and Administrative Officer - 15 - 16 EXHIBIT INDEX Exhibit No. Exhibit - ----------- ------- 3.1 Amendment to the Amended and Restated Articles of Incorporation of BTG, Inc. (incorporated by reference to BTG, Inc.'s Form 10-Q for the quarter ended September 30, 1997). 3.2 Amended and Restated Articles of Incorporation of BTG, Inc. (incorporated by reference to BTG, Inc.'s Form 10-Q for the quarter ended September 30, 1997). 3.3 Amended and Restated By-laws of BTG, Inc. (incorporated by reference to exhibit 3.4 to BTG, Inc.'s registration statement on Form S-1 (File No. 33-85854)). 4.1 Specimen certificate of share of Common Stock (incorporated by reference to exhibit 4.3 to BTG, Inc.'s registration statement on Form S-8 (File No. 33-97302)). 11 Statement regarding computation of per share earnings. 27 Financial data schedule. - 16 -