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 SEPTEMBER 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.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 54-1194161
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(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 OCTOBER 27, 1999
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COMMON STOCK 8,878,855
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BTG, INC.
INDEX TO FORM 10-Q
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Interim Balance Sheets, September 30, 1999 (unaudited)
and March 31, 1999 3
Consolidated Interim Statements of Operations for the three
months ended September 30, 1999 and 1998 and the six
months ended September 30, 1999 and 1998 (unaudited) 4
Consolidated Interim Statements of Cash Flows for the six
months ended September 30, 1999 and 1998 (unaudited) 5
Notes to Consolidated Interim Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-13
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 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BTG, INC. AND SUBSIDIARIES
CONSOLIDATED INTERIM BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, MARCH 31,
1999 1999
------------------ ---------------
ASSETS (unaudited)
Current assets:
Receivables, net............................................................... $ 61,460 $ 53,281
Inventory, net................................................................. 105 378
Prepaid expenses............................................................... 2,621 2,786
Other.......................................................................... 4,678 4,846
--------------- ---------------
Total current assets........................................................ $ 68,864 $ 61,291
--------------- ---------------
Property and equipment, net...................................................... 7,131 5,202
Goodwill, net.................................................................... 14,861 15,211
Other intangible assets, net..................................................... - 48
Restricted investments........................................................... 6,429 6,429
Other ........................................................................... 2,277 2,196
--------------- ---------------
$ 99,562 $ 90,377
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................................... $ 425 $ 1,700
Accounts payable............................................................... 21,664 18,203
Accrued expenses............................................................... 12,747 11,050
Other.......................................................................... 3,222 3,443
--------------- ---------------
Total current liabilities.................................................. $ 38,058 $ 34,396
Line of credit................................................................... 21,903 17,666
Other liabilities................................................................ 1,715 2,304
--------------- ---------------
Total liabilities........................................................... $ 61,676 $ 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; 8,862,635
and 8,852,205 shares issued and outstanding at September 30, 1999
and March 31, 1999, respectively.............................................. 55,054 54,860
Accumulated deficit............................................................ (16,504) (18,534)
Treasury stock, at cost, 104,200 and 53,000 shares at September 30, 1999 ......
and March 31, 1999 respectively............................................... (664) (315)
--------------- ---------------
Total shareholders' equity.................................................. $ 37,886 $ 36,011
--------------- ---------------
$ 99,562 $ 90,377
=============== ===============
See notes to consolidated interim financial statements (unaudited).
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BTG, INC. AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
Revenues:
Contract revenue.................................... $ 49,810 $ 43,880 $ 98,365 $ 83,573
Product sales....................................... 14,101 43,803 31,882 88,190
--------------- --------------- --------------- ---------------
63,911 87,683 130,247 171,763
Direct costs:
Contract costs...................................... 32,629 28,925 64,148 54,576
Cost of product sales............................... 13,529 42,294 30,826 84,973
--------------- --------------- --------------- ---------------
46,158 71,219 94,974 139,549
Indirect, general and administrative expenses......... 15,041 14,826 30,250 29,545
Amortization expense.................................. 174 180 348 353
--------------- --------------- --------------- ---------------
61,373 86,225 125,572 169,447
Operating income...................................... 2,538 1,458 4,675 2,316
Interest expense...................................... (448) (836) (877) (2,518)
Equity in earnings of unconsolidated affiliate........ - 24 - 24
Gain (loss) on sale of investments.................... - (404) - 647
--------------- --------------- --------------- ---------------
Income (loss) from continuing operations
before income taxes................................ 2,090 242 3,798 469
Income tax expense.................................... 909 97 1,652 187
--------------- --------------- --------------- ---------------
Income (loss) from continuing operations.............. 1,181 145 2,146 282
Loss from discontinued operations,
net of income taxes................................ (116) (52) (116) (107)
--------------- --------------- --------------- ---------------
Net income ........................................... $ 1,065 $ 93 $ 2,030 $ 175
=============== =============== =============== ===============
Basic earnings per share:
Income from continuing operations..................... $ 0.13 $ 0.02 $ 0.24 $ 0.03
Loss from discontinued operations..................... (0.01) (0.01) (0.01) (0.01)
--------------- --------------- --------------- ---------------
Net income.......................................... $ 0.12 $ 0.01 $ 0.23 $ 0.02
=============== =============== =============== ==============
Diluted earnings per share:
Income from continuing operations..................... $ 0.13 $ 0.02 $ 0.24 $ 0.03
Loss from discontinued operations..................... (0.01) (0.01) (0.01) (0.01)
--------------- --------------- --------------- ---------------
Net income ........................................... $ 0.12 $ 0.01 $ 0.23 $ 0.02
=============== =============== =============== ==============
Weighted average shares outstanding (used in
the calculation of basic per share results)........ 8,836 8,803 8,839 8,741
=============== =============== =============== ==============
Weighted average shares outstanding (used in
the calculation of diluted per share results)...... 9,062 8,819 8,966 8,790
=============== =============== =============== ==============
See notes to consolidated interim financial statements (unaudited).
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BTG, INC. AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1999 1998
--------------- ---------------
Cash flows from operating activities:
Net income ....................................................................... $ 2,030 $ 175
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Loss on discontinued operations................................................. 116 107
Depreciation and amortization................................................... 1,137 1,244
Deferred income taxes........................................................... -- (94)
Reserves for accounts receivable and inventory.................................. 245 100
Loss on sale or disposal of property and equipment.............................. 86 --
Gain on sale of investments..................................................... -- (647)
Equity in earnings of unconsolidated affiliate.................................. -- (24)
Changes in assets and liabilities, net of the effects from purchases of
subsidiaries:
(Increase) decrease in receivables............................................. (8,364) 69,846
(Increase) decrease in inventory............................................... (38) 628
(Increase) decrease in income taxes receivable................................. 32 8,848
(Increase) decrease in prepaid expenses and other current assets............... 301 3,516
(Increase) decrease in other assets............................................ (81) 44
Increase (decrease) in accounts payable........................................ 3,461 (54,287)
Increase (decrease) in accrued expenses........................................ 1,697 1,315
Increase (decrease) in other liabilities....................................... (503) (1,428)
--------------- ---------------
Net cash provided by (used in) operating activities of
continuing operations................................................ 119 29,343
Net cash provided by (used in) discontinued operations...................... 135 (107)
--------------- ---------------
Net cash provided by (used in) operating activities............ $ 254 $ 29,236
--------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment............................................. (3,009) (319)
Proceeds from sale of investments............................................... -- 23,970
--------------- ---------------
Net cash provided by (used in) investing activities............. $ (3,009) $ 23,651
--------------- ---------------
Cash flows from financing activities:
Net advances (repayments) under line of credit.................................. 4,237 (39,510)
Principal payments on long-term debt and capital lease obligations.............. (1,327) (15,049)
Proceeds from the issuance of common stock...................................... 194 1,704
Purchase of treasury stock...................................................... (349) (32)
--------------- ---------------
Net cash provided by (used in) financing activities............ $ 2,755 $ (15,887)
--------------- ---------------
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 (unaudited).
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BTG, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 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 six-month period ended
September 30, 1999, are not necessarily indicative of the results to be expected
for the full fiscal year ending March 31, 2000.
2. 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 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 three-month and six-month
periods ended September 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 periods ended September 30, 1999.
3. 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 six-month period ended
September 30, 1999, approximately $2.3 million 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.
4. RECLASSIFICATION
Certain amounts in the prior period's interim financial statements have
been reclassified to conform to the fiscal 2000 presentation.
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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
SECTION ENTITLED "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 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"). During fiscal 1998 and prior years, 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. To the extent the Company continues to
have product sales, such product sales are typically 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.
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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 which was contingent on the achievement of certain
stock market thresholds 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
PERCENTAGE OF REVENUE INCREASE (DECREASE) OF DOLLARS
--------------------------------------------------- ------------------------------
THREE MONTHS SIX MONTHS
THREE MONTHS ENDED SIX MONTHS ENDED ENDED SEPT. ENDED SEPT.
SEPTEMBER 30, SEPTEMBER 30, 30, 1999 30, 1999
--------------------- ----------------- COMPARED TO COMPARED TO
THREE MONTHS SIX MONTHS
ENDED SEPT. ENDED SEPT.
1999 1998 1999 1998 30, 1998 30, 1998
---- ---- ---- ---- ------------- ----------------
Revenue:
Contract revenue.................... 77.9% 50.0% 75.5% 48.7% 13.5% 17.7%
Product sales....................... 22.1 50.0 24.5 51.3 (67.8) (63.8)
Total revenue.................... 100.0 100.0 100.0 100.0 (27.1) (24.2)
Direct costs:
Contract costs (as a % of
contract revenue)................ 65.5 65.9 65.2 65.3 12.8 17.5
Cost of product sales (as a %
of product sales)................ 95.9 96.6 96.7 96.7 (68.0) (63.7)
Total direct costs (as a %
of total revenue)............. 72.2 81.2 72.9 81.2 (35.2) (31.9)
Indirect, general and administrative
expenses............................ 23.5 16.9 23.2 17.2 1.5 2.4
Amortization expense................... 0.3 0.2 0.3 0.2 (3.3) (1.4)
Operating income....................... 4.0 1.7 3.6 1.4 74.1 101.9
Interest expense....................... 0.7 1.0 0.7 1.5 (46.4) (65.2)
Equity in earnings of affiliate ....... -- 0.0 -- 0.0 (A) (A)
Gain (loss) on sale of investments..... -- (0.4) -- 0.4 (A) (A)
Income from continuing operations
before income taxes................. 3.3 0.3 2.9 0.3 763.6 709.8
Income tax expense..................... 1.4 0.1 1.3 0.1 840.1 783.7
Income from continuing operations...... 1.9 0.2 1.6 0.2 712.7 660.8
Loss from discontinued operations, net. (0.2) (0.1) (0.1) (0.1) 121.8 8.4
Net income............................. 1.7 0.1 1.5 0.1 1,045.2 1,060.0
- --------------------------
(A) There was no expense or income in the comparison period.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998
During the three months ended September 30, 1999, there was a net decrease
in revenue of $23.8 million, or 27.1%, from the three months ended September 30,
1998. Contract revenue increased $5.9 million and was offset by a decrease of
$29.7 million attributable to product sales. The decrease in product sales was
primarily due to the sale to Government Technology Services, Inc. ("GTSI") of
substantially all of the Product Reselling Business (the "GTSI Transaction").
Included in product sales during the three months ended September 30, 1998 was
$28.6 million of revenue resulting from certain contracts awarded to
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BTG's Product Reselling Business in a prior year which were subcontracted to
GTSI as part of the GTSI Transaction (the "Royalty Contracts"). During fiscal
1999, the Company entered into an agreement to novate these contracts to GTSI.
In the three months ended September 30, 1999, approximately 90.4% of the
Company's revenue was derived from contracts or subcontracts with and product
sales to the Government, as compared with 93.6% for the three months ended
September 30, 1998.
Direct costs, expressed as a percentage of total revenue, decreased from
81.2% for the three months ended September 30, 1998 to 72.2% for the three
months ended September 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 decreased slightly from 65.9%
in the three months ended September 30, 1998 to 65.5% in the three months ended
September 30, 1999. Cost of product sales as a percentage of product sales also
decreased slightly from 96.6% in the three months ended September 30, 1998 to
95.9% in the three months ended September 30, 1999. Included in cost of product
sales for the three months ended September 30, 1999 was a $325,000 addition to
the Company's reserve for anticipated warranty costs. This warranty reserve is
related to computer hardware products sold by the Company's product reselling
division 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 September 30,1999 increased $215,000, or 1.5%, from the
same period in 1998. This increase was due primarily to incremental expenses
associated with the acquisition of STAC. Expressed as a percentage of total
revenues, indirect, general and administrative expenses increased for the three
months ended September 30, 1999 to 23.5% from 16.9% in the three months ended
September 30, 1998, principally due to the decreased proportion of total revenue
derived from product sales. As a percentage of contract revenues, these costs
decreased during the three months ended September 30, 1999 from 33.8% to 30.2%
when compared to the three months ended September 30, 1998.
Amortization expense during the three months ended September 30, 1999,
which includes the amortization of goodwill and other intangible assets,
remained fairly consistent with the amount reported in the comparable period of
the prior year.
Interest expense for the three months ended September 30, 1999 decreased by
$388,000 or 46.4%, from the comparable period of the prior year. This decrease
was due to a 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 a result of the
GTSI Transaction, 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 September 30,
1999, from 40.1% in the comparable period of the prior year.
The Company recognized a loss of $116,000, net of income taxes, during the
three-month period ended September 30, 1999 from the final disposal of the
Company's retail computer store outlet.
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 30,
1998
During the six months ended September 30, 1999, the Company experienced a
net decrease in revenues of $41.5 million, or 24.2%, as compared with the six
months ended September 30, 1998. A contract revenue increase of $14.8 million
was offset by a decrease of $56.3 million attributable to product sales.
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The decrease in product sales was primarily due to the GTSI Transaction.
Included in product sales during the six months ended September 30, 1998 was
$62.7 million of revenue resulting from the Royalty Contracts. In the six
months ended September 30, 1999, approximately 92.7% of the Company's revenues
were derived from contracts or subcontracts with and product sales to the
Government, as compared with 94.3% for the six months ended September 30, 1998.
Direct costs, expressed as a percentage of total revenues, decreased from
81.2% for the six months ended September 30, 1998 to 72.9% for the six months
ended September 30, 1999. Contract costs as a percentage of contract revenue
were virtually unchanged at 65.3% in the six months ended September 30, 1998
versus 65.2% in the six months ended September 30, 1999. Cost of product sales
as a percentage of product sales also were constant, increasing slightly from
96.4% in the six months ended September 30, 1998 to 96.7% in the six months
ended September 30, 1999 due. Included in cost of product sales for the six
months ended September 30, 1999 was a $778,000 addition to the Company's reserve
for anticipated warranty costs. This warranty reserve is related to computer
hardware products sold by the Company's product reselling division prior to the
GTSI Transaction.
Indirect, general and administrative expenses for the six months ended
September 30, 1999 increased by $705,000, or 2.4%, from the same period in 1998.
This increase was primarily due to incremental expenses associated with the
acquisition of STAC. Expressed as a percentage of total revenues, indirect,
general and administrative expenses increased for the six months ended September
30, 1999 to 23.2% from 17.2% in the six months ended September 30, 1998. This
increase is principally due to the decreased proportion of total revenue derived
from product sales. As a percentage of contract revenues, these costs decreased
during the six months ended September 30, 1999 from 35.4% to 30.8% when compared
to the three months ended September 30, 1998.
Amortization expense was relatively unchanged when comparing the six months
ended September 30, 1999 to the same period for 1998.
Interest expense for the six months ended September 30, 1999 decreased by
$1.6 million, or 65.2%, 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 line of
credit borrowings was primarily generated from the collection of outstanding
receivables. Due to the GTSI Transaction, receivables which were generated by
the Company's Product Reselling Business were not replaced with new receivables
and, thus, the collection of these amounts resulted in a permanent decrease to
the Company's working capital needs.
Income tax expense, as a percentage of income from continuing operations
before income taxes, was 43.5% in the six months ended September 30, 1999, as
compared to 39.9% for the comparable period of the prior year.
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.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash of $254,000 was provided by operating activities during the six
months ended September 30, 1999. This largely resulted from an increase in
outstanding receivables of $8.4 million, offset by net income of $2.0 million,
depreciation and amortization of $1.1 million, and increases in accounts payable
and accrued expenses of $5.2 million, all of which are reflective of the
Company's increased contract revenue volumes.
Investing activities used cash of approximately $3.0 million during the six
months ended September 30, 1999, all of which related to the purchase of
property and equipment. This was principally attributable to the Company's
implementation of 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 six-month period ended September 30, 1999, approximately
$2.3 million of costs associated with the acquisition and development of the
system have been capitalized. The Company believes that the system will be fully
implemented and in use during the quarter ending December 31, 1999.
During the six months ended September 30, 1999, the Company's financing
activities provided cash of approximately $2.8 million. This resulted primarily
from $4.2 million in borrowings under the Company's revolving line of credit
facility offset by $1.3 million used to reduce outstanding promissory notes
payable and $349,000 used for the purchase of treasury stock. In addition, the
Company received proceeds of $194,000 from the issuance of common stock under
certain employee benefit plans.
As of September 30, 1999, working capital was $30.8 million, compared to
$26.9 million at March 31, 1999. At September 30, 1999, the Company had
approximately $11.0 million available for borrowing under its revolving line of
credit facility. The Company believes that funds available under its credit
facility will be sufficient to fund the Company's cash requirements for the next
12 months.
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.
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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 and during fiscal
1999, 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 completed
remediation of all critical internal systems in 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 $261,000, out of a total
information technology budget of $6.2 million. This figure has been revised
downward from the previous quarterly estimate due to lower than anticipated
costs for server and desktop remediation. 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 be materially adversely affected
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 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
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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
"workarounds" 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.
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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
At the Company's Annual Meeting of Shareholders held on September 9,
1999, the following proposals were adopted by the margins indicated:
1. To elect two nominees for Director:
For Withheld Authority
Ruth M. Davis 7,603,430 113,776
Raymond T. Tate 7,605,905 111,301
The following Directors continued their terms of office: Edward
H. Bersoff, Alan G. Merten, Ronald L. Turner, Donald M. Wallach,
and Earle C. Williams.
2. To approve amendments to the Directors Stock Option Plan to
increase the number of option shares issuable per year to each
eligible director to 2,500 and to increase the option price from
the fair market value of the stock on the date of the grant to
110% of such fair market value:
For 5,227,747
Against 722,355
Abstain 1,709,186
3. To ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending March
31, 2000:
For 7,701,103
Against 9,340
Abstain 6,763
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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 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)).
10.1 Amended and Restated Directors Stock Option Plan.
11 Statement regarding computation of per share earnings.
27 Financial data schedule.
B. REPORTS ON FORM 8-K
August 4, 1999 BTG reported that KPMG LLP's appointment as
August 20, 1999 certifying accountants was terminated and
Deloitte & Touche LLP was engaged as certifying
accountants.
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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: November 15, 1999
/s/ Todd A. Stottlemyer
------------------------------------------
Todd A. Stottlemyer
Duly Authorized Signatory and
Chief Financial and Administrative Officer
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