10-Q 1 w45429e10-q.txt QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) 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 DECEMBER 31, 2000 [ ] 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 INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 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 FEBRUARY 12, 2001 ------------------------------- ------------------------------------- COMMON STOCK 8,931,717 2 BTG, INC. INDEX TO FORM 10-Q

-2- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BTG, INC. AND SUBSIDIARIES CONSOLIDATED INTERIM BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)

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)

See notes to consolidated interim financial statements. -4- 5 BTG, INC. AND SUBSIDIARIES CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)

See notes to consolidated interim financial statements. -5- 6 BTG, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS DECEMBER 31, 2000 (Unaudited) 1. BASIS OF PRESENTATION BTG, Inc. and subsidiaries ("we" or the "Company") have prepared the consolidated interim financial statements included herein without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). These financial statements include, in the opinion of our 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. We believe, however, that our disclosures are adequate to make the information presented not misleading. These consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report to Shareholders for the fiscal year ended March 31, 2000. The results of operations for the nine-month period ended December 31, 2000, are not necessarily indicative of the results to be expected for the full fiscal year ending March 31, 2001. 2. REVENUE RECOGNITION In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The guidelines in SAB No. 101 must be adopted by the fourth quarter of 2000. Our adoption of SAB No. 101 did not have a material impact on our financial position or results of operations. 3. COMPREHENSIVE INCOME We adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130") during fiscal 1999. SFAS 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. We had other comprehensive income resulting from unrealized holding losses on available-for-sale investments as follows (in thousands):

-6- 7 4. BUSINESS COMBINATION On April 19, 2000, we purchased substantially all of the net assets of the enterprise network solutions division, of SSDS Inc. of Colorado, for approximately $13.9 million, exclusive of our closing costs. We accounted for this acquisition using the purchase method of accounting and, accordingly, the division's results of operations have been included in the Company's consolidated statements of operations since the date of the acquisition. The purchase price was allocated to net tangible and identifiable intangible assets and liabilities based on preliminary estimates of their fair value as of the date of acquisition. The excess of purchase price over the estimated fair value of net tangible and identifiable intangible assets and liabilities acquired of approximately $9.8 million was allocated to goodwill and is being amortized on a straight-line basis over the expected period of benefit, 20 years. The final allocation of the purchase price will be determined during the subsequent fiscal year when preliminary analyses and other estimates are final. This business combination does not have a material effect on pro forma operations. 5. LONG-TERM DEBT On April 19, 2000, we issued two term notes totaling $8.0 million to each of the two financial institutions that lend to us under our line of credit facility. The principal under these notes was due in 30 equal installments beginning on May 1, 2000. Additionally, a quarterly payment was required to reduce the principal balance in excess of an established threshold. The notes included interest at our principal lender's prime rate. We used the proceeds from the term notes to finance the SSDS business combination. The principal under these notes was paid in full during October 2000. 6. RESTRICTED INVESTMENTS On October 23, 2000, we sold 1.3 million shares of common stock we held in GTSI corporation for $4.25 per share. This represented a liquidation of the remainder of our equity holdings in GTSI. As a result of this transaction, we recognized a $905,000 non-operating loss in our third quarter results. Our investment in GTSI represented all of the restricted investments included in the accompanying consolidated interim balance sheets. 7. INVESTMENT IN DOAR COMMUNCIATIONS, INC. On January 23, 2001, we signed a strategic partnership agreement with DOAR Communications, Inc. Under the terms of the agreement, we may acquire up to 19.5% of DOAR stock over the next year for a potential investment of up to $3 million. We made an initial investment in January 2001 of $1 million and will follow with a second investment of $1 million in February 2001. In return for our initial investments, we will receive 12% of the common stock of DOAR. 8. RECLASSIFICATION Certain amounts in the prior period's interim financial statements have been reclassified to conform to the fiscal 2001 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 is an information systems and technical services company. For nearly two decades, we have developed and provided solutions to the complex systems needs of the United States Government and its agencies and departments ("the Government") as well as to other commercial and state and local government customers. Our current services and solutions are focused on four principal areas: systems analysis and engineering services, solutions development, systems integration, and computer-based operations and enterprise support. Since BTG's founding, we have provided highly sophisticated software-based solutions to our customers, especially to those in the Government defense intelligence community. More recently, we have seen that the skills we have developed in working with Government agencies are increasingly useful for commercial and state and local government customers and, in this regard, we have seen that a larger percentage of our revenues has come from these customers. We believe that our key competencies include our skills in the areas of (i) information and network security, (ii) electronic commerce, (iii) technology in schools, (iv) geographic information systems, (v) Microsoft and Remedy services and solutions, (vi) modeling, simulation and training, (vii) integrated logistics support, and (viii) enterprise support services and systems management. We have an experienced management team and approximately 1,400 employees. Due to the secure nature of much of the work that we do in the Government defense and intelligence markets, over 70% of our employees have received Secret or Top Secret security clearances from the Government. Our customers include the four U.S. armed forces, many of the U.S. intelligence and civilian agencies, a variety of commercial entities including Verizon, NCR, JP Morgan, and Educational Testing Service, and a number of state and local governments in Virginia, Colorado, -8- 9 Florida, North Carolina and Oklahoma. We are headquartered in Fairfax, Virginia and have employees in over 93 locations worldwide. On April 19, 2000, we completed the acquisition of the enterprise network solutions division of SSDS Inc. of Colorado. We purchased substantially all of the net assets of the SSDS division for approximately $13.9 million. We have accounted for this acquisition using the purchase method of accounting, and accordingly, the results of operations of the SSDS division 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:

(A) There was no expense or income in the comparison year. Three Months Ended December 31, 2000 Compared With Three Months Ended December 31, 1999 REVENUES During the three months ended December 31, 2000, we had a net decrease in revenue of $8.0 million, or 13.4%, from the three months ended December 31, 1999. Contract revenue increased $837,000, or 1.7%, from the comparable period of the prior year, while product sales decreased $8.8 million, or 84.7%, from the same period of the prior year. The increase in our contract revenue was due to revenue generated by new contracts associated with the SSDS business combination offset by a net decrease in selected contracts of our services and solutions business. The net decrease in our services and solutions business is primarily attributable to the end of an enterprise support services contract with a Federal Civilian agency during the second quarter of fiscal 2001 as well as certain -9- 10 other expired contracts. The decrease in our product sales was principally due to management's decision to significantly reduce our sales and marketing efforts under our remaining product reselling contracts. DIRECT COSTS Direct costs, expressed as a percentage of total revenue, decreased from 70.7% for the three months ended December 31, 1999 to 66.9% for the three months ended December 31, 2000, 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 remained consistent at 66.0% in the three months ended December 31, 2000 compared to 65.9% in the three months ended December 31, 1999. Cost of product sales as a percentage of product sales increased slightly from 93.1% in the three months ended December 31, 1999 to 94.4% in the three months ended December 31, 2000. INDIRECT, GENERAL AND ADMINISTRATIVE EXPENSES Indirect, general and administrative expenses include the costs of indirect labor, fringe benefits, overhead, sales and administration, bid and proposal preparation, and research and development. Indirect, general and administrative expenses for the three months ended December 31, 2000 increased by $2.2 million, or 14.9%, from the same period in 1999 principally due to increased contract revenue activities, a significant increase in our bid and proposal activities, and severance costs for terminated employees. As a percentage of total revenue, indirect, general and administrative costs increased from 24.8% for the three months ended December 31, 1999 to 33.0% for the three months ended December 31, 2000 due, in large part, to the fact that a greater portion of our revenue was derived from services contracts, which inherently have higher indirect costs. The percentage of our revenue from services contracts increased from 82.5% in the three months ended December 31, 1999 to 96.9% in the three months ended December 31, 2000. As a percentage of contract revenue, indirect, general and administrative costs increased in the three months ended December 31, 2000 to 34.0%, compared to the three months ended December 31, 1999 of 30.1%. We have spent approximately $1.2 million on bid and proposal activities during this period which were approximately $336,000 higher than in the comparable period of the previous year. Additionally, severance costs were approximately $484,000 during the three month period ended December 31, 2000; there were no severance costs in the comparable period of the previous year. AMORTIZATION EXPENSE Our amortization expense, which results from the amortization of goodwill, increased by $119,000 in the three months ended December 31, 2000 as compared with the comparable period of the prior year. This was due to the additional goodwill associated with the SSDS business combination. INTEREST EXPENSE Interest expense for the three months ended December 31, 2000 increased by $308,000 from the comparable period of the prior year. This increase was principally due to the additional debt obtained to finance the SSDS business combination offset by a higher level of collections of existing receivables. PROVISION FOR INCOME TAXES The income tax expense (benefit), as a percentage of income (loss) before income taxes, decreased to 42.5% in the three months ended December 31, 2000, from 43.5% in the comparable period of the prior year. The lower effective tax rate in the three months ended December 31, 2000 is -10- 11 largely attributable to a reduction in the Company's non-deductible goodwill amortization expense as a percentage of pre-tax income. Nine Months Ended December 31, 2000 Compared With Nine Months Ended December 31, 1999 REVENUES During the nine months ended December 31, 2000, we had a net decrease in revenue of $23.5 million, or 12.4%, from the nine months ended December 31, 1999. Contract revenue increased $10.1 million, or 6.8%, from the comparable period of the prior year, while product sales decreased $33.7 million, or 85.2%, from the same period of the prior year. The increase in our contract revenue was due to increases in our services and solutions business and revenue generated by new contracts associated with the SSDS business combination. The decrease in our product sales was principally due to management's decision to significantly reduce our sales and marketing efforts under our remaining product reselling contracts. DIRECT COSTS Direct costs, expressed as a percentage of total revenue, decreased from 72.2% for the nine months ended December 31, 1999 to 66.5% for the nine months ended December 31, 2000, primarily due to the higher percentage of contract-related business. Contract costs as a percentage of contract revenue decreased from 66.5% in the nine months ended December 31, 1999 compared to 65.5% in the nine months ended December 31, 2000. Cost of product sales as a percentage of product sales decreased from 94.1% in the nine months ended December 31, 1999 to 93.3% in the nine months ended December 31, 2000. This is attributable, in large part, to a $778,000 increase to the Company's reserve for anticipated warranty costs which was recognized in the three months ended December 31, 1999. This warranty reserve is related to computer hardware products sold several years ago by the Company's now divested product reselling business unit. In addition, the higher product gross margins experienced in the nine months ended December 31, 2000 also result from management's decision during the previous fiscal year to significantly reduce its sales and marketing efforts under its remaining product reselling contracts. Currently, we only sell products to our customers when there is a strategic reason to do so and when we can sell these products at acceptable gross margins. INDIRECT, GENERAL AND ADMINISTRATIVE EXPENSES Indirect, general and administrative expenses for the nine months ended December 31, 2000 increased by $3.5 million, or 7.8%, from the same period in 1999 principally due to increased contract revenue activities, a significant increase in our bid and proposal activities, and severance costs for terminated employees. As a percentage of total revenue, indirect, general and administrative costs increased from 23.7% for the nine months ended December 31, 1999 to 29.2% for the nine months ended December 31, 2000 due, in large part, to the fact that a greater portion of our revenue was derived from services contracts, which inherently have higher indirect costs. The percentage of our revenue from services contracts increased from 79.2% in the three months ended December 31, 1999 to 96.5% in the three months ended December 31, 2000. As a percentage of contract revenue, indirect, general and administrative costs increased in the three months ended December 31, 2000 to 30.3%, compared to the three months ended December 31, 1999 which was 30.0%. We have spent approximately $3.6 million on bid and proposal activities, which was higher than in the comparable period of the previous year. Additionally, severance costs were approximately $561,000 during the nine month period ended December 31, 2000; there were no severance costs in the comparable period of the previous year. -11- 12 AMORTIZATION EXPENSE Our amortization expense, which results from the amortization of goodwill, increased by $323,000 in the nine months ended December 31, 2000 as compared with the comparable period of the prior year. This was due to the additional goodwill associated with the SSDS business combination. INTEREST EXPENSE Interest expense for the nine months ended December 31, 2000 increased by $1.2 million from the comparable period of the prior year. This increase was principally due to the additional debt obtained to finance the SSDS business combination offset by a higher level of collections of existing receivables. PROVISION FOR INCOME TAXES Our income tax expense (benefit), as a percentage of income (loss) before income taxes, decreased to 42.5% in the nine months ended December 31, 2000, from 43.5% in the comparable period of the prior year. The lower effective tax rate in the nine months ended December 31, 2000 is largely attributable to a reduction in the Company's non-deductible goodwill amortization expense as a percentage of pre-tax income. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES Operating activities during the nine months ended December 31, 2000 provided net cash of approximately $11.1 million. This largely resulted from a $12.8 million decrease in receivables, which was due to improved collections of our outstanding customer invoices. We had depreciation and amortization expense of approximately $2.1 million which was greater than the same period in 1999 due to the additional amortization of SSDS goodwill. Additionally, we had net income of $1.6 million and a decrease in other noncurrent assets of $2.2 million that related to the escrow associated with the SSDS business combination which was paid in February 2000. These amounts were partially offset by decreases in both accounts payable and accrued expenses, which together totaled $7.7 million. INVESTING ACTIVITIES Our investing activities used cash of approximately $9.0 million during the nine months ended December 31, 2000. This was primarily due to the $13.9 million purchase price associated with the SSDS business combination in April 2000 net of the proceeds of $5.6 million from the sale of the investments. FINANCING ACTIVITIES During the nine months ended December 31, 2000, our financing activities used cash of approximately $2.1 million. This resulted primarily from principal payments of our long-term debt of $8.1 million and repurchases of $1.3 million of treasury stock, offset by $8.0 million received under two notes payable issued to fund the SSDS business combination. As of December 31, 2000, our working capital was $37.4 million, compared to $37.6 million at March 31, 2000. At December 31, 2000, the Company had approximately $8.4 million available for borrowing under its revolving line of credit facility. We expect that funds available under our line of credit will be sufficient to fund our cash requirements for the next twelve months. At December 31, -12- 13 2000, we were not in compliance with two financial covenants under our credit facility; however, we obtained a waiver of this non-compliance in the subsequent period. ITEM 3. 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, 2000, filed with the SEC on June 29, 2000. There have been no material changes in the Company's market risk from that disclosed in the Company's 2000 Form 10-K. -13- 14 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 three-month period ended December 31, 2000. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS The following exhibit is filed with this Report: 11 Statement regarding computation of per share earnings. B. REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended December 31, 2000. -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: February 14, 2001 BTG, INC. /s/ Thomas W. Weston, Jr. ------------------------- Thomas W. Weston, Jr. Duly Authorized Signatory and Chief Financial Officer -15- 16 EXHIBIT INDEX

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BTG INC /VA/ 10-Q