<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996.
OR
[ ] 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 0-19394.
GOVERNMENT TECHNOLOGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1248422
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
4100 LAFAYETTE CENTER DRIVE
CHANTILLY, VIRGINIA 20151-1200
(Address and zip code of principal executive offices)
(703) 502-2000
(Registrant's telephone number, including area code)
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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Shares Outstanding at November 1, 1996
- ------------------------------ --------------------------------------
Common Stock, $0.005 par value 6,702,797
Total number of pages in this report: 19.
Index to Exhibits on Page 18.
<PAGE>
GOVERNMENT TECHNOLOGY SERVICES, INC.
INDEX
-----
Page Reference
--------------
COVER PAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995. . . . . . . . . . . 4
Consolidated Statements of Income
Three Months and Nine Months Ended September 30, 1996
and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 8
PART II -- OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . .15
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
- 2 -
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited, consolidated financial statements of
Government Technology Services, Inc. ("GTSI" (R) or the "Company") have
been prepared in accordance with the instructions to Form 10-Q and,
therefore, omit or condense certain footnotes and other information
normally included in financial statements prepared in accordance with
generally accepted accounting principles. This report should be read in
conjunction with the audited financial statements for the year ended
December 31, 1995, and the accompanying Notes to Financial Statements,
which appear in the Company's Annual Report on Form 10-K filed for the year
ended December 31, 1995. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results for the interim period have been made. The
interim results reflected in the consolidated financial statements are not
necessarily indicative of results expected for the full year, or for future
periods.
- 3 -
<PAGE>
<TABLE>
GOVERNMENT TECHNOLOGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
------------ ------------
(unaudited) (audited)
<S> <C> <C>
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . $ 32 $ 18
Accounts receivable, net. . . . . . . . . . . 118,606 91,187
Merchandise inventories, net. . . . . . . . . 39,537 64,515
Deferred taxes and other. . . . . . . . . . . 12,085 10,381
---------- ----------
Total current assets. . . . . . . . . . . . 170,260 166,101
Property and equipment, net . . . . . . . . . . 8,887 8,065
Intangible assets, net. . . . . . . . . . . . . 10,039 10,609
Deferred taxes and other. . . . . . . . . . . . 589 565
---------- ----------
Total assets. . . . . . . . . . . . . . . . $ 189,775 $ 185,340
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks. . . . . . . . . . . . $ 23,382 $ 56,496
Accounts payable. . . . . . . . . . . . . . . 96,161 52,082
Accrued liabilities . . . . . . . . . . . . . 8,504 11,926
---------- ----------
Total current liabilities . . . . . . . . . 128,047 120,504
Other liabilities . . . . . . . . . . . . . . . 1,681 2,359
---------- ----------
Total liabilities . . . . . . . . . . . . . 129,728 122,863
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock -- $0.25 par value, 680,850
shares authorized; none issued and
outstanding . . . . . . . . . . . . . . . . - -
Common stock -- $0.005 par value; 10,000,000
shares authorized; 6,806,084 shares issued
and 6,702,797 outstanding at September 30,
1996; and 6,806,084 shares issued and
6,676,461 outstanding at December 31, 1995. 34 34
Capital in excess of par value. . . . . . . . 33,420 33,611
Retained earnings . . . . . . . . . . . . . . 27,712 30,237
Treasury stock -- 103,287 shares at September
30, 1996 and 129,623 shares at December 31,
1995, at cost . . . . . . . . . . . . . . . (1,119) (1,405)
---------- ----------
Total stockholders' equity. . . . . . . . . 60,047 62,477
---------- ----------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . . . . . $ 189,775 $ 185,340
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
- 4 -
</TABLE>
<PAGE>
<TABLE>
GOVERNMENT TECHNOLOGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . $ 163,221 $ 175,705 $346,822 $ 366,091
Cost of sales . . . . . . . . . . . . . 152,056 161,419 321,581 337,399
--------- --------- --------- ---------
Gross margin. . . . . . . . . . . . . . 11,165 14,286 25,241 28,692
Operating expenses. . . . . . . . . . . 9,489 10,424 27,209 30,526
--------- --------- --------- ---------
Income (loss) from operations . . . . . 1,676 3,862 (1,968) (1,834)
Interest expense, net . . . . . . . . . 495 1,069 2,053 2,970
--------- --------- --------- ---------
Income (loss) before taxes. . . . . . . 1,181 2,793 (4,021) (4,804)
Income tax provision (benefit). . . . . 478 1,067 (1,496) (1,833)
--------- --------- --------- ---------
Net income (loss) . . . . . . . . . . . $ 703 $ 1,726 $ (2,525) $ (2,971)
========= ========= ========= =========
Net income (loss) per share . . . . . . $ 0.10 $ 0.26 $ (0.38) $ (0.45)
========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding
during the period . . . . . . . . . . 7,060 6,626 6,685 6,599
The accompanying notes are an integral part of
these consolidated financial statements.
- 5 -
</TABLE>
<PAGE>
<TABLE>
GOVERNMENT TECHNOLOGY SERVICES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (2,525) $ (2,971)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization. . . . . . . . . . . . 2,088 2,376
Deferred taxes and other . . . . . . . . . . . . . . (13) 55
Net cash provided by changes in assets and
liabilities . . . . . . . . . . . . . . . . . . . 35,810 28,681
-------- --------
Net cash provided by operating activities . . . . 35,360 28,141
-------- --------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . (2,340) (1,954)
-------- --------
Net cash used in investing activities . . . . . . (2,340) (1,954)
-------- --------
Cash flows from financing activities:
Repayments of notes payable to banks, net. . . . . . (33,114) (26,086)
Principal payments under capital lease obligations . 0 (264)
Proceeds from the exercise of stock options. . . . . 108 181
-------- --------
Net cash used in financing activities . . . . . . (33,006) (26,169)
-------- --------
Net increase in cash. . . . . . . . . . . . . . . . . . 14 18
Cash at beginning of period . . . . . . . . . . . . . . 18 30
-------- --------
Cash at end of period . . . . . . . . . . . . . . . . . $ 32 $ 48
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . $ 3,695 $ 1,662
Income taxes. . . . . . . . . . . . . . . . . . . 6 5
The accompanying notes are an integral part of
these consolidated financial statements.
- 6 -
</TABLE>
<PAGE>
GOVERNMENT TECHNOLOGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
by the Company in accordance with the accounting policies described in its
Annual Report on Form 10-K and should be read in conjunction with the Notes
to Financial Statements which appear in that report. The accompanying
interim financial statements do not include all disclosures required by
generally accepted accounting principles.
Net income per share is based on the weighted average number of shares
of common stock and common equivalent shares outstanding during each
period. Common stock equivalents include dilutive stock options and
warrants using the treasury stock method.
2. NOTES PAYABLE TO BANKS
During the fourth quarter of 1995, the Company began negotiations with
a bank (the "Principal Lender") and other lenders ("Other Lenders") to form
a new lending syndicate to obtain a $110.0 million credit facility. On
December 29, 1995, the Company executed an interim credit agreement
("Interim Agreement") with the Principal Lender for $50.0 million and an
intercreditor agreement with the Company's prior bank ("Prior Lender") for
an additional $30.0 million (decreasing to $20.0 million on February 1,
1996 and expiring on February 29, 1996). This intercreditor agreement with
the Prior Lender included terms and conditions similar to those existing
under the previous credit facility with the prior lending syndicate. On
May 2, 1996, the Company executed a three-year credit facility ("Credit
Facility") with the Principal Lender for $40.0 million and with the Other
Lenders for an additional $55.0 million. Additionally, on June 27, 1996,
the Company executed a separate $10.0 million facility with the Principal
Lender for inventory financing of certain vendor products. On August 23,
1996, the Company and its banks executed Amendment No. 1 to the Credit
Facility, which modified certain financial covenants. The Credit Facility
can be canceled upon default of certain conditions and in addition, each
Other Lender may elect not to renew each year by providing notice of such
election 120 days before the automatic annual renewal.
- 7 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and
Notes thereto included elsewhere in this Quarterly Report and the Company's
financial statements and notes thereto incorporated into its Annual Report
on Form 10-K for the year ended December 31, 1995.
OVERVIEW
GTSI is the largest dedicated reseller of microcomputer and Unix
workstation hardware, software and networking products to the Federal
Government ("Government") market. The Company currently offers access to
over 75,000 information technology products from more than 800
manufacturers. GTSI also performs network integration services, including
configuring, installing and maintaining microcomputers in local area
networks. The Company sells to virtually all departments and agencies of
the Government, most state governments and several hundred systems
integrators and prime contractors that sell to the Government market. GTSI
offers its customers a convenient and cost-effective centralized source for
microcomputer and workstation products through its competitive pricing,
broad product selection and procurement expertise. The Company provides
its vendors with a low-cost marketing and distribution channel to the
millions of end users comprising the Government market, while virtually
insulating these vendors from most of the complex government procurement
rules and regulations.
Changes in sales throughout the Company's history have been
attributable to increased or decreased unit sales, to expansion of the
Company's product offerings (e.g., peripherals, microcomputers and
networking and workstation products from 1985 to 1992), to the addition of
new vendors (e.g., IBM, Sun Microsystems, Panasonic, Apple and Nexar in
1988 to 1996, respectively) and to the addition or expiration of sales
contract vehicles (e.g., the addition of the U.S. Air Force Desktop IV
contract, the National Aeronautics and Space Administration Scientific &
Engineering Workstation Procurement ("SEWP") contract, the National
Institutes of Health ("NIH") Electronic Computer Store contract and the
U.S. Treasury Department Acquisition-1 contract in 1993, 1995, 1995 and
1996, respectively; and the expiration of the U.S. Navy Companion contract
in 1995). The Company's financial results have fluctuated seasonally, and
may continue to do so in the future, because of the Government's buying
patterns which have historically favorably impacted the last two calendar
quarters and adversely affected the first two calendar quarters.
The Company's primary strategy is to focus on its core GSA Schedule
business and to compete aggressively on bids in order to win as many sales
contract vehicles as possible under the various purchasing programs
available in the Government market. With those contract vehicles in place,
it is then possible for the Company to use its significant product base and
marketing knowledge to sell products which both meet customers'
requirements and provide an attractive financial return to the Company.
- 8 -
<PAGE>
<TABLE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage relationship of selected income
statement items to sales and the percentage change in the dollar amounts of such items.
<CAPTION>
PERCENTAGE
CHANGE
PERCENTAGE OF SALES -----------------------
-------------------------------------- THREE SIX
THREE NINE MONTHS MONTHS
MONTHS ENDED MONTHS ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEP. 30, SEP. 30,
------------------ ------------------ 1996 1996
1996 1995 1996 1995 TO 1995 TO 1995
-------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% (7.1)% (5.3)%
Cost of sales . . . . . . . . . . . . . . 93.2 91.9 92.7 92.2 (5.8) (4.7)
-------- -------- -------- --------
Gross margin. . . . . . . . . . . . . . . 6.8 8.1 7.3 7.8 (21.8) (12.0)
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative. . . 5.2 5.5 7.1 7.7 (12.3) (12.7)
Depreciation and amortization. . . . . . 0.6 0.4 0.7 0.6 41.3 11.3
-------- -------- -------- --------
5.8 5.9 7.8 8.3 (9.0) (10.9)
-------- -------- -------- --------
Income (loss) from operations . . . . . . 1.0 2.2 (0.5) (0.5) (56.6) 7.3
Interest expense, net . . . . . . . . . . 0.3 0.6 0.6 0.8 (53.7) (30.9)
-------- -------- -------- --------
Income (loss) before taxes. . . . . . . . 0.7 1.6 (1.1) (1.3) (57.7) (16.3)
Income tax provision (benefit). . . . . . 0.3 0.6 (0.4) (0.5) (55.2) (18.4)
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . 0.4% 1.0% (0.7)% (0.8)% (59.3) (15.0)
======== ======== ======== ========
<CAPTION>
The following table sets forth sales by contract vehicle:
(DOLLARS IN THOUSANDS) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------- ---------------------------------------
CONTRACT VEHICLES: 1996 1995 1996 1995
- ----------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IDIQ Contracts. . . . $ 37,585 23.0% $ 49,957 28.5% $ 81,532 23.5% $ 98,367 26.9%
GSA Schedules . . . . 94,568 57.9 79,137 45.0 168,806 48.7 152,200 41.6
Open Market . . . . . 26,254 16.1 43,012 24.5 84,509 24.4 101,536 27.7
Other Contracts . . . 4,814 3.0 3,599 2.0 11,975 3.4 13,988 3.8
--------- --------- --------- --------- --------- --------- --------- ---------
Total. . . . . . $ 163,221 100.0% $175,705 100.0% $ 346,822 100.0% $ 366,091 100.0%
========= ========= ========= ========= ========= ========= ========= =========
- 9 -
</TABLE>
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1995
Sales. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. In the third
quarter of 1996, sales decreased $12.5 million, or 7.1%. Decreases in open
market sales and sales under indefinite-delivery/indefinite-quantity
("IDIQ") contracts of approximately $16.8 million (or 40.0%) and $12.4
million (or 24.8%), respectively, were partially offset by increases in
sales under GSA Schedule contracts of $15.4 million (or 19.5%).
It is management's belief that the decline in open market sales during
the third quarter was primarily attributable to recent changes in the
procurement regulations that allow the Government to purchase products by
other means (e.g., GSA Schedule contracts) in a quicker and easier manner
than was the case before such changes. Sales under IDIQ contracts declined
in the third quarter primarily due to decreased sales under the Desktop IV
contract (as systems ordering expired on February 1, 1996) and the lack of
sales under the U.S. Navy Companion contract (which expired on September
30, 1995) of $28.1 million and $5.9 million, respectively. In addition,
sales under the Company's Portable-1 contract with the U.S. Army declined
during the third quarter primarily as a result of a delay until late in
September by one of the Company's vendors in the release of new product
technology desired by the customer. These decreases were partially offset
by increases in sales under the Company's NIH contract (which started
shipping in the first quarter of 1996) and its SEWP contract. The increase
in sales under the Company's GSA Schedule contracts was primarily comprised
of $23.8 million of increased GSA Schedule B/C sales offset by a decline in
sales under GSA Schedule A of $8.8 million.
Backlog at September 30, 1996 was approximately $70.1 million, up
57.2% from approximately $44.6 million at September 30, 1995. Backlog was
$40.1 million at November 8, 1996.
Gross Margin. Gross margin is sales less cost of sales (which
includes product purchase cost, freight and certain overhead expenses
related to the cost of acquiring products). Gross margin percentages vary
over time and change significantly depending on the contract vehicle and
product involved; therefore, the Company's overall gross margin percentages
are dependent on the mix and timing of products sold and the strategic use
of contract vehicles that are available to sell its products.
During the third quarter of 1996, gross margin decreased in absolute
dollars by approximately $9.4 million, or 5.8%, and decreased as a
percentage of sales from 8.1% to 6.8% when compared to the same period a
year ago. The decline in absolute dollars is primarily attributable to the
lower sales volume during the third quarter. Another contributing factor
to the decline in absolute dollars is the shift in sales made under IDIQ
contracts to sales made under the Company's GSA Schedule B/C contract,
which currently earns lower margins than most other sales. The increased
mix of sales under the GSA Schedule B/C also relates to the decline in
gross margin percentage during the third quarter of 1996. Additionally, a
large drop shipment of product from one of the Company's vendors directly
to the customer at a lower than normal margin and several large software
orders contributed to the decreased gross margin percentage during the
- 10 -
<PAGE>
third quarter of 1996 when compared to the same period a year ago. The
change in gross margin percentages is not necessarily indicative of gross
margin percentages to be earned in future periods.
Operating Expenses. Operating expenses in the third quarter of 1996
decreased approximately $0.9 million, or 9.0%, and decreased as a
percentage of sales from 5.9% to 5.8%. In the third quarter of 1996,
decreases in contracted services, facility costs, legal costs, travel
costs, and personnel costs were partially offset by an increase in
expenditures for professional services and increased equipment depreciation
costs. In addition, the Company received slightly higher vendor incentives
than in the third quarter of 1995, which contributed to decreased net
marketing expenses. Vendor incentives, cooperative advertising and market
development reimbursements are used to partially offset selling,
advertising, promotion and marketing expenses.
Interest Expense. The $574,000, or 53.7%, decrease in net interest
expense in the third quarter of 1996 was due to a combination of lower
average borrowings and lower interest rates, offset by increased bank fees
related to the Interim Agreement and the Credit Facility executed in
December 1995 and May 1996, respectively.
Income Taxes. The Company's effective tax rate was 40.5% in the third
quarter of 1996, as compared to 38.2% in the third quarter of 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED
WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1995
Sales. In the first nine months of 1996, sales decreased $19.3
million, or 5.3%. Decreases in open market sales and sales under IDIQ
contracts of $17.0 million and $6.8 million, respectively, were partially
offset by a $16.6 million increase in sales under GSA Schedule contracts.
It is management's belief that the decline in open market sales is
primarily attributable to recent changes in the procurement regulations
that allow the Government to purchase products by other means (e.g., GSA
Schedule contracts) in a quicker and easier manner than was the case before
such changes. As previously noted, Open Market sales also included $15.8
million of product originally purchased for sale under the Company's
Desktop IV contract which was commercialized and sold via the open market
during the first nine months of 1996. Sales under IDIQ contracts declined
during the first nine months of 1996 primarily as a result of decreased
sales under the Company's Desktop IV contract and the lack of sales under
the U.S. Navy Companion contract (which expired September 30, 1995) of
$27.1 million and $19.5 million, respectively. These decreases were
partially offset by an increase in sales under the Company's NIH contract
(which started shipping in the first quarter of 1996) and its SEWP
contract. Other new contracts procured by the Company during 1996 took
longer than expected to be awarded and, upon award to the Company, did not
generate sufficient revenue to offset the declining sales under contracts
which had ended or were near completion. The increase in sales under the
Company's GSA Schedule contracts was primarily comprised of $31.8 million
of increased GSA Schedule B/C sales offset by a decline in sales under GSA
Schedule A of $15.6 million.
- 11 -
<PAGE>
During the fourth quarter of 1995 and the first quarter of 1996, the
executive and legislative branches of the Government could not agree on a
budget for fiscal year 1996. Although the Company cannot precisely
quantify the specific effect of the Government's work stoppages on the
Company's operations, it is believed that sales were negatively impacted
during these periods.
Gross Margin. In the first nine months of 1996, gross margin
decreased in absolute dollars by approximately $3.5 million, or 12.0%, and
decreased as a percentage of sales from 7.8% to 7.3% when compared to the
same period a year ago. The decline in absolute dollars is primarily
attributable to the lower sales volume and was partially offset by the
resolution of a vendor contractual matter. The decline in both absolute
dollars and gross margin percentage is also attributable to the shift from
sales under IDIQ contracts to sales made under the Company's GSA Schedule
B/C, which currently earns lower margins than most other sales.
Additionally, the gross margin percentage was negatively impacted by the
open market sale of near-obsolete inventory noted above, which earned
little or no gross margin. The change in gross margin percentages is not
necessarily indicative of gross margin percentages to be earned in future
periods.
Operating Expenses. Total operating expenses in the first nine months
of 1996 decreased $3.3 million, or 10.9%, and decreased as a percentage of
sales from 8.3% to 7.8%. This decrease is primarily attributable to
decreases in personnel costs, contracted services and facility costs and
higher vendor incentives, which were partially offset by increases in
expenditures for professional services and consultants. The Company also
received $0.8 million during the second quarter in connection with the
settlement of certain litigation, which amount was applied against related
legal and program expenses.
Interest Expense. Net interest expense decreased approximately $0.9
million, or 30.9%, in the first nine months of 1996 due to a combination of
lower average borrowings outstanding and lower interest rates, offset by
increased bank fees related to the Interim Agreement and the Credit
Facility executed in December 1995 and May 1996, respectively.
Income Taxes. Tax benefits of $1.5 million and $1.8 million were
recorded during the first nine months of 1996 and 1995, respectively, as a
result of the Company's net operating loss for those respective periods.
These benefits can be realized by carrying back the loss to prior years in
which the Company recorded net income.
SEASONAL FLUCTUATIONS AND OTHER FACTORS
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its operations as a result
of Government buying and funding patterns, which also impact the buying
patterns of GTSI's prime contractor customers. These buying and funding
patterns historically have had a significant positive effect on GTSI's
bookings in the third quarter ending September 30 each year (the
Government's fiscal year end) and consequently on sales and net income in
the third and fourth quarters of each year. Quarterly financial results
are also affected by the timing of the award of and shipments of products
- 12 -
<PAGE>
under government contracts, price competition in the microcomputer and
workstation industries, the addition of personnel or other expenses in
anticipation of sales growth, product line changes and expansions, and the
timing and costs of changes in customer and product mix. In addition,
customer order deferrals in anticipation of new product releases by leading
microcomputer and workstation hardware and software manufacturers, delays
in vendor shipments of new or existing products, a shift in sales mix to
more complex requirements contracts with more complex service costs, and
vendor delays in the processing of incentives and credits due GTSI, have
occurred (all of which are also likely to occur in the future) and have
adversely affected the Company's operating performance in particular
periods. The seasonality and the unpredictability of the factors affecting
such seasonality make GTSI's quarterly and yearly financial results
difficult to predict and subject to significant fluctuation. The Company's
stock price could be adversely affected if any such financial results fail
to meet the financial community's expectations.
Additionally, legislation is periodically introduced in Congress that
may change the Government's procurement practices. GTSI cannot predict
whether any such legislative or related regulatory proposals will be
adopted or, if adopted, the impact upon its operating results. Changes in
the structure, composition and/or buying patterns of the Government, either
alone or in combination with competitive conditions or other factors, could
adversely affect future results.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1996, the Company generated $34.0
million of cash flow from operations, as compared to $28.1 million for the
same period in 1995. Most of the increase from year to year relates to a
significant reduction in net operating assets (accounts receivable plus
merchandise inventories less accounts payable) resulting from the Company's
increased focus on collection of accounts receivable and inventory
management. After reduction of approximately $1.4 million of capital
expenditures from the net cash provided by operating activities, overall
short-term notes payable to banks decreased $32.8 million from December 31,
1995. As a result of the Company's seasonal sales patterns, working
capital levels are traditionally lower in the first half of the year and
short-term debt levels are reduced.
Capital expenditures are expected to be approximately $5.1 million in
1996, including expenditures of approximately $1.6 million for equipment
and leasehold improvements related to the Company's new distribution center
(under construction), and approximately $1.5 million for a financial
information system which is expected to be completely installed by the
first quarter of 1997.
During the fourth quarter of 1995, the Company began negotiations with
a bank (the "Principal Lender") and other lenders ("Other Lenders") to form
a new lending syndicate to obtain a $110.0 million credit facility. On
December 29, 1995, the Company executed an interim credit agreement
("Interim Agreement") with the Principal Lender for $50.0 million and an
intercreditor agreement with the Company's prior bank ("Prior Lender") for
an additional $30.0 million (decreasing to $20.0 million on February 1,
1996 and expiring on February 29, 1996). This intercreditor agreement with
- 13 -
<PAGE>
the Prior Lender included terms and conditions similar to those existing
under the previous credit facility with the prior lending syndicate. On
March 26, 1996, the Company and its bank executed Amendment No. 1 to the
Interim Agreement which modified certain financial covenants. On May 2,
1996, the Company executed a three-year credit facility ("Credit Facility")
with the Principal Lender for $40.0 million and with the Other Lenders for
an additional $55.0 million. Additionally, on June 27, 1996, the Company
executed a separate $10.0 million facility with the Principal Lender for
inventory financing of vendor products. The Credit Facility can be canceled
upon default of certain conditions and in addition, each Other Lender may
elect not to renew each year by providing notice of such election 120 days
before the automatic annual renewal. At September 30, 1996, $44.2 million
was available to the Company for borrowing under the terms of its Credit
Facility. In addition, interest was payable at a rate of 7.5% at September
30, 1996.
Interest under the Credit Facility is payable monthly and is accrued
at an effective rate equal to the London Interbank Offered Rate (LIBOR)
plus 2.24%. Borrowing is limited to 85% of eligible accounts receivable.
The Credit Facility is substantially collateralized by all of the operating
assets of the Company. Current obligations are first funded and then all
cash receipts are automatically applied to reduce outstanding borrowings.
The Credit Facility also contains certain covenants, including restrictions
on the payment of dividends and repurchase of stock, and provisions
specifying compliance with certain financial ratios. At June 30, 1996, the
Company was not in compliance with two covenants contained in the Credit
Facility. On August 12, 1996, the Company's banks agreed to waive
compliance with the June 30, 1996 application of these covenants. On
August 23, 1996, the Company and its banks executed Amendment No. 1 to the
Credit Facility, which modified certain financial covenants. At September
30, 1996, the Company was in compliance with all financial covenants
contained in the Credit Facility.
The Company anticipates that it will continue to rely primarily on
operating cash flow, bank loans and vendor credit to finance its reasonably
anticipated cash needs. Such funds should be sufficient to satisfy the
Company's near term anticipated cash requirements for operations.
Nonetheless, the Company may seek additional sources of capital to finance
its operating requirements. The Company currently has no reason to believe
that such capital sources will not be available to it on acceptable terms,
if needed.
- 14 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS --
On May 31, 1995, the Company received a civil investigative demand
("CID") from the United States Department of Justice ("DOJ") seeking
information relating to the Company's GSA Schedule sales for the years 1988
to the present. The CID sought information regarding the Company's
disclosure to the Government and use of vendor incentives and marketing
funds in connection with such GSA Schedule sales. On January 24, 1996, the
Company received a letter from the DOJ withdrawing the CID. The Company is
continuing to cooperate with a GSA audit of the Company's GSA Schedule
sales by providing information to the GSA's auditors. No reserve has been
provided in the accompanying financial statements concerning this matter
because management is currently unable to estimate a range of exposure, if
any.
On November 27, 1995, the Department of the Air Force issued a final
decision to the Company under its Desktop IV Contract directing the Company
to provide, without additional consideration, "upgrades" to certain
computer software. As required by the contract, the Company has proceeded
to perform in accordance with the final decision. However, the Company
timely filed a complaint on July 31, 1996 with the Armed Services Board of
Contract Appeals ("ASBCA") contesting the final decision concerning
software upgrades. The Company will vigorously contest the Air Force's
final decision and intends to seek full compensation for the costs it
incurs in connection therewith. The current reserve, established in 1995,
is believed by management to be adequate to cover the costs of compliance
with the Air Force's final decision. The Company and the Air Force are
presently engaged in discussions concerning the Air Force's November 27,
1995 final decision, recent additional demands by the Air Force and the
Company's ASBCA case. The adequacy of the Company's recorded reserve will
necessarily be determined by the results of the Company's current
discussions, both with the Air Force and with a vendor; the ASBCA case; and
any possible additional litigation. No additional reserve has been
provided in the accompanying financial statements concerning this matter
because management is currently unable to reasonably estimate a range of
additional exposure, if any.
The Company is occasionally a defendant in litigation incidental to
its business. The Company believes that none of such litigation currently
pending against it, individually or in the aggregate, will have a material
adverse effect on the Company's financial condition or results of
operations.
ITEM 2. CHANGES IN SECURITIES -- Inapplicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --
Inapplicable.
ITEM 5. OTHER INFORMATION -- Inapplicable.
- 15 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K --
(a) Exhibits:
11.1 Computation of Earnings Per Share
(b) Reports on Form 8-K:
None.
- 16 -
<PAGE>
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 14, 1996
GOVERNMENT TECHNOLOGY SERVICES, INC.
By: /s/ M. DENDY YOUNG
--------------------------------------
M. Dendy Young
President and Chief Executive Officer
By: /s/ PETER E. JANKE
--------------------------------------
Peter E. Janke
Executive Vice President and
Chief Financial Officer
- 17 -
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ---------- --------------------------------------- -------------
11.1 Computation of Earnings Per Share 19
- 18 -
<PAGE>
<TABLE>
EXHIBIT 11.1
GOVERNMENT TECHNOLOGY SERVICES, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 703 $ 1,726 $ (2,525) $(2,971)
-------- -------- -------- --------
Weighted average shares of common stock outstanding . . . . 6,701 6,609 6,685 6,594
Weighted average effect of common share equivalents . . . . 359 17 - -
-------- -------- -------- --------
Weighted average shares outstanding . . . . . . . . . . . . 7,060 6,626 6,685 6,599
-------- -------- -------- --------
Net income (loss) per common share and common share
equivalent. . . . . . . . . . . . . . . . . . . . . . . . $ 0.10 $ 0.26 $ (0.38) $ (0.45)
======== ======== ======== ========
- 19 -
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 32
<SECURITIES> 0
<RECEIVABLES> 118,606
<ALLOWANCES> 0
<INVENTORY> 39,537
<CURRENT-ASSETS> 170,260
<PP&E> 8,887
<DEPRECIATION> 0
<TOTAL-ASSETS> 189,775
<CURRENT-LIABILITIES> 128,047
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 60,013
<TOTAL-LIABILITY-AND-EQUITY> 189,775
<SALES> 346,822
<TOTAL-REVENUES> 346,822
<CGS> 321,581
<TOTAL-COSTS> 321,581
<OTHER-EXPENSES> 27,209
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,053
<INCOME-PRETAX> (4,021)
<INCOME-TAX> (1,496)
<INCOME-CONTINUING> (2,525)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,525)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> 0
</TABLE>
