<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
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 May 1, 1997
- ------------------------------ --------------------------------------
Common Stock, $0.005 par value 6,724,919
<PAGE>
GOVERNMENT TECHNOLOGY SERVICES, INC.
Quarterly Report on Form 10-Q
for the Quarterly Period Ended March 31, 1997
INDEX
-----
Page Reference
--------------
COVER PAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1996. . . . . . . . 4
Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996. . . . . . . . . . . 5
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996. . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 9
PART II -- OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . .16
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
- 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, 1996, 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, 1996. 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>
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . $ 88,407 $ 82,792
Cost of sales . . . . . . . . . . . . . . . . . 81,399 75,641
---------- ----------
Gross margin. . . . . . . . . . . . . . . . . . 7,008 7,151
Operating expenses. . . . . . . . . . . . . . . 9,993 9,492
---------- ----------
Loss from operations. . . . . . . . . . . . . . (2,985) (2,341)
Interest expense, net of interest income of
$80 and $102, respectively. . . . . . . . . . 419 598
---------- ----------
Loss before taxes . . . . . . . . . . . . . . . (3,404) (2,939)
Income tax benefit. . . . . . . . . . . . . . . - (1,121)
---------- ----------
Net loss. . . . . . . . . . . . . . . . . . . . $ (3,404) $ (1,818)
========== ==========
Net loss per share. . . . . . . . . . . . . . . $ (0.51) $ (0.27)
========== ==========
Weighted average number of shares outstanding . 6,725 6,675
========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 4 -
<PAGE>
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1997 1996
------------ ------------
(unaudited) (audited)
<S> <C> <C>
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . $ 169 $ 48
Accounts receivable, net. . . . . . . . . . . 59,919 90,116
Merchandise inventories . . . . . . . . . . . 22,443 31,844
Net deferred taxes and other. . . . . . . . . 7,738 7,367
---------- ----------
Total current assets. . . . . . . . . . . . 90,269 129,375
Property and equipment, net . . . . . . . . . . 8,894 9,146
Intangible assets, net. . . . . . . . . . . . . 703 788
Net deferred taxes and other. . . . . . . . . . 1,030 1,692
---------- ----------
Total assets. . . . . . . . . . . . . . . . $ 100,896 $ 141,001
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks. . . . . . . . . . . . 3,592 15,828
Accounts payable. . . . . . . . . . . . . . . 44,867 68,707
Accrued liabilities . . . . . . . . . . . . . 9,938 10,241
---------- ----------
Total current liabilities . . . . . . . . . 58,397 94,776
Other liabilities . . . . . . . . . . . . . . . 1,055 1,377
---------- ----------
Total liabilities . . . . . . . . . . . . . 59,452 96,153
---------- ----------
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 6,724,919 outstanding at March 31,
1997 and December 31, 1996. . . . . . . . . 34 34
Capital in excess of par value. . . . . . . . 33,295 33,295
Retained earnings . . . . . . . . . . . . . . 8,995 12,399
Treasury stock, 81,165 shares at March 31,
1997 and December 31, 1996, at cost . . . . (880) (880)
---------- ----------
Total stockholders' equity. . . . . . . . . 41,444 44,848
---------- ----------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . . . . . $ 100,896 $ 141,001
========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 5 -
<PAGE>
<TABLE>
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . $ (3,404) $ (1,818)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . 894 790
Stock compensation expense. . . . . . . . . . . . . - (12)
Net cash provided by changes in assets and
liabilities . . . . . . . . . . . . . . . . . . . 15,335 45,935
-------- --------
Net cash provided by operating activities . . . 12,825 44,895
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of property and equipment. . . . . . . . . . . (489) (499)
Proceeds from sales of property and equipment. . . 21 -
-------- --------
Net cash used in investing activities . . . . . (468) (499)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of bank notes, net . . . . . . . . . . . . (12,236) (44,059)
Proceeds from exercises of stock options and
warrants. . . . . . . . . . . . . . . . . . . . . - 13
-------- --------
Net cash used in financing activities . . . . . (12,236) (44,046)
-------- --------
Net increase in cash. . . . . . . . . . . . . . . . . . 121 350
Cash at beginning of period . . . . . . . . . . . . . . 48 18
-------- --------
Cash at end of period . . . . . . . . . . . . . . . . . $ 169 $ 368
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . $ 607 $ 2,069
Income taxes. . . . . . . . . . . . . . . . . . . 2 -
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
- 6 -
<PAGE>
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
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
1996 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 loss per share is based on the weighted average number of shares
of common stock outstanding during each period. Common stock equivalents
have not been considered as they are anti-dilutive.
In 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS
128"). FAS 128 requires dual presentation of basic and diluted earnings
per share on the face of the income statement for all periods presented.
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted- average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to Accounting Principles
Bulletin No. 15. FAS 128 is effective for reporting periods ending after
December 15, 1997 and, when adopted, will require restatement of prior
years' earnings per share.
Since the effect of outstanding options is anti-dilutive, they have
been excluded from the Company's computation of net loss per share.
Accordingly, Management does not believe that FAS 128 will have an impact
upon historical net income (loss) per share as reported.
Certain amounts from prior years have been reclassified to conform to
the current year financial statement presentation.
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
- 7 -
<PAGE>
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 with the
Principal Lender for $40.0 million and a one-year credit facility with the
Other Lenders for an additional $55.0 million (collectively, the "Credit
Facility"), replacing the Interim Agreement. 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. At December
31, 1996, the Company was not in compliance with the Earnings Before
Interest and Taxes and Tangible Net Worth covenants contained in the Credit
Facility. Although the Principal Lender has the right to discontinue
making any new loans and to call the outstanding loan, such Principal
Lender has continued to provide financing to the Company under the existing
Credit Facility. All amounts due to the Lenders as of March 31, 1997 are
classified as current liabilities.
As of May 15, 1997, the Company continued to be out of compliance with
certain 1996 year-end financial covenants contained in the Credit Facility.
The Company is currently reviewing a proposal from its Principal Lender to
amend the terms and conditions of the Credit Facility. Management
presently estimates that the amended Credit Facility will reflect market
pricing common to credit agreements with companies of similar size,
complexity and risk as GTSI. The Company presently expects to complete
negotiations with its Principal Lender on or before June 30, 1997, and the
Principal Lender has agreed to refrain from enforcing its rights with
respect to such covenant violations on the condition that the Company
execute an amendment to the Credit Facility prior to said date. Management
presently estimates that the final terms of the amended Credit Facility
will neither adversely impact nor materially benefit the Company's total
borrowing costs in 1997.
- 8 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Consolidated
Financial Statements and Notes thereto included elsewhere in this Report,
as well as the Company's consolidated financial statements and notes
thereto incorporated into its Annual Report on Form 10-K for the year ended
December 31, 1996. Historical results and percentage relationships among
any amounts in the Consolidated Financial Statements are not necessarily
indicative of trends in operating results for any future period.
OVERVIEW
GTSI is the largest dedicated reseller of microcomputer and Unix
workstation hardware, software and networking products to the Government.
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, many 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 through 1992); to the
addition of new vendors (e.g., IBM, Sun, Panasonic, Apple and Nexar, from
1988 through 1996); and to the addition or expiration of sales contract
vehicles (e.g., the addition of the Desktop IV Contract, the SEWP I
Contract, the NIH Contract and the TDA-1 Contract from 1993 through 1996,
and the expiration of the Companion Contract in 1995 and Desktop IV systems
ordering in 1996). 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
contract vehicles as possible under the various purchasing programs
available to it 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.
- 9 -
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that selected items within the statement of operations bear to
sales and the annual percentage changes in the dollar amounts of such
items.
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE CHANGE
OF SALES ----------
------------------ THREE
THREE MONTHS
MONTHS ENDED ENDED
MARCH 31, MAR. 31,
------------------ 1996
1997 1996 TO 1997
-------- -------- ----------
<S> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 6.8%
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 92.1 91.4 7.6
-------- --------
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . 7.9 8.6 (2.0)
-------- --------
Operating expenses:
Selling, general and administrative. . . . . . . . . . . . . 10.3 10.5 4.4
Depreciation and amortization. . . . . . . . . . . . . . . . 1.0 0.9 14.8
-------- --------
Total operating expenses. . . . . . . . . . . . . . . . . . . 11.3 11.4 5.3
-------- --------
Loss from operations. . . . . . . . . . . . . . . . . . . . . (3.4) (2.8) 27.5
Interest expense, net . . . . . . . . . . . . . . . . . . . . 0.4 0.7 (29.9)
-------- --------
Loss before taxes . . . . . . . . . . . . . . . . . . . . . . (3.8) (3.5) 15.8
Income tax benefit. . . . . . . . . . . . . . . . . . . . . . - (1.3) (100.0)
-------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . (3.8)% (2.2)% 87.2
======== ========
</TABLE>
- 10 -
<PAGE>
The following table sets forth, for the periods indicated, the
approximate sales by sales category, along with related percentages of
total sales.
<TABLE>
<CAPTION>
SALES CATEGORY THREE MONTHS ENDED MARCH 31,
---------------------------------------
(Dollars in Thousands) 1997 1996
------------------- -------------------
<S> <C> <C> <C> <C>
GSA Schedules . . . . $ 32,010 36.2% $ 30,730 37.1%
IDIQ Contracts. . . . 26,028 29.5 29,888 36.1
Open Market . . . . . 22,647 25.6 20,053 24.2
Other Contracts . . . 6,634 7.5 2,121 2.6
Blanket Purchase
Agreements. . . . . 1,088 1.2 - -
--------- --------- --------- ---------
Total. . . . . . $ 88,407 100.0% $ 82,792 100.0%
========= ========= ========= =========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED
WITH THE THREE MONTHS ENDED MARCH 31, 1996
Sales. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. In the first
quarter of 1997, sales increased $5.6 million, or 6.8%. The primary
reasons for the increase over the same quarter last year were the increased
sales under Other Contracts (including sales to both prime contractors and
state and local governments) and Blanket Purchase Agreements (a category
which did not exist during the first quarter of 1996) of approximately $4.5
million, and $1.1 million, respectively. The Company also realized
increases in the Open Market and GSA Schedules sales categories of $2.6
million and $1.3 million, respectively, which were offset by a reduction in
sales under indefinite-delivery/indefinite- quantity ("IDIQ") contracts of
$3.9 million, or 12.9%. The slight increase in sales under the Company's
GSA Schedule contracts was comprised of $2.3 million of increased GSA
Schedule B/C sales offset by a decline in sales under GSA Schedule A of
$1.0 million.
From a vendor perspective, sales of Compaq, Panasonic and Epoch
products increased approximately $7.1 million (from $7.0 million to $14.1
million, or 101.4%), $5.3 million (from $4.5 million to $9.8 million, or
117.8%) and $4.7 million (from $0 to $4.7 million, or 100.0%),
respectively. These increases were partially offset by decreased sales of
IBM label and Everex products, which declined $8.2 million (from $10.6
million to $2.4 million, or 77.4%) and $6.5 million (from $6.5 million to
$0, or 100%), respectively, due to the lack of shipments under the Desktop
IV contract (as systems ordering expired on February 1, 1996).
- 11 -
<PAGE>
Backlog at March 31, 1997 was approximately $11.5 million, down 43.9%
from approximately $20.5 million at March 31, 1996. Backlog was $11.8
million at May 1, 1997.
Gross Margin. Gross margin is sales less cost of sales (which
includes product purchase cost, freight and certain other 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 first quarter of 1997, gross margin decreased in absolute
dollars by approximately $143,000, or 2%, and decreased as a percentage of
sales from 8.6% to 7.9% when compared to the same period a year ago.
Although sales were higher during 1997, the negligible decrease in absolute
dollars resulted primarily from the favorable resolution of a vendor
contractual matter during the first quarter of 1996. This matter also
favorably impacted the overall gross margin percentage in 1996. Excluding
the gross margin impact of this matter from 1996 operating results, the
gross margin percentage earned in the first quarter of 1997 was slightly
higher than the gross margin percentage earned during the same period in
1996. 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 first quarter of 1997
increased approximately $500,000, or 5.3%, and decreased as a percentage of
sales from 11.4% to 11.3%. The increase in absolute dollars is primarily
attributable to increases in personnel costs. This increase was partially
offset by a decrease in expenditures for contracted services. The Company
also received a lower amount of vendor incentives during the first quarter
of 1997, which contributed to increased net marketing expenses. Vendor
incentives, cooperative advertising and market development reimbursements
are used to partially offset selling, advertising, promotion and marketing
expenses. Operating expenses decreased as a percentage of sales due to the
higher volume of sales in the first quarter of 1997 when compared to the
same quarter in 1996.
Interest Expense. The approximate $180,000, or 29.9% decrease in net
interest expense in the first quarter of 1997 was due primarily to lower
average borrowings throughout the first quarter, offset by higher interest
rates.
Income Taxes. No tax benefit was recognized with respect to the
Company's operating loss in the first quarter of 1997 as the Company
determined that certain net deferred tax assets did not satisfy the
recognition criteria set forth in Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). Accordingly,
the Company increased its valuation allowance to $6.4 million in the first
quarter of 1997. In the fourth quarter of 1996, the Company determined
that $5.1 million of net deferred tax assets did not satisfy the
- 12 -
<PAGE>
recognition criteria set forth in FAS 109. As such, a valuation allowance
was initially recorded against the applicable net deferred tax assets
during the fourth quarter of 1996. A tax benefit of $1.1 million was
recorded in the first quarter of 1996 as a result of the Company's net
operating loss for the respective period. The 1996 tax benefit will be
realized by carrying back the loss to prior years in which the Company
recognized taxable 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
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 legislative or any 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 quarter of 1997, the Company generated $12.8 million
of cash flow from operations, as compared to $44.9 million for the quarter
ended March 31, 1996. Most of the decrease from year to year relates to
the Company's focused efforts over the past 15 months to reduce net
- 13 -
<PAGE>
operating assets (accounts receivable plus merchandise inventories less
accounts payable). After reduction of approximately $500,000 of capital
expenditures from the net cash provided by operating activities, overall
short-term notes payable to banks decreased $12.2 million. As a result of
the Company's seasonal sales patterns, working capital levels are
traditionally lower in the first quarter of the year and short-term debt
levels are reduced.
During the fourth quarter of 1995, the Company began negotiations with
a bank ("Principal Lender") and other lenders ("Other Lenders")
(collectively, "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 March 26, 1996, the Company and its Principal Lender
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 with
the Principal Lender for $40.0 million and a one-year credit facility with
the Other Lenders for an additional $55.0 million (collectively, the
"Credit Facility"), replacing the Interim Agreement. Additionally, on June
27, 1996, the Company executed a separate $10.0 million facility with the
Principal Lender for inventory financing of vendor products. Interest
under the inventory financing facility is accrued at a rate equal to prime
plus 3.00% (11.5% at March 31, 1997). On August 23, 1996, the Company and
its Lenders executed Amendment No. 1 to the Credit Facility, which modified
certain financial covenants. At March 31, 1997, the unused portion of the
Credit Facility was $22.3 million.
Interest under the Credit Facility is payable quarterly and is accrued
at a rate equal to the London Interbank Offered Rate ("LIBOR") plus 2.24%
(7.64% at March 31, 1997). 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 December 31, 1996, the Company was not in compliance
with the Earnings Before Interest and Taxes and Tangible Net Worth
covenants contained in the Credit Facility. Although the Principal Lender
has the right to discontinue making any new loans and to call the
outstanding loan, such Principal Lender has continued to provide financing
to the Company under the existing Credit Facility. All amounts due to the
Lenders as of March 31, 1997 are classified as current liabilities.
- 14 -
<PAGE>
As of May 15, 1997, the Company continued to be out of compliance with
certain 1996 year-end financial covenants contained in the Credit Facility.
The Company is currently reviewing a proposal from its Principal Lender to
amend the terms and conditions of the Credit Facility. Management
presently estimates that the amended Credit Facility will reflect market
pricing common to credit agreements with companies of similar size,
complexity and risk as GTSI. The Company presently expects to complete
negotiations with its Principal Lender on or before June 30, 1997, and the
Principal Lender has agreed to refrain from enforcing its rights with
respect to such covenant violations on the condition that the Company
execute an amendment to the Credit Facility prior to said date. Management
presently estimates that the final terms of the amended Credit Facility
will neither adversely impact nor materially benefit the Company's total
borrowing costs in 1997.
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, including
permanent financing over a longer term at fixed rates, 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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The references to amendment to, and/or renegotiation of, the Credit
Facility, and other statements which are not historical facts contained in
the Management's Discussion and Analysis of Financial Condition, Results of
Operations and Notes to Consolidated Financial Statements, are
forward-looking statements that involve certain risks and uncertainties.
Actual results may differ materially based on numerous factors, including
but not limited to competition in the government markets, spending patterns
of the Company's customers, general economic and political conditions,
success of negotiations with the Company's Lenders, and other risks
described in this Report and in the Company's other Securities and Exchange
Commission filings.
- 15 -
<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 rebates 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.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K --
(a) Exhibits:
11.1 Computation of Earnings Per Share
(b) Reports on Form 8-K: Inapplicable.
- 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: May 15, 1997
GOVERNMENT TECHNOLOGY SERVICES, INC.
By: /s/ M. DENDY YOUNG
--------------------------------------
M. Dendy Young
President and Chief Executive Officer
By: /s/ CHARLES A. HASPER
--------------------------------------
Charles A. Hasper
Vice President, Controller and
Acting Chief Financial Officer
- 17 -
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ---------- ---------------------------------------
11.1 Computation of Earnings Per Share
<PAGE>
Exhibit 11.1
GOVERNMENT TECHNOLOGY SERVICES, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (3,404) $ (1,818)
======== ========
Weighted average shares of common stock outstanding . . . 6,725 6,675
Weighted average effect of common share equivalents . . . - -
-------- --------
Weighted average shares outstanding . . . . . . . . . . . 6,725 6,675
======== ========
Net loss per common share and common share equivalent . . $ (0.51) (0.27)
======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 169
<SECURITIES> 0
<RECEIVABLES> 59,919
<ALLOWANCES> 0
<INVENTORY> 22,443
<CURRENT-ASSETS> 90,269
<PP&E> 8,894
<DEPRECIATION> 0
<TOTAL-ASSETS> 100,896
<CURRENT-LIABILITIES> 58,397
<BONDS> 0
0
0
<COMMON> 34
<OTHER-SE> 41,410
<TOTAL-LIABILITY-AND-EQUITY> 100,896
<SALES> 88,407
<TOTAL-REVENUES> 88,407
<CGS> 81,399
<TOTAL-COSTS> 81,399
<OTHER-EXPENSES> 9,993
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 419
<INCOME-PRETAX> (3,404)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,404)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,404)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> 0
</TABLE>
