<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, 1998
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, 1998
- ------------------------------ --------------------------------------
Common Stock, $0.005 par value 6,778,180
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GOVERNMENT TECHNOLOGY SERVICES, INC.
Quarterly Report on Form 10-Q
for the Quarterly Period Ended March 31, 1997
Table of Contents Page
- ----------------- ----
COVER PAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS -
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997. . . . . . . . . . . . . 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1997. . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997. . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . .11
PART II -- OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . .17
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
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GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . $ 168 $ 856
Accounts receivable, net. . . . . . . . . . . 82,433 90,905
Merchandise inventories . . . . . . . . . . . 65,141 33,000
Net deferred taxes and other. . . . . . . . . 3,177 3,423
---------- ----------
Total current assets. . . . . . . . . . . . 150,919 128,184
Property and equipment, net . . . . . . . . . . 7,776 8,217
Intangible assets, net. . . . . . . . . . . . . 367 534
Net deferred taxes and other. . . . . . . . . . 529 529
---------- ----------
Total assets. . . . . . . . . . . . . . . . $ 159,591 $ 137,464
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks. . . . . . . . . . . . 13,324 21,569
Accounts payable. . . . . . . . . . . . . . . 87,408 67,720
Accrued liabilities . . . . . . . . . . . . . 9,276 8,035
---------- ----------
Total current liabilities . . . . . . . . . 110,008 97,324
Other liabilities . . . . . . . . . . . . . . . 244 266
---------- ----------
Total liabilities . . . . . . . . . . . . . 110,252 97,590
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred Stock - $0.25 par value;
680,850 shares authorized; 15,375 issued
and outstanding at March 31, 1998; and
none issued and outstanding at December
31, 1997. . . . . . . . . . . . . . . . . . 12,952 -
Common Stock - $0.005 par value;
10,000,000 shares authorized;
6,806,084 shares issued and 6,763,180
outstanding at March 31, 1998; and
6,806,084 shares issued and 6,756,180
outstanding at December 31, 1997. . . . . . 34 34
Capital in excess of par value. . . . . . . . 33,033 33,086
Retained earnings . . . . . . . . . . . . . . 3,785 7,295
Treasury stock, 42,904 shares at March 31,
1998; and 49,904 shares at December 31,
1997, at cost . . . . . . . . . . . . . . . (465) (541)
---------- ----------
Total stockholders' equity. . . . . . . . . 49,339 39,874
---------- ----------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . . . . . $ 159,591 $ 137,464
========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . $ 99,094 $ 88,407
Cost of sales . . . . . . . . . . . . . . . . . 90,554 81,277
---------- ----------
Gross margin. . . . . . . . . . . . . . . . . . 8,540 7,130
Operating expenses. . . . . . . . . . . . . . . 11,602 10,115
---------- ----------
Loss from operations. . . . . . . . . . . . . . (3,062) (2,985)
Interest expense, net of interest income of
$105 and $80, respectively. . . . . . . . . . 447 419
---------- ----------
Loss before taxes . . . . . . . . . . . . . . . (3,509) (3,404)
Income tax benefit. . . . . . . . . . . . . . . - -
---------- ----------
Net loss. . . . . . . . . . . . . . . . . . . . $ (3,509) $ (3,404)
========== ==========
Net loss per share. . . . . . . . . . . . . . . $ (0.52) $ (0.51)
========== ==========
Weighted average number of shares outstanding . 6,756 6,725
========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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<TABLE>
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . $ (3,509) $ (3,404)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . 961 894
Accounts receivable . . . . . . . . . . . . . . . 8,472 30,197
Merchandise inventories . . . . . . . . . . . . . (32,140) 9,401
Other assets. . . . . . . . . . . . . . . . . . . 329 470
Accounts payable. . . . . . . . . . . . . . . . . 19,688 (23,841)
Other liabilities . . . . . . . . . . . . . . . . 1,219 (892)
-------- --------
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . . . (4,980) 12,825
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of property and equipment . . . . . . . . . . . (438) (489)
Payment related to asset purchase of
BTG Division. . . . . . . . . . . . . . . . . . . (7,826) -
Proceeds from sales of property and equipment . . . - 21
-------- --------
Net cash provided by (used in) investing
activities. . . . . . . . . . . . . . . . . . (8,264) (468)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of bank notes, net. . . . . . . . . . . . . (419) (12,236)
Proceeds from issuance of preferred stock
pursuant to asset purchase of BTG Division. . . . 12,952 -
Proceeds from exercises of stock options
and warrants. . . . . . . . . . . . . . . . . . . 23 -
-------- --------
Net cash provided by (used in) financing
activities. . . . . . . . . . . . . . . . . . 12,556 (12,236)
-------- --------
Net increase in cash. . . . . . . . . . . . . . . . . . (688) 121
Cash at beginning of period . . . . . . . . . . . . . . 856 48
-------- --------
Cash at end of period . . . . . . . . . . . . . . . . . $ 168 $ 169
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . $ 707 $ 607
Income taxes. . . . . . . . . . . . . . . . . . . - 2
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements of
Government Technology Services, Inc. ("GTSI" or the "Company") have been
prepared pursuant to the rules and regulations for the Securities and
Exchange Commission ("SEC") 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 financials for the
year ended December 31, 1997 and the accompanying Notes to the Financial
Statements, contained in the Company's 1997 Annual Report on Form 10-K. In
the opinion of Management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of interim period
results have been made. The interim results reflected in the consolidated
financial statements are not necessarily indicative of results expected for
the full year, or future periods.
Certain amounts from prior years have been reclassified to conform to
the current year financial statement presentation.
EARNINGS PER SHARE. Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") 128, "Earnings Per
Share," which 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 subsequently share in the
earnings of the entity. Since the effect of outstanding options is anti-
dilutive, they have been excluded from the Company's computation of net
loss per share.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board issued SFAS 130, "Reporting Comprehensive Income," and SFAS
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components, and SFAS 131 establishes new
standards for public companies to report information about their operating
segments, products and services, geographic areas and major customers.
SFAS 130 is effective for financial statements issued for fiscal years
beginning after December 31, 1997. Accordingly, effective January 1, 1998,
the Company adopted SFAS 130 and in accordance therewith, the Company's
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Comprehensive Income equals reported "Net Income (Loss)." SFAS 131 is
effective for financial statements issued for fiscal years beginning after
December 15, 1997; however, in the initial year of application, SFAS 131
need not be applied to interim financial statements.
2. NOTES PAYABLE TO BANKS
On May 2, 1996, the Company executed a three-year credit facility with
a bank (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"). 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 "Wholesale Financing
Facility"). Interest under the inventory financing facility is accrued at
a rate equal to prime plus 3.00% (11.25% at December 31, 1996). On August
23, 1996, the Company and its banks executed Amendment No. 1 to the Credit
Facility, which modified certain quarterly financial covenants.
On June 30, 1997, the Company and its banks executed the Second
Amended and Restated Business Credit and Security Agreement. The agreement
modified some of the terms and conditions contained in the Credit Facility
and effectively eliminated the Company's default condition with certain
1996 year-end financial covenants. The total amount available under the
Credit Facility was reduced from a total of $95 million to $60 million,
with an additional $30 million reduction during the period February 1 -
July 31 of each year. Further, the Wholesale Financing Facility was
increased from $10 million to $20 million, with a $10 million reduction
during the period March 1 - July 31 of each year. Other modifications
included the revision of the Credit Facility's term to one year with a one-
year automatic renewal, the addition of an unused line fee, an increase in
the interest rate accrued against outstanding borrowings, and the
modification of all financial covenants.
At December 31, 1997, the Company was not in compliance with the
annual covenant covering Net Income and the fourth quarter covenant related
to Tangible Net Worth. On February 3, 1998, the Company obtained waivers
from the agent for all covenant violations at December 31, 1997. Amounts
due to the lenders as of December 31, 1997 are classified as current
liabilities and the available portion of the Credit Facility at December
31, 1997 was approximately $18.7 million.
On February 11, 1998, the Second Amended and restated Business Credit
and Security Agreement was revised to limit the total amount available
under the facility to $60 million for an additional two months. The total
available under the facility is reduced to $30 million only during the
period April 1, 1998 to July 31, 1998. As for the Wholesale Financing
facility, the amount available under the agreement remains at $20 million
and is used solely for inventory purchases. The amount available is
reduced to $10 million only during the period April 1, 1998 to July 31,
1998. All other terms of both facilities remain the same. Interest under
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the Credit Facility is payable quarterly and is accrued at a rate equal to
the London Interbank Offered Rate ("LIBOR") plus 2.95% (8.64% at March 31,
1998). Borrowing is limited to 80% of eligible accounts receivable. The
Credit Facility is substantially secured 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 that include restrictions
on the payment of dividends, the repurchase of stock, and provisions
specifying compliance with certain quarterly and annual financial
statistical ratios. At March 31, 1998, the Company was in compliance with
its quarterly financial covenants.
The Company is in the process of renegotiating the terms of its credit
facility for the renewal period beginning August 1, 1998.
3. ACQUISITION
On February 12, 1998, the Company entered into and closed on an Asset
Purchase Agreement with BTG, Inc. and two of its subsidiaries
(collectively, "BTG") under which the Company acquired substantially all of
the assets of the BTG division that resells computer hardware, software and
integrated systems to the Government (the "BTG Division"). The acquired
assets consisted primarily of inventory and rights under certain contracts
and intangible personal property, along with furniture, fixtures, supplies
and equipment. In addition, the Company assumed certain liabilities under
specified contracts of BTG as well as certain liabilities arising from the
ownership or operation of the acquired assets after the closing. The
Company paid at closing $7,325,265 in cash (after a $174,735 adjustment for
accrued vacation liability and satisfaction of an outstanding invoice owed
by BTG) and issued 15,375 shares, having a liquidation preference of
$15,375,000, of a new series of preferred stock designated Series C 8%
Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"). The
Company paid an additional $500,000 in cash upon the release of liens on
certain items of equipment which are part of the acquired assets. A
portion of the consideration, $800,000 in cash and 1,538 shares of Series C
Preferred Stock, is being held under an escrow agreement to secure BTG's
indemnification obligations under the Asset Purchase Agreement. Under the
Asset Purchase Agreement, BTG is obligated to repay to the Company up to
$4.5 million to the extent that there is a shortfall in the amounts that
the Company receives from dispositions of certain inventory acquired.
Subsequent to the closing, BTG delivered to the Company certain other
inventory for which BTG has submitted an invoice in the amount of
$3,500,000, as estimated by BTG, payable net 90 days. The Company and BTG
are engaged in discussions regarding the manner of crediting and disposing
of such inventory and payment, if any, therefor under the Asset Purchase
Agreement or under a possible amendment or supplement thereto, or other
agreement, that the parties may negotiate.
Pursuant to the Asset Purchase Agreement, the Company agreed to
convene a meeting of stockholders no later than January 1, 1999 (the "First
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Meeting") to approve a proposal to convert the Series C Preferred Stock
into 3,000,000 shares of Common Stock (the "Conversion Proposal"), and a
proposal to amend the Company's Certificate of Incorporation to increase
the number of authorized shares of Common Stock from 10,000,000 to
20,000,000 (the "Charter Amendment Proposal"). If the Conversion Proposal
and the Charter Amendment Proposal are approved, the Series C Preferred
Stock will be converted automatically into that number of shares of Common
Stock equal to the liquidation preference of the Series C Preferred Stock
($15,375,000 or $1,000 per share) plus all accrued and unpaid dividends
thereon divided by the conversion price of $5.125. If the Conversion
Proposal and the Charter Amendment Proposal are approved at the Annual
Meeting of Stockholders scheduled to be held on May 12, 1998, which will be
the First Meeting, the Series C Preferred Stock will be converted into
3,000,000 shares of Common Stock. If the Conversion Proposal and the
Charter Amendment Proposal are not approved at the Annual Meeting, (a) the
Company has agreed to convene a second meeting of stockholders no later
than January 1, 2000 to approve the Conversion Proposal and the Charter
Amendment Proposal, and (b) the Series C Preferred Stock will begin to
accrue dividends.
The acquisition of the BTG Division was accounted for using the
purchase method of accounting. The purchase price was allocated to
tangible assets based on fair value ($22 million of product inventory).
The financial statements include the results of operation of the BTG
Division since the acquisition date.
The following table sets forth the unaudited pro forma results of
operations of the Company and the BTG Division for the three months ended
March 31, 1997 and 1998, assuming the acquisition occurred on January 1,
1997. Net loss for 1998 excludes approximately $1 million of operating
cost directly attributable to the acquisition.
1998 1997
---------- ----------
Revenues . . . . . . . . . . . . . $ 140,231 $ 149,504
Net loss . . . . . . . . . . . . . $ (2,874) $ (4,515)
Loss per share . . . . . . . . . . $ (0.43) $ (0.67)
This pro forma information does not purport to be indicative of the
results which may have been obtained had the acquisition been consummated
at the date assumed.
4. PROPERTIES
The Company's administrative offices are located in an approximate
190,000-square foot group of facilities in Chantilly, Virginia under a
lease expiring in November 1998. In November 1997, the Company entered
into an agreement to build and lease a new administrative facility
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consisting of approximately 100,000 square feet. The agreement has a 10-
year term with one 5-year option period and will commence on December 1,
1998. The Company, as obligated under the agreement, provided to the
Landlord two Letters of Credit ("LOC") in the amounts of $600,000 on
December 11, 1997 and $1.4 million on April 20, 1998 as a security deposit
for all tenant-requested improvements associated with the lease. The
deposit will be reduced by 10% per year, over the life of the lease.
In addition to the administrative offices, the Company leases a
separate 200,000 square foot warehouse and distribution facility in
Chantilly, Virginia, under a lease expiring December 2006. As a result of
the BTG Division acquisition, the Company also has an agreement to sublease
from BTG two warehouse and distribution facilities located in Chattanooga,
Tennessee and Fairfax, Virginia, respectively. The Chattanooga facility's
sublease will expire in March of 1999, and the Fairfax facility's sublease
will expire in August of 1998.
The Company also has branch sales offices located in Chicago, Illinois
and Heidelberg, Germany, which operate under multi-year leases expiring at
various times throughout 1998.
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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, 1997. 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 one of the largest dedicated resellers of microcomputers and
Unix workstation hardware, software and networking products to the
Government. The Company currently offers access to over 150,000
information technology products from more that 1,200 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 of 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.
The Company is committed to and focused on the government customer.
The Company's primary strategy is to focus on maximizing its presence in
the government market by competitively bidding as many contract vehicles as
possible under various government purchasing programs, maintaining and
establishing relationships with vendors which allow for a broader product
offering, and focusing to increasing customer responsiveness and service.
The February 12, 1998 acquisition of the BTG Division provides the Company
with key government contract vehicles, especially indefinite
delivery/indefinite quantity contracts, that will continued to enhance its
presence in the Government market.
Changes in sales throughout the Company's history have been
attributed to increased or decreased unit sales, to expansion of the
Company's product offerings, to the addition of new vendors and to the
addition or expiration of contract sales vehicles. The Company's financial
results have fluctuated seasonally, and may continue to do so because of
the of the Government's buying patterns which have historically favorably
impacted the last two calendar quarters and adversely affected the first
two calendar quarters.
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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,
------------------ 1997
1998 1997 TO 1998
-------- -------- ----------
<S> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 12.1%
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 91.4 91.9 (11.4)
-------- --------
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . 8.6 8.1 19.8
-------- --------
Operating expenses:
Selling, general and administrative. . . . . . . . . . . . . 10.7 10.4 14.4
Depreciation and amortization. . . . . . . . . . . . . . . . 1.0 1.0 8.3
-------- --------
Total operating expenses. . . . . . . . . . . . . . . . . . . 11.7 11.4 14.7
-------- --------
Loss from operations. . . . . . . . . . . . . . . . . . . . . (3.1) (3.3) (2.6)
Interest expense, net . . . . . . . . . . . . . . . . . . . . 0.5 0.5 6.9
-------- --------
Loss before taxes . . . . . . . . . . . . . . . . . . . . . . (3.6) (3.8) (3.1)
Income tax benefit. . . . . . . . . . . . . . . . . . . . . . - - -
-------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . (3.6)% (3.8)% (3.1)%
======== ========
</TABLE>
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) 1998 1997
------------------- -------------------
<S> <C> <C> <C> <C>
GSA Schedules . . . . . . . . . . . . . . $ 25,965 26.2% $ 32,010 36.2%
IDIQ Contracts. . . . . . . . . . . . . . 50,817 51.3 26,028 29.5
Open Market . . . . . . . . . . . . . . . 16,558 16.7 22,647 25.6
Other Contracts . . . . . . . . . . . . . 5,754 5.8 7,722 8.7
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . . . . $ 99,094 100.0% $ 88,407 100.0%
========= ========= ========= =========
</TABLE>
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THREE MONTHS ENDED MARCH 31, 1998 COMPARED
WITH THE THREE MONTHS ENDED MARCH 31, 1997
SALES. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. In the first
quarter of 1998, sales increased by $10.7 million, or 12.1% from the same
period in 1997. This increase is a result of increased sales under
indefinite-delivery/indefinite quantity ("IDIQ") contracts of $24.8 million
or 95.2%. The increased IDIQ contract sales were partially offset by
decreased sales under GSA Schedule and Open Market Contracts of $6.0
million and $6.1 million respectively. The decline in Open Market sales,
in management's belief, 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, BPA's) in a quicker and easier
manner than was the case before such changes.
From a vendor perspective, sales of Hewlett-Packard Company, CISCO
Systems Incorporated and Everex Systems Incorporated products increased
approximately $8.0 million (from $12.9 million to $20.9 million), $3.9
million (from $300,000 to $4.2 million), and $8.5 million (from $14,000 to
$8.5 million) respectively. These increases were partially offset by lower
Apple Computer, Inc., Nexar Technologies, Inc., Compaq Computer Corporation
and International Business Machines Corporation-label products of $1.7
million, $2.0 million, $3.8 million and $1.6 million, respectively.
Booked Backlog at March 31, 1998, was approximately $69.5 million
compared to $31.1 million at March 31, 1997. Booked Backlog was $61.6
million at April 30, 1998, up $30.8 million, or 100%. The increase in
booked backlog is primarily related to orders that were recorded as part of
the BTG Division acquisition. Booked backlog represents orders received
but product has yet to ship.
GROSS MARGIN. Gross margin is sales less cost of sales, which
includes product purchase cost, freight, warranty maintenance cost 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 available contract vehicles.
During the first quarter of 1998, gross margin increased by
approximately $1.4 million, or 19.8%. In addition, gross margin, as a
percentage of sales, increased slightly from 8.1% to 8.6%. The increase in
gross margin is the result of recognition of greater price protection
credits partially offset by increased product warranty maintenance expense.
The change in gross margin percentage is not necessary indicative of gross
margin percentages to be earned in future periods.
OPERATING EXPENSES. Selling, general and administrative expenses for
the three months ended March 31, 1998 increased by approximately $1.5
million, or 14.7%, from the same period in 1997. The increase was due
primarily to operating costs related to the BTG Division acquisition in the
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<PAGE>
amount of $1.0 million, and the increase in the overall volume of business.
Expressed as a percentage of total sales, selling, general and
administrative expenses increased for the three months ended March 31,
1998, to 10.7% from 10.4% in the three months ended March 31, 1997.
Excluding the BTG Division acquisition-related costs of $1.0 million,
selling, general and administrative expenses decreased for the three months
ended March 31, 1998, to 9.7% from 10.4% in the three months ended March
31, 1997. This decrease is reflective of the growth in sales of 12.1%
requiring less additional infrastructure expenses as existing facilities
and personnel are utilized more effectively.
INTEREST EXPENSE. Interest expense for the three months ended March
31, 1998 increased by $53,000, or 10.6%, from the same period in 1997. The
increase was primarily attributable to the additional borrowings required
for the BTG Division acquisition.
INCOME TAXES. No tax benefit was recognized with respect to the
Company's operating loss in the first quarter of 1998 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."
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.
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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
Net cash of approximately $5.0 million was used in operating
activities during the three months ended March 31, 1998. Merchandise
inventories increased significantly due to the acquisition of the BTG
Division. A portion of the increase in inventories was offset by increases
in accounts payable. Accounts receivable decreased on higher sales volume
for the quarter, reflecting improved collection activity.
Investing activities used cash of approximately $8.3 million during
the three months ended March 31, 1998. The primary reason was the cash
payment in February 1998 of $7.8 million relating to the acquisition of the
BTG Division.
During the three months ended March 31, 1998, the Company's financing
activities provided cash of approximately $12.6 million. The Company
received proceeds of $13.0 million from the issuance of 15,875 shares of
preferred stock relative to the BTG Division acquisition. The net payments
against the Company's bank notes includes $7.8 million used to fund the
cash portion of the BTG Division acquisition. At March 31, 1998, the
Company had approximately $16.7 million available for borrowing under its
credit facility.
On July 28, 1997, the Company and its banks executed the Second
Amended and Restated Business Credit and Security Agreement. The amendment
modified certain terms and conditions contained in the Credit Facility and
effectively eliminated the Company's default condition with respect to
compliance with certain 1996 year-end financial covenants contained in the
Credit Facility. More specifically, the total amount available under the
Credit Facility was reduced from a total of $95 million to $60 million,
with an additional $30 million reduction from February 1 - July 31 of each
year. Further, the Wholesale Financing Facility was increased from $10
million to $20 million, with a $10 million reduction from March 1 - July 31
of each year. Other modifications included the revision of the Credit
Facility's term to one year with a one-year automatic renewal, the addition
of an unused line fee, an increase in the interest rate accrued against
outstanding borrowings, and the modification of certain financial
covenants.
At December 31, 1997, the Company was not in compliance with the
annual covenant covering Net Income and the fourth quarter covenant related
to Tangible Net Worth. On February 3, 1998, the Company obtained waivers
from the Agent for all covenant violations at December 31, 1997. All
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<PAGE>
amounts due to the Lenders as of December 31, 1997 are classified as
current liabilities, and the available portion of the modified Credit
Facility was $18.7 million at December 31, 1997.
On February 11, 1998, the Second Amended and Restated Business Credit
and Security Agreement was amended to extend the credit limit for two
months, during which time the total amount available equaled $60.0 million.
For the "Seasonal Reduction Period" commencing March 31, 1998 and ending on
July 31, 1998, the credit available will equal $30 million. Additionally,
the reduction period for the Wholesale Financing facility was amended to
extend from March 31, 1998 to July 31, 1998 during which the available
credit under the facility will equal $10 million.
Interest under the Credit Facility is payable quarterly and is accrued
at a rate equal to the London Interbank Offered Rate ("LIBOR") plus 2.95%
(8.64% at March 31, 1998). Borrowing is limited to 80% of eligible
accounts receivable. The Credit Facility is secured 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 March
31, 1998, the Company was in compliance with its quarterly financial
covenants.
The Company anticipates that it will continue to rely primarily on
operating cash flow, bank loans and vendor credit to finance its operating
cash needs. The Company believes that 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 working capital requirements. The Company believes that
such capital sources will be available to it on acceptable terms, if
needed. The Company is in the process of renegotiating its terms with its
credit facility for the renewal period beginning August 1, 1998.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
This Form 10-Q, including certain documents incorporated herein by
reference, contains "forward-looking" statements that involve certain risks
and uncertainties. Actual results may differ materially from results
express or implied by such forward-looking statements, based on numerous
factors. Such factors include, but are not limited to, competition in the
government markets, buying patterns of the Company's customers, general
economic and political conditions, results of negotiations with the
Company's lenders concerning a new credit facility, changes in laws and
government procurement regulations, and other risks described in this Form
10-Q and in the Company's other SEC filings. For these statements, the
Company claims the protection of the safe harbor for forward-looking
statements under the Private Securities Litigation Reform Act of 1995.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS --
On October 5 1997, the Company entered into a settlement agreement
with the Department of Justice under which the Company will pay the
Government a total of $400,000 plus $22,000 in legal fees that are to be
paid in three equal installments. Interest will accrue from the date of
settlement and will be paid over the installment period. The agreement
resolves and releases the Company from claims relating to a GSA audit of
the Company's GSA schedule sales for the years 1988 to 1997, and settles
and dismisses with prejudice a qui tam lawsuit filed on behalf of the
Government regarding such GSA schedule sales. The qui tam lawsuit naming
the Company was filed under seal in 1995 and was subject to a court order
prohibiting disclosure of the suit. The qui tam action was filed by the
same individual who filed a similar suit against Novell, Inc. in 1992,
which Novell settled by paying the Government $1.7 million.
In December 1996, the Company settled litigation pending before the
Armed Services Board of Contract Appeals related to the Company's
obligation to provide "upgrades" of certain computer software under the
Desktop IV Contract. The settlement required the Company to provide,
without charge, certain software licenses to users who registered before
February 28, 1997.
At December 31, 1996, the Company recorded a liability of
approximately $3.0 million, which represented management's estimate of the
costs necessary to provide the "upgrades" noted above plus estimated
professional services costs paid in 1997 related to the GSA audit. The
balance of this reserve was approximately $800,000 as of February 28, 1998.
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K --
(a) Exhibits:
11 Computation of Earnings Per Share
(b) Reports on Form 8-K:
(1) On October 9, 1997, the Registrant filed a Current Report on
Form 8-K reporting that the Registrant had reached an
agreement of certain legal matters.
(2) On December 19, 1997, the Registrant filed a Current Report
on Form 8-K reporting that the Registrant had signed a
letter of intent for the purchase by the Registrant of the
product sales division of BTG, Inc.
(3) On January 13, 1998, the Registrant filed a Current Report
on Form 8-K reporting that the Registrant had amended the
above-referenced letter of intent.
(4) On January 26, 1998, the Registrant filed a Current Report
on Form 8-K reporting that the Registrant had extended the
above-referenced letter of intent.
(5) On February 12, 1998, the Registrant filed a Current Report
on Form 8-K reporting that the Registrant had completed the
transaction contemplated by the above-referenced letter of
intent.
(6) On April 2, 1998, the Registrant filed Amendment No. 1 to
Current Report on Form 8-K/A to provide the required
financial statements in connection with the completion of
the above-referenced transaction.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: May 15, 1997
GOVERNMENT TECHNOLOGY SERVICES, INC.
By: /s/ DENDY YOUNG
--------------------------------------
Dendy Young
Chairman, President and
Chief Executive Officer
By: /s/ STEPHEN L. WAECHTER
--------------------------------------
Stephen L. Waechter
Senior Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
===========================================================================
EXHIBIT |
NUMBER | DESCRIPTION
- ---------------------------------------------------------------------------
11 | Computation of Earnings Per Share
- ---------------------------------------------------------------------------
27 | Financial Data Schedule
===========================================================================
<PAGE>
Exhibit 11
GOVERNMENT TECHNOLOGY SERVICES, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (3,509) $ (3,404)
======== ========
Weighted average shares of common
stock outstanding. . . . . . . . . . . . . . . . . . . 6,756 6,725
======== ========
Net loss per common share and common
share equivalent . . . . . . . . . . . . . . . . . . . $ (0.52) $ (0.51)
======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 168
<SECURITIES> 0
<RECEIVABLES> 86,764
<ALLOWANCES> (4,331)
<INVENTORY> 65,141
<CURRENT-ASSETS> 150,919
<PP&E> 17,679
<DEPRECIATION> (9,903)
<TOTAL-ASSETS> 159,951
<CURRENT-LIABILITIES> 109,908
<BONDS> 0
0
13,052
<COMMON> 34
<OTHER-SE> 36,353
<TOTAL-LIABILITY-AND-EQUITY> 159,591
<SALES> 99,094
<TOTAL-REVENUES> 99,094
<CGS> 90,554
<TOTAL-COSTS> 90,554
<OTHER-EXPENSES> 11,507
<LOSS-PROVISION> 95
<INTEREST-EXPENSE> 447
<INCOME-PRETAX> (3,509)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,509)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,509)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> 0
</TABLE>
