<PAGE>
1
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 JUNE 30, 1999
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)
3901 STONECROFT BOULEVARD
CHANTILLY, VIRGINIA 20151-0808
(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 August 1, 1999
- ------------------------------ --------------------------------------
Common Stock, $0.005 par value 9,211,402
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2
GOVERNMENT TECHNOLOGY SERVICES, INC.
Quarterly Report on Form 10-Q
for the Period Ended June 30, 1999
INDEX
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Table of Contents Page
- ----------------- ----
COVER PAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS -
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1999 and 1998 . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998 . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . .12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . .22
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . .23
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
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3
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
ASSETS ----------- ------------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,131 $ 39
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . 101,926 106,334
Merchandise inventories . . . . . . . . . . . . . . . . . . . . 27,822 36,544
Net deferred taxes and other. . . . . . . . . . . . . . . . . . 3,843 3,099
---------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . 137,722 146,016
Property and equipment, net . . . . . . . . . . . . . . . . . . . 11,952 11,381
Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . - 114
Net deferred taxes and other. . . . . . . . . . . . . . . . . . . 2,001 3,579
---------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 151,675 $ 161,090
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks. . . . . . . . . . . . . . . . . . . . . $ - $ 14,889
Current portion of long-term debt . . . . . . . . . . . . . . . 500 -
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 85,789 75,806
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 13,265 13,115
---------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . 99,554 103,810
Long-term debt, less current maturities . . . . . . . . . . . . . 1,500 -
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,986 1,956
---------- -----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 103,040 105,766
---------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred Stock - $0.25 par value; 680,850 shares authorized;
none issued or outstanding . . . . . . . . . . . . . . . . . - -
Common Stock - $0.005 par value; 20,000,000 shares authorized;
9,806,084 issued and 9,211,402 outstanding at June 30,
1999; and 9,806,084 issued and 9,799,490 outstanding at
December 31, 1998. . . . . . . . . . . . . . . . . . . . . . 49 49
Capital in excess of par value. . . . . . . . . . . . . . . . . 43,681 45,712
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 7,810 9,634
Treasury stock, 594,682 shares at June 30, 1999; and
6,594 shares at December 31, 1998, at cost . . . . . . . . . (2,905) (71)
---------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . 48,635 55,324
---------- -----------
Total liabilities and stockholders' equity . . . . . . . . . $ 151,675 $ 161,090
========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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4
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $148,760 $136,901 $274,309 $235,995
Cost of sales . . . . . . . . . . . . . . . . . . . . . 136,514 124,560 251,991 215,122
-------- -------- -------- --------
Gross margin. . . . . . . . . . . . . . . . . . . . . . 12,246 12,341 22,318 20,873
Operating expenses. . . . . . . . . . . . . . . . . . . 12,345 11,789 24,875 23,391
-------- -------- -------- --------
Income (loss) from operations . . . . . . . . . . . . . (99) 552 (2,557) (2,518)
Interest income . . . . . . . . . . . . . . . . . . . . (278) (97) (995) (224)
Interest expense. . . . . . . . . . . . . . . . . . . . 110 481 262 1,047
-------- -------- -------- --------
Interest (income) expense, net. . . . . . . . . . . . . (168) 384 (733) 823
-------- -------- -------- --------
Income (loss) before taxes. . . . . . . . . . . . . . . 69 168 (1,824) (3,341)
Income tax expense. . . . . . . . . . . . . . . . . . . - - - -
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 69 $ 168 $ (1,824) $ (3,341)
======== ======== ======== ========
Basic net income (loss) per share . . . . . . . . . . . $ 0.01 $ 0.02 $ (0.20) $ (0.44)
======== ======== ======== ========
Diluted net income (loss) per share . . . . . . . . . . $ 0.01 $ 0.02 $ (0.20) $ (0.44)
======== ======== ======== ========
Basic weighted average shares outstanding . . . . . . . 9,200 8,422 9,332 7,589
======== ======== ======== ========
Diluted weighted average shares outstanding . . . . . . 9,859 8,631 9,332 7,589
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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5
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,824) $ (3,341)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 1,787 1,802
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,551 (13,628)
Merchandise inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 8,722 599
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 834 (1,309)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,308 26,523
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (327) 2,200
-------- --------
Net cash provided by operating activities. . . . . . . . . . . . . . . . 21,051 12,846
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of property and equipment. . . . . . . . . . . . . . . . . . . . . . . (2,244) (986)
Payment related to asset purchase of BTG Division . . . . . . . . . . . . . - (7,826)
Net proceeds from BTG transaction . . . . . . . . . . . . . . . . . . . . . 132 -
-------- --------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . (2,112) (8,812)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of bank notes, net . . . . . . . . . . . . . . . . . . . . . . . . (14,889) (4,887)
Proceeds from exercises of stock options and warrants . . . . . . . . . . . 42 113
-------- --------
Net cash used in financing activities. . . . . . . . . . . . . . . . . . (14,847) (4,774)
-------- --------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . 4,092 (740)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . 39 856
-------- --------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,131 $ 116
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 397 $ 1,122
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Supplemental disclosure of non-cash activities:
The Company entered into a transaction with BTG on February 10, 1999, resulting in the following
non-cash activities:
Treasury stock acquired (600,000 shares at $4.9375 per share). . . . . . $ 2,963 $ -
Option received from BTG to repurchase 1.3 million shares of
GTSI common stock . . . . . . . . . . . . . . . . . . . . . . . . . . 1,944 -
Reduction in net receivables from BTG. . . . . . . . . . . . . . . . . . (1,737) -
Note payable to BTG. . . . . . . . . . . . . . . . . . . . . . . . . . . (2,000) -
Assumption of contract warranty liabilities. . . . . . . . . . . . . . . (1,170) -
During 1998, Company issued 15,375 shares of preferred stock in exchange for $12.952 million of
inventory and other assets in connection with the acquisition of the BTG Division. The shares of
preferred stock were subsequently converted during 1998 to 3.0 million shares of common stock.
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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6
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 of 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, 1998 and the accompanying Notes to the Financial
Statements, contained in the Company's 1998 Annual Report on Form 10-K. In
the opinion of Management, all adjustments, consisting primarily 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. Outstanding common stock options and common stock
purchase warrants were not included in the calculation of diluted per share
results for the six months ended June 30, 1999 and 1998, since the effect
would be anti-dilutive.
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
Comprehensive Income equals reported "Net Income (Loss)." SFAS 131 is
effective for financial statements issued for fiscal years beginning after
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7
December 15, 1997; the Company has determined that through June 30, 1999,
it operated as one business segment as defined by SFAS 131. In addition,
the Company aggregates and reports revenues from products which have
similar economic characteristics in their nature, production, and
distribution process. The primary customer of the Company is the federal
Government, which under SFAS 131 is considered a single customer.
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 million and a one-year credit
facility with the other banks in the lending consortium (the "Other
Lenders") for an additional $55 million (collectively, the "Credit
Facility"). Additionally, on June 27, 1996, the Company executed a
separate $10 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 July 28, 1997, the Company and its banks executed the Second
Amended and Restated Business Credit and Security Agreement (the "Credit
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 $95 million to
$60 million, with an additional $30 million reduction during the period
February 1 through 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 through 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.
On February 11, 1998, the Credit Agreement was revised to, among other
things, limit the total amount available under the facility to $60 million
for an additional two months. The total available under the facility was
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 remained at $20 million and was to be used solely for
inventory purchases. The amount available was reduced to $10 million only
during the period April 1, 1998 to July 31, 1998. All other material terms
of both facilities remained the same.
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8
On July 2, 1998, the Company and its banks executed separate
amendments adjusting, among other things, the seasonality of the total
amount available under the Credit Facility and the Wholesale Financing
Facility, respectively, in any calendar year. The limit of the Credit
Facility will increase to $75 million during the period October 1 through
January 31. During the periods February 1 through April 30 and July 1
through September 30, the total amount available under the Credit Facility
will be limited to $50 million. During the period May 1 through June 30,
the total amount available under the Credit Facility will be limited to $30
million. In addition, the interest rate under the Credit Facility was
amended to a rate of LIBOR plus 2.45%, payable quarterly; reducing to LIBOR
plus 2.25% if, commencing with the fiscal quarter ending September 30,
1998, the Company achieves certain quarterly financial covenants. At
September 30, 1998, the Company was in compliance with all quarterly
financial covenants set forth in the Credit Agreement. As a result, on
October 28, 1998, when the Company delivered its certified financial
statements to the Principal Lender, the interest rate was reduced to LIBOR
plus 2.25%. Prior to this event, the interest rate under the Credit
Agreement was LIBOR plus 2.45%. On August 14, 1998, the limit of the
Wholesale Financing Facility was increased via temporary over-line limit of
up to $10 million through January 31, 1999. The limit of the Wholesale
Financing Facility will remain at $20 million during the period June 1
through January 31, and will decrease to $10 million for the period
February 1 through May 31, of any calendar year. All other material terms
of both facilities remained the same.
On July 1, 1999, the Company and its banks executed an amendment to
the Credit Agreement extending the termination date of the Credit Agreement
through the close of business on August 27, 1999. The Company is
continuing the process of renegotiating the terms of the Credit Facility
for the renewal period beginning August 28, 1999.
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 and the repurchase of the Company's Common
Stock, as well as provisions specifying compliance with certain quarterly
and annual financial statistical ratios. At June 30, 1999, the Company was
in compliance with all quarterly financial covenants set forth in the
Credit Agreement.
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. At June 30, 1999, the Company had no borrowings against the Credit
Facility.
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9
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, was held under an escrow agreement to secure BTG's
indemnification obligations under the Asset Purchase Agreement. Under the
Asset Purchase Agreement, BTG was obligated to repay to the Company up to
$4,500,000 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 ("Surplus Inventory") for which BTG submitted an invoice to the
Company in the amount of $3,500,000, as estimated by BTG, payable net 90
days. By letter dated May 15, 1998, the Company and BTG agreed that BTG
would invoice (payable on June 30, 1998) GTSI an aggregate of $3,912,419.58
($3,500,000 of which had previously been invoiced) for Surplus Inventory.
In addition, the parties agreed that on June 30, 1998, BTG would pay to the
Company $1,000,000, which would constitute full and complete payment for
any inventory shortfall as described in the Asset Purchase Agreement, as
well as $250,000 for costs associated with processing the Surplus
Inventory.
Pursuant to the Asset Purchase Agreement, the Company agreed to
convene a meeting of stockholders no later than January 1, 1999 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"). At the Company's annual meeting of stockholders held
on May 12, 1998, the Company's stockholders approved the Conversion
Proposal and the Charter Amendment Proposal. The Series C Preferred Stock
was converted automatically into 3,000,000 shares of Common Stock valued at
$5.125 per share and which, pursuant to the exemption provided under
Section 4(2) of the Securities Act of 1933, as amended ("Securities Act"),
were not registered under the Securities Act.
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10
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 ($22,000,000 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 six months ended
June 30, 1998, assuming the acquisition occurred on January 1, 1998.
1998
----------
Revenues . . . . . . . . . . . . . . . . . . . . $ 277,133
Net income (loss). . . . . . . . . . . . . . . . $ (3,711)
Income (loss) per share. . . . . . . . . . . . . $ (0.44)
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.
On February 10, 1999, the Company entered into subsequent agreements
with BTG. The agreements relate to the reacquisition of stock by GTSI from
BTG, the terms of certain contracts and the relationship of the parties
going forward. Pursuant to the agreements, GTSI reacquired 600,000 shares
of its stock from BTG. Of the 600,000 shares, 200,000 were tendered to
GTSI at no cost and 400,000 were purchased by GTSI for $5.00 per share,
using a three-year, 8% interest bearing note from BTG with the principal
repaid in three annual installments of $500,000, $500,000 and $1,000,000,
respectively. As part of the agreements, GTSI has an exclusive five-year
option to purchase the remaining 1.3 million shares of GTSI stock held by
BTG for $5.25 per share. Under the February 12, 1998 Asset Purchase
Agreement, BTG is precluded from selling any of its holdings, with certain
limited exceptions, to a third party for six years without GTSI's prior
consent. Under the February 10, 1999 agreement, GTSI must consent to a
sale by BTG of their stock to any third party. If GTSI consents to such a
sale, BTG is obligated to pay GTSI $0.50 per share on any shares sold by
BTG.
As a result of the agreement, BTG transferred to GTSI all of the cash
portion of the February 12, 1998 escrow, totaling $827,219, and BTG's
ownership interest in GTSI was reduced to 13.3%. Consequently, BTG
forfeited its right to representation on the GTSI Board and Dr. Edward H.
Bersoff, Chief Executive Officer of BTG, resigned from the GTSI Board. The
agreements also provide that BTG will novate certain contracts that GTSI
had been performing in the capacity of a subcontractor, and halts all
royalty payments by GTSI to BTG after December 31, 1998.
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11
GTSI recorded the shares reacquired on February 10, 1999 in treasury
stock at cost, totaling approximately $3,000,000. The Company also
recorded the option to purchase the remaining shares of its own stock as a
$1,900,000 reduction to capital in excess of par value.
4. PROPERTIES
In November 1988, the Company executed a ten-year lease for its
corporate headquarters that comprises approximately 120,000 square feet of
office space and 14,000 square feet of warehouse space. The Company also
entered into a nine-year lease for 55,170 square feet of office space in
two buildings beginning December 1, 1989. The lease for the entire facility
expired on November 30, 1998. In October 1997, the Company executed a ten-
year lease for a new administrative facility consisting of approximately
100,500 square feet of new office space in Chantilly, Virginia. The
agreement has one five-year option period and commenced on December 1,
1998. The Company is obligated under the lease agreement to provide to the
Landlord a Letter of Credit ("LOC") in the amount of $2.0 million as a
security deposit for all tenant-requested improvements associated with the
lease. The LOC provided to the Landlord is funded through the Company's
Credit Facility. The Credit Facility's available borrowing amount is
reduced by the $2.0 million LOC. This deposit will be reduced by 10%, per
year, over the life of the lease. The Company has recorded leasehold
improvements in the amount of $2.0 million, as well as a liability for
deferred rent of $2.0 million in conjunction with the build-out
improvements. The asset and liability will be amortized over the life of
the lease.
In addition to the corporate headquarters, the Company leases a
separate 200,000 square foot warehouse and distribution facility in
Chantilly, Virginia, under a lease expiring December 2006.
The Company also subleases a distribution center in Chattanooga,
Tennessee which expired March 31, 1999 and was renewed for a two-year
period with an option to terminate after one year with a termination fee.
The facility was leased on a 20,000 square foot basis until March 31, 1999
with the renewal being for 10,000 square feet. The Company also maintains
a sales office in Germany and has entered into a lease agreement that
extends through December 31, 2000.
<PAGE>
<PAGE>
12
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, 1998. 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 microcomputer 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 than 2,100 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 Cisco in 1998); and to the addition, renewal or
expiration of sales contract vehicles (e.g., the addition of the SEWP II
Contract, the NIH ECS-II Contract, the TDA-1 Contract, the STAMIS Contract
and the PC-3 Contract, from 1997 through 1999, 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
and IDIQ 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 these 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.
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13
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
CHANGE
PERCENTAGE OF SALES -----------------------
-------------------------------------- THREE SIX
THREE SIX MONTHS MONTHS
MONTHS ENDED MONTHS ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
------------------ ------------------ 1998 1998
1999 1998 1999 1998 TO 1999 TO 1999
-------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 8.7% 16.2%
Cost of sales . . . . . . . . . . . . . . 91.8 91.0 91.9 91.2 9.6 17.1
-------- -------- -------- --------
Gross margin. . . . . . . . . . . . . . . 8.2 9.0 8.1 8.8 (0.8) 6.9
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative . . . 7.8 8.0 8.4 9.1 5.7 6.9
Depreciation and amortization . . . . . . 0.5 0.6 0.7 0.8 (15.4) (0.8)
-------- -------- -------- --------
8.3 8.6 9.1 9.9 4.7 6.3
-------- -------- -------- --------
Income (loss) from operations . . . . . . (0.1) 0.4 (1.0) (1.1) (117.9) 1.5
Interest (income) expense, net. . . . . . (0.1) 0.3 (0.3) 0.3 (143.8) (189.1)
-------- -------- -------- --------
Income (loss) before taxes. . . . . . . . - 0.1 (0.7) (1.4) (58.9) (45.4)
Income tax expense. . . . . . . . . . . . - - - - - -
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . - % 0.1% (0.7)% (1.4)% (58.9) (45.4)
======== ======== ======== ========
<CAPTION>
The following table sets forth, for the periods indicated, the
approximate sales by category, along with the related percentages of total
sales:
SALES CATEGORY THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------------------
(Dollars in thousands) 1999 1998 1999 1998
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GSA Schedules . . . . . . . . . . . . . . $ 61,223 41.1 $ 40,367 29.5% $ 104,868 38.2% $ 66,238 28.1%
IDIQ Contracts. . . . . . . . . . . . . . 68,883 46.3 74,643 54.5 133,700 48.8 125,862 53.3
Open Market . . . . . . . . . . . . . . . 14,981 10.1 17,160 12.5 29,936 10.9 33,372 14.1
Other Contracts . . . . . . . . . . . . . 3,673 2.5 4,731 3.5 5,805 2.1 10,523 4.5
--------- --------- --------- --------- --------- --------- --------- ---------
Total. . . . . . . . . . . . . . . . $148,760 100.0% $ 136,901 100.0% $ 274,309 100.0% $ 235,995 100.0%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE>
<PAGE>
14
THREE MONTHS ENDED JUNE 30, 1999 COMPARED
WITH THE THREE MONTHS ENDED JUNE 30, 1998
SALES. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. In the second
quarter of 1999, sales increased $11.9 million or 8.7% from the same period
in 1998. This increase resulted primarily from increased sales under GSA
Schedule-related Blanket Purchase Agreements ("BPAs") over the same quarter
last year of approximately $19.3 million or 91.3%. In addition to
increased BPA sales, GSA Schedule B/C sales increased $2.3 million or
12.7%. The growth in BPA sales is primarily attributed to changes in the
procurement regulations that allow the Government to purchase products by
other means in a quicker and easier manner than was the case in previous
years. In addition, the Company restructured fulfillment under its U.S.
Treasury TDA-1, TDA-2 and TDA-3 contracts under a Treasury Commercial BPA.
In the second quarter of 1998, TDA-1 and TDA-2, both IDIQ contracts, had
aggregate sales of $10.9 million for the quarter ended June 30, 1998.
Sales under IDIQ contracts for the quarter ended June 30, 1999 decreased
$5.8 million or 7.7%. This decrease is primarily attributed to the
restructuring of U.S. Treasury TDA-1, TDA-2 and TDA-3 contracts under the
Treasury Commercial BPA, which was offset by increased sales under the
Company's STAMIS, SEWP and NIH ECS II contracts of $2.5 million or 36.0%,
$4.0 million or 30.0%, and $3.4 million or 39.5%, respectively. Sales of
Microsoft, Hewlett-Packard, Panasonic, Sun and Compaq products comprise a
substantial portion of the Company's business. In the second quarter of
1999 sales from these vendors increased 39.6% or $27.1 million compared to
the same period in 1998.
Total booked backlog at June 30, 1999 was approximately $53.0 million
compared to $65.0 million at June 30, 1998. Total booked backlog was $53.9
million at July 31, 1999, down $13.2 million or 19.7% compared to July 31,
1998, however, the backlog at June 30, 1998 included orders that were
recorded as part of the BTG Division acquisition. Booked backlog
represents orders received for which 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 second quarter of 1999, gross margin decreased by
approximately $95,000 or 0.8%. Gross margin as a percentage of sales
decreased to 8.2% from 9.0%. During the second quarter of 1998, gross
margin was positively impacted by a one-time inventory adjustment of
approximately $2.2 million resulting from a June physical inventory
valuation. Removal of this inventory adjustment results in a pro forma
gross margin of 7.4% for the second quarter of 1998. Excluding the
inventory adjustment, margins during the second quarter of 1999 improved as
a result of favorable margins realized under the Company's Army PC-2
contract as well as improved manufacturer price protection over the same
<PAGE>
<PAGE>
15
period in 1998. The change in gross margin percentages can be impacted by
a variety of factors and is not necessarily indicative of gross margin
percentages to be earned in future periods.
OPERATING EXPENSES. Total selling, general and administrative
expenses for the three months ended June 30, 1999 increased $556,000 or
4.7% from the same period in 1998. The increase was primarily due to
increased personnel cost as well as increases in the overall volume of the
business. Expressed as a percentage of total sales, selling, general and
administrative expenses decreased from 8.6% to 8.3%, reflecting the
Company's growth in sales with relatively lower additional infrastructure
expense as existing facilities and personnel were utilized more
effectively.
INTEREST EXPENSE. The approximate $552,000 or 143.8% decrease in net
interest expense in the second quarter of 1999 was due primarily to
decreased average borrowing as well as an increase in the collections of
interest on late customer payments.
INCOME TAXES. No income tax expense was recorded in the second
quarter since the Company has a net loss on a year-to-date basis. Also, no
tax benefit was recognized for the loss since 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."
SIX MONTHS ENDED JUNE 30, 1999 COMPARED
WITH THE SIX MONTHS ENDED JUNE 30, 1998
SALES. For the first six months of 1999, sales increased $38.3
million or 16.2% from the same period in 1998. This increase resulted
primarily from higher sales under GSA Schedule-related BPAs over the
same period of approximately $37.8 million or 130.0%. In addition to
increased BPA sales, GSA Schedule B/C sales increased $3.2 million or 8.2%.
In addition, the Company combined fulfillment under its U.S. Treasury
TDA-1, TDA-2 and TDA-3 contracts under a Treasury Commercial BPA. In the
first half of 1998, TDA-1 and TDA-2, both IDIQ contracts, had aggregate
sales of $19.8 million for the six months ended June 30, 1998.
Net sales under IDIQ contracts also increased $8.0 million or 6.4%
during the first six months of 1999 compared to the same period of 1998.
In addition, IDIQ contracts comprise the largest proportion of the
Company's 1999 revenue at 48.8%. The increase in IDIQ contracts is
primarily comprised of increases in sales under the Army's PC-2 contract of
$9.3 million or 66.4%, the Government-wide SEWP II contract of $13.4
million or 70.9% and the NIH ECS II contract of $5.1 million or 34.9%,
offset by a decrease in U.S. Treasury contracts of $19.8 million.
For the six months ended June 30, 1999, sales of Hewlett-Packard,
Microsoft, Compaq and Panasonic products comprise a substantial portion of
the Company's business. During that period, sales from these vendors
increased $50.0 million or 41.4% compared to the same period in 1998.
<PAGE>
<PAGE>
16
GROSS MARGIN. Gross margin for the first six months of 1999 increased
$1.4 million or 6.9%. As a percentage of sales, gross margin decreased to
8.1% from 8.8%. In 1998, the gross margin was impacted by a one time
inventory adjustment of approximately $2.2 million resulting from a June
physical inventory valuation. Removal of this inventory adjustment results
in a pro forma gross margin of 7.9% for the first six months of 1998.
Excluding the inventory adjustment, margins during 1999, improved as a
result of favorable margins realized under the Company's Army PC-2
contract, improved manufacturer price protection and decreased warranty
liabilities over the same period in 1998. The change in gross margin
percentages can be impacted by a variety of factors and is not necessarily
indicative of gross margin percentages to be earned in future periods.
OPERATING EXPENSES. Total selling, general and administrative
expenses for the six months ended June 30, 1999 increased $1.5 million or
6.3% from the same period in 1998. The increase was primarily due
increased personnel cost as well as increases in the overall volume of the
business. Expressed as a percentage of total sales, selling, general and
administrative expenses decreased to 9.1% from 9.9%, reflecting the
Company's growth in sales requiring less additional infrastructure expenses
as existing facilities and personnel are utilized more effectively.
INTEREST EXPENSE. The approximate $1.6 million or 189.1% decrease in
net interest expense for the six months ended June 30, 1999 compared to the
same period in 1998 was due primarily to decreased average borrowing as
well as an increase in the collections of interest on late customer
payments. In addition, during the first six months of 1999, the Company
utilized more prompt payment discounts as compared to the same period in
1998.
INCOME TAXES. No tax benefit was recognized with respect the
Company's operating loss in the first six months of 1999 as the Company
determined that certain net deferred assets did not satisfy the recognition
criteria set forth in the 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
<PAGE>
<PAGE>
17
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 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 six months of 1999, the Company's operating
activities provided $21.1 million of cash flow, compared to $12.8 million
for the same period in 1998. The increase from year to year relates
primarily to the Company's increased sales volume, decreased accounts
receivable (reflecting improved collection activity), lower merchandise
inventories and increased accounts payable.
During the first six months of 1999, the Company used $2.1 million of
cash, compared to $8.8 million for the same period in 1998 which included
$7.8 million related to the purchase of the BTG Division.
During the six months ended June 30, 1999, The Company's financing
activities used cash of approximately $14.9 million, primarily related to
payments under the Company's bank notes. At June 30, 1999, the Company had
approximately $27.8 million available for borrowing under its credit
facility.
On May 2, 1996, the Company executed a three-year credit facility with
a bank (the "Principal Lender") for $40 million and a one-year credit
facility with the other banks in the lending consortium (the "Other
Lenders") for an additional $55 million (collectively, the "Credit
Facility"). Additionally, on June 27, 1996, the Company executed a
separate $10 million facility with the Principal Lender for inventory
financing of vendor products (the "Wholesale Financing Facility").
Interest under the inventory financing facility 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.
<PAGE>
<PAGE>
18
On July 28, 1997, the Company and its banks executed the Second
Amended and Restated Business Credit and Security Agreement (the "Credit
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 $95 million to
$60 million, with an additional $30 million reduction during the period
February 1 through 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 through 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.
On February 11, 1998, the Credit Agreement was revised to, among other
things, limit the total amount available under the facility to $60 million
for an additional two months. The total available under the facility was
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 remained at $20 million and was to be used solely for
inventory purchases. The amount available was reduced to $10 million
during the period April 1, 1998 to July 31, 1998. All other material terms
of both facilities remained the same.
On July 2, 1998, the Company and its banks executed separate
amendments adjusting, among other things, the seasonality of the total
amount available under the Credit Facility and the Wholesale Financing
Facility, respectively, in any calendar year. The limit of the Credit
Facility will increase to $75 million during the period October 1 through
January 31. During the periods February 1 through April 30 and July 1
through September 30, the total amount available under the Credit Facility
will be limited to $50 million. During the period May 1 through June 30,
the total amount available under the Credit Facility will be limited to $30
million. In addition, the interest rate under the Credit Facility was
amended to a rate of LIBOR plus 2.45%, payable quarterly; reducing to LIBOR
plus 2.25% if, commencing with the fiscal quarter ending September 30,
1998, the Company achieves certain quarterly financial covenants. At
September 30, 1998, the Company was in compliance with all quarterly
financial covenants set forth in the Credit Agreement. As a result, on
October 28, 1998, when the Company delivered its certified financial
statements to the Principal Lender, the interest rate was reduced to LIBOR
plus 2.25%. Prior to this event, the interest rate under the Credit
Agreement was LIBOR plus 2.45%. On August 14, 1998, the limit of the
Wholesale Financing Facility was increased via temporary over-line limit of
up to $10 million through January 31, 1999. The limit of the Wholesale
Financing Facility will remain at $20 million during the period June 1
<PAGE>
<PAGE>
19
through January 31, and will decrease to $10 million during the period
February 1 through May 31, of any calendar year. All other material terms
of both facilities remained the same.
On July 1, 1999, the Company and its banks executed an amendment to
the Credit Agreement extending the termination date of the Credit Agreement
through the close of business on August 27, 1999. The Company is
continuing the process of renegotiating the terms of the Credit Facility
for the renewal period beginning August 28, 1999.
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 and the repurchase of the Company's Common
Stock, as well as provisions specifying compliance with certain quarterly
and annual financial statistical ratios. At June 30, 1999, the Company was
in compliance with all quarterly financial covenants set forth in the
Credit Agreement.
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. At June 30, 1999, the Company had no borrowings against the Credit
Facility.
YEAR 2000
IMPACT OF YEAR 2000. The Company is aware of the issues associated
with the programming code in existing computer systems as the millennium
("Year 2000") approaches. The Year 2000 problem is complex as certain
computer operations will be affected in some way by the rollover of the
two-digit year value to 00. The issue is whether computers systems will
properly recognize date-sensitive information when the year changes to
2000. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. Assessments of the
potential effects of the Year 2000 issue vary markedly among different
companies, governments, consultants and economists, and it is not possible
to predict what the actual impact may be. Given this uncertainty, the
Company recognizes the need to remain vigilant and is continuing its
analysis, assessment and planning for the various Year 2000 issues, across
the entire business.
STATE OF READINESS. The Company's primary focus has been on its own
internal information technology systems, including all types of systems in
use by the Company in its operations, marketing, finance and human
resources departments, and to deal with the most critical systems first.
<PAGE>
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20
The Company has formed an Action Team representing every functional area of
the Company, with the Chairman and CEO as the Executive Sponsor, and the
senior executive management staff as the Steering Committee, of the Team.
The Year 2000 Plan is comprehensive and auditable, and involves generally
the following phases: inventory, risk classification, assessment,
remediation, and testing. The scope of the plan is broad and addresses
critical suppliers, internal systems and processes, and customers.
With respect to its internal information technology systems, the
Company has conducted an inventory of a substantial majority of its central
systems for Year 2000 compliance. The most significant risk faced by the
Company is the Just-In-Time ("JIT") application, the Company's key
enterprise operations system. The Company completed JIT Year 2000
conversion and testing in early 1999. The Company has completed
remediation plans for the majority of its material information technology
systems, and continues implementation of remediation plans for the
remaining material information technology systems. In addition, the
Company currently is reviewing, and implementing remediation plans for, its
other non-critical internal information technology systems. With respect
to the Company's non-information technology systems, the Company moved its
headquarters to a new location during the end of 1998. All systems in the
new facility are Year 2000 compliant.
The Company has begun to assess the potential for Year 2000 problems
with the information systems of its customers and vendors. The Company has
sent questionnaires to the primary product vendors with which the Company
has a material relationship, and has received responses from the majority
of its primary product vendors. The Company is in the process of assessing
the responses received to date from the vendors and plans to follow-up with
vendors that have not responded. The Company does not have sufficient
information to provide an estimated timetable for completion of renovation
and testing that such parties with which the Company has a material
relationship may undertake. The Company is unable to estimate the costs
that it may incur to remedy the Year 2000 issues relating to such parties.
The Company's primary customer is the Federal Government. Various
departments in the Federal Government have achieved different degrees of
readiness regarding Year 2000 compliance.
COSTS TO ADDRESS YEAR 2000 ISSUES. The Company has reevaluated its
estimate of the aggregate cost associated with becoming Year 2000
compliant, based upon certain of such costs being reclassified as capital
expenses. The Company presently estimates its Year 2000-related costs to
be approximately $700,000, approximately $175,000 of which has been
incurred. Any external and internal costs specifically associated with
modifying internal-use software for the Year 2000 will be charged to
expense as incurred in accordance with the Emerging Issues Task Force
("EITF") of the Financial Accounting Standards Board Issue No. 96-14,
"Accounting for the Costs Associated with Modifying Computer Software for
the Year 2000." The costs associated with the replacement of computerized
systems, hardware or equipment will be capitalized and are included in the
above estimate. These costs do not include any costs associated with the
implementation of contingency plans.
<PAGE>
<PAGE>
21
The Company's Year 2000 program is an ongoing process and the estimate
of costs and completion dates for various components of the program above
are subject to change. The present cost estimates of the Company's Year
2000 identification, assessment, remediation and testing efforts and the
dates on which the Company believes it will complete such efforts are based
on management's best estimates, which were derived using numerous
assumptions regarding future events, including among other factors the
continued availability of certain resources. There can be no assurance
that these estimates will prove to be accurate, and actual results could
differ materially from those currently anticipated. Specific factors that
could cause such material differences include, but are not limited to, the
availability and cost of personnel trained in Year 2000 issues, the ability
to identify, assess, remediate, and test all relevant computer codes,
third-party remediation plans, and similar uncertainties.
RISKS TO THE COMPANY. The Government includes certain Year 2000
warranty clauses in its contracts, which the Company executes. The Company
strives to pass the Government contract clauses on to its product vendors,
however, in some instances vendors refuse to accept such clauses. There
can be no assurance that the Company will not be materially adversely
affected if the Government were to enforce these clauses and the Company
did not have corresponding protection from such vendors. In addition, it
is unknown how Government and other customer spending patterns may be
impacted by Year 2000 issues. As customers focus on preparing their
business for the Year 2000, information technology budgets may be spent on
remediation efforts, potentially delaying the purchase and implementation
of new systems, thereby creating less demand for the Company's products and
services. The Year 2000 presents a number of other risks and uncertainties
that could affect the Company, including utilities failures and competition
for personnel skilled in the resolution of Year 2000 issues.
The failure to correct a material Year 2000 problem could result in
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. Due to
the general uncertainty of the Year 2000 readiness of third-party suppliers
and customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material adverse impact on
the Company's results of operations, liquidity or financial condition.
CONTINGENCY PLAN. The Company has not yet established a contingency
plan to address the most reasonably likely worst case scenario and such
scenario has not yet been identified. The Company currently plans to
complete such analysis and contingency planning by December 31, 1999.
"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
<PAGE>
<PAGE>
22
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
<PAGE>
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 AND USE OF PROCEEDS -- Inapplicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on May 18,
1999.
(b) At said Annual Meeting, the Company's stockholders elected eight
directors:
<TABLE>
<CAPTION>
VOTES
VOTES WITHHELD OR
FOR AGAINST ABSTENTIONS
---------- ------------- -------------
<S> <C> <C> <C>
DIRECTORS:
Tania Amochaev 7,788,830 70,066
Gerald W. Ebker 7,788,830 70,066
Lee Johnson 7,788,830 70,066
Steven Kelman 7,788,830 70,066
James J. Leto 7,788,830 70,066
Lawrence J. Schoenberg 7,788,830 70,066
John M. Toups 7,788,830 70,066
Dendy Young 7,788,746 70,150
</TABLE>
ITEM 5. OTHER INFORMATION -- Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Computation of Earnings Per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
<PAGE>
<PAGE>
24
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: August 16, 1999
GOVERNMENT TECHNOLOGY SERVICES, INC.
By: /s/ DENDY YOUNG
-----------------------------------
Dendy Young
Chairman and
Chief Executive Officer
By: /s/ ROBERT D. RUSSELL
-----------------------------------
Robert D. Russell
Senior Vice President and
Chief Financial Officer
<PAGE>
<PAGE>
INDEX TO EXHIBITS
===========================================================================
EXHIBIT |
NUMBER | DESCRIPTION
- ---------------------------------------------------------------------------
11 | Computation of Earnings Per Share
- ---------------------------------------------------------------------------
27 | Financial Data Schedule
===========================================================================
<PAGE>
EXHIBIT 11.1
GOVERNMENT TECHNOLOGY SERVICES, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 69 $ 168 $ (1,824) $(3,341)
Basic:
Weighted average shares of common stock outstanding . . . 9,200 8,422 9,332 7,589
Net loss per common share and common share equivalent . . $ 0.01 $ 0.02 $ (0.20) $ (0.44)
Diluted:
Weighted average shares of common stock outstanding . . . 9,859 8,631 9,332 7,589
Net loss per common share and common share equivalent . . $ 0.01 $ 0.02 $ (0.20) $ (0.44)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 4,131
<SECURITIES> 0
<RECEIVABLES> 104,689
<ALLOWANCES> (2,763)
<INVENTORY> 27,822
<CURRENT-ASSETS> 137,722
<PP&E> 22,302
<DEPRECIATION> (10,350)
<TOTAL-ASSETS> 151,675
<CURRENT-LIABILITIES> 99,554
<BONDS> 0
0
0
<COMMON> 49
<OTHER-SE> 43,681
<TOTAL-LIABILITY-AND-EQUITY> 48,635
<SALES> 274,309
<TOTAL-REVENUES> 274,309
<CGS> 251,991
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,673
<LOSS-PROVISION> 202
<INTEREST-EXPENSE> (733)
<INCOME-PRETAX> (1,824)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,824)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,824)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
