<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 SEPTEMBER 30, 1999
COMMISSION FILE NO. 0-19394
GOVERNMENT TECHNOLOGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 54-1248422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
3901 STONECROFT BOULEVARD
(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. YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<S> <C>
Class Shares Outstanding at November 1, 1999
- ---------------------------------- ------------------------------------------
Common Stock, $0.005 par value 9,211,402
</TABLE>
================================================================================
<PAGE> 2
GOVERNMENT TECHNOLOGY SERVICES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
COVER PAGE....................................................................................................1
TABLE OF CONTENTS.............................................................................................2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS -
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998.................................................3
Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1999 and 1998...........................4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998............................................5
Notes to Consolidated Financial Statements...................................................6
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................................................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................20
PART II - OTHER INFORMATION..................................................................................21
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...................................................................................................22
</TABLE>
- 2 -
<PAGE> 3
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------ -----------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash.................................................................. $ 56 $ 39
Accounts receivable, net.............................................. 131,903 106,334
Merchandise inventories............................................... 52,549 36,544
Net deferred taxes and other.......................................... 4,582 3,099
------------ -----------
Total current assets.............................................. 189,090 146,016
Property and equipment, net................................................ 11,994 11,381
Intangible assets, net..................................................... - 114
Net deferred taxes and other............................................... 2,001 3,579
------------ -----------
Total assets...................................................... $ 203,085 $ 161,090
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks................................................ $ - $ 14,889
Current portion of long-term debt..................................... 500 -
Accounts payable...................................................... 133,263 75,806
Accrued liabilities................................................... 13,542 13,115
------------ -----------
Total current liabilities......................................... 147,305 103,810
Long-term debt, less current maturities.................................... 1,500 -
Other liabilities.......................................................... 2,897 1,956
------------ -----------
Total liabilities................................................. 151,702 105,766
------------ -----------
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 September 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..................................................... 10,557 9,634
Treasury stock, 594,682 shares at September 30, 1999; and
6,594 shares at December 31, 1998, at cost........................ (2,904) (71)
------------- -----------
Total stockholders' equity........................................ 51,383 55,324
------------ -----------
Total liabilities and stockholders' equity........................ $ 203,085 $ 161,090
============ ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- 3 -
<PAGE> 4
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales..................................................... $ 194,494 $ 196,029 $ 468,803 $ 432,023
Cost of sales............................................. 181,002 178,182 432,994 393,304
----------- ----------- ----------- -----------
Gross margin.............................................. 13,492 17,847 35,809 38,719
Operating expenses........................................ 11,102 13,535 35,977 36,926
----------- ----------- ----------- -----------
Income (loss) from operations............................. 2,390 4,312 (168) 1,793
Interest income........................................... (437) (60) (1,433) (284)
Interest expense.......................................... 79 412 342 1,459
----------- ----------- ----------- -----------
Interest (income) expense, net............................ (358) 352 (1,091) 1,175
----------- ----------- ------------ -----------
Income before taxes....................................... 2,748 3,960 923 618
Income tax expense........................................ - - - -
----------- ----------- ----------- -----------
Net income ............................................... $ 2,748 $ 3,960 $ 923 $ 618
=========== =========== =========== ===========
Basic net income per share................................ $ 0.30 $ 0.40 $ 0.10 $ 0.07
=========== =========== =========== ===========
Diluted net income per share.............................. $ 0.30 $ 0.40 $ 0.10 $ 0.07
=========== =========== =========== ===========
Basic weighted average shares outstanding................. 9,211 9,788 9,291 8,333
=========== =========== =========== ===========
Diluted weighted average shares outstanding............... 9,308 9,849 9,406 8,562
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- 4 -
<PAGE> 5
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................................... $ 923 $ 618
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................. 2,627 2,086
Accounts receivable............................................................ (28,426) (58,987)
Merchandise inventories........................................................ (16,005) (11,246)
Other assets................................................................... 96 (1,382)
Accounts payable............................................................... 57,781 78,348
Other liabilities.............................................................. 861 5,803
----------- -----------
Net cash provided by operating activities.................................. 17,857 15,240
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of property and equipment................................................. (3,125) (1,501)
Payment related to asset purchase of BTG Division.............................. - (7,826)
Net proceeds from BTG transaction.............................................. 132 -
----------- -----------
Net cash used in investing activities.......................................... (2,993) (9,327)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of bank notes, net.................................................... (14,889) (6,765)
Proceeds from exercises of stock options and warrants.......................... 42 113
----------- -----------
Net cash used in financing activities...................................... (14,847) (6,652)
----------- -----------
Net increase (decrease) in cash..................................................... 17 (739)
Cash at beginning of period......................................................... 39 856
----------- -----------
Cash at end of period............................................................... $ 56 $ 117
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................................... $ 431 $ 1,073
Income taxes............................................................... - 2
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) -
</TABLE>
During 1998, the 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.
The accompanying notes are an integral part of these consolidated financial
statements.
- 5 -
<PAGE> 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.
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 December 15, 1997; the Company has determined that through
September 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
- 6 -
<PAGE> 7
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 was
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.
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. On September 22, 1999, the Company and
its banks executed an amendment to the Credit Agreement further extending the
termination date of the Credit Agreement through the close of business on
October
- 7 -
<PAGE> 8
27, 1999. On October 26, 1999, the Company and its banks executed an amendment
to the Credit Agreement extending the termination of the Credit facility through
the close of business on November 30, 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 September 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 September 30, 1999, the Company had no
borrowings against the Credit Facility.
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 resold 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.
- 8 -
<PAGE> 9
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.
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 nine months ended
September 30, 1998, assuming the acquisition occurred on January 1, 1998.
<TABLE>
<CAPTION>
1998
---------------
<S> <C>
Revenues.............................................. $ 473,162
Net income ........................................... $ 248
Income (loss) per share............................... $ 0.03
</TABLE>
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 to be 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.
- 9 -
<PAGE> 10
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.
- 10 -
<PAGE> 11
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.
- 11 -
<PAGE> 12
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 NINE
THREE NINE MONTHS MONTHS
MONTHS ENDED MONTHS ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEP. 30, SEP. 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% -0.8% 8.5%
Cost of sales........................................ 93.1 90.9 92.4 91.0 1.6 10.1
----- -------- -------- --------
Gross margin......................................... 6.9 9.1 7.6 9.0 -24.4 -7.5
Operating expenses:
Selling, general and administrative.................. 5.3 6.4 7.1 7.9 -18.7 2.5
Depreciation and amortization........................ 0.4 0.5 0.5 0.6 -9.4 3.5
-------- -------- -------- --------
5.7 6.9 7.6 8.5 -18.0 -2.6
Income (loss) from operations........................ 1.2 2.2 0.0 0.4 -44.6 -109.4
Interest (income) expense, net....................... -0.2 0.2 -0.2 0.3 -201.7 -192.9
-------- -------- -------- --------
Income before taxes.................................. 1.4 2.0 0.2 0.1 -30.6 49.4
Income tax expense................................... 0.0 0.0 0.0 0.0 - -
-------- -------- -------- --------
Net income .......................................... 1.4% 2.0% 0.2% 0.1% -30.6% 49.4%
======== ==== ===== ===== ===== ====
</TABLE>
- 12 -
<PAGE> 13
The following table sets forth, for the periods indicated, the approximate
sales by category, along with the related percentages of total sales:
<TABLE>
<CAPTION>
Sales Category THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------- ----------------------------------------------
(Dollars in 1999 1998 1999 1998
thousands)
--------------------- ------------------------ ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GSA Schedules $ 83,396 42.9% $ 75,468 38.5% $188,060 40.1% $ 141,706 32.8%
IDIQ Contracts 83,723 43.0% 97,441 49.7% 217,629 46.4% 223,303 51.7%
Open Market 22,580 11.6% 18,269 9.3% 52,515 11.2% 51,641 12.0%
Other Contracts 4,795 2.5% 4,851 2.5% 10,599 2.3% 15,373 3.6%
--------------------- ------------------------ ----------------------------------------------
Total $ 194,494 100.0% $ 196,029 100.0% $468,803 100.0% $ 432,023 100.0%
========= ===== ========== ===== ======== ===== ========== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Sales. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. In the third
quarter of 1999, sales decreased $1.5 million, or 0.8% from the same period in
1998. A substantial number of orders were received in the last few days of
September, which the Company was unable to ship in September. As a result, the
backlog of orders at September 30, 1999 was approximately $127.9 million, up
$12.4 million or 10.7% compared to the $115.5 million backlog at September 30,
1998. The backlog represents orders received for which product has yet to ship.
In the third quarter of 1999, sales under GSA Schedule increased $7.9
million or 10.5% compared to 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 $12.3
million or 38.8%. In addition, GSA Schedule B/C sales increased $1.9 million or
4.8%. 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 single Treasury Commercial BPA. In the third
quarter of 1999, the sales under the Company's Treasury Commercial BPA totaled $
7.9 million. TDA-1 and TDA-2, both IDIQ contracts had aggregate sales of $13.2
million for the quarter ended September 30, 1998. Sales under IDIQ contracts for
the quarter ended September 30, 1999 decreased $13.7 million or 14.1%. This
decrease is primarily a result of the restructuring of the U.S. Treasury TDA-1,
TDA-2 and TDA-3 contracts under a Treasury Commercial BPA and lower sales under
the U.S. State Department contract of $7.3 million or 61.0%. This decrease was
offset by increased sales on the SEWP contract of $14.0 million or 69.6%.
Gross Margin. Gross margin is sales less cost of goods sold, 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. The Company's overall gross margin percentages are
dependent on the mix and timing of products sold and customer's use of available
contract vehicles.
- 13 -
<PAGE> 14
During the third quarter of 1999, gross margin decreased by
approximately $4.4 million or 24.4%. Gross margin as a percentage of sales
decreased to 6.9% from 9.1% in the third quarter of 1998. The decrease in gross
margin is partially attributable to a shift in the mix of contracts being used
by customers to purchase products and services. Several large contracts won
earlier this year are still in the start-up phase and they are not yet producing
the revenue or the gross margins that typically are achieved as such contracts
mature. Gross margin in the quarter was also reduced by approximately 0.7
percentage point related to losses on the sale of inventory returned by
customers. The Company has traditionally been somewhat liberal in allowing
customers to return equipment in an effort to provide superior customer service.
In addition, intense competition has continued to put pressure on the Company's
margins. 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 September 30, 1999 decreased $2.4 million, or 18.0%,
from the same period in 1998. The reduction in operating expense is primarily
due to decreased bad debt expense as well as an increase in vendor marketing
development funds earned. Expressed as a percentage of total sales, total
selling, general and administrative expenses decreased to 5.7% from 6.9%,
reflecting the Company's ability to utilize existing facilities and personnel
more effectively.
Interest Expense. The approximate $710,000, or 201.7%, positive change
in net interest expense in the third quarter of 1999 was due primarily due to
decreased average borrowings as well as an increase in the collection of
interest on late customer payments.
Income Tax. No tax benefit was recognized with respect the Company's
operating income in the first nine 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."
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Sales. For the first nine months of 1999, sales increased $36.8
million, or 8.5%, from the same period in 1998. This increase resulted primarily
from higher sales under GSA Schedule-related BPAs over the same period of
approximately of $49.9 million or 81.9%. Open market sales also increased
$874,000, or 1.7%. In addition, the Company restructured fulfillment under its
U.S. Treasury TDA-1, TDA-2 and TDA-3 contracts under a single Treasury
Commercial BPA. For the first nine months of 1999, the sales under the Company's
Treasury Commercial BPA totaled $12.2 million. TDA-1 and TDA-2, both IDIQ
contracts had aggregate sales of $32.9 million for the same period in 1998.
Net sales under IDIQ contracts decreased $5.7 million or 2.5% during
the first nine months of 1999 compared to the same period in 1998. The decrease
is primarily a result of lower sales under the U.S. State Department contract of
$12.7 million, or 44.4%, offset by increases in sales under the Government-wide
SEWP II contract and NIH ECS II contract of $12.0 million, or 42.8%, and $4.0
million, or 14.7%, respectively.
For the nine months ended September 30, 1999, sales of Hewlett-Packard,
Microsoft, Panasonic, Sun and Compaq products comprise a substantial portion of
the Company's business. During that period, sales from those vendors increased
$54.6 million or 22.4% compared to the same period in 1998.
- 14 -
<PAGE> 15
Gross Margin. Gross margin for the first nine months of 1999 decreased
by approximately $2.9 million, or 7.5%. Gross margin as a percentage of sales
decreased to 7.6% from 9.0%. 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 8.5% for the first nine months of 1998. Gross
margins decreased the first nine months of 1999 as a result of higher initial
costs in the infancy stage of various contracts the Company successfully
won in 1999. Gross margin in the current nine-month period was also reduced
by approximately 0.8 of a percentage point related to losses on the sale of
inventory returned by customers. In addition, intense competition has continued
to put pressure on the Company's margins. 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 nine months ended September 30, 1999 decreased $949,000, or 2.6%, from
the same period in 1998. The reduction in operating expense is primarily due to
increased vendor marketing development funds being earned as well as a $1.1
million reduction in bad debt expense. The reduction in bad debt expense results
primarily from improved collection activities. The reductions in operating
expense were partially offset by a $2.6 million, or 10.1%, increase in personnel
expense. Expressed as a percentage of total sales, selling, general and
administrative expenses decreased to 7.7% from 8.5%, reflecting the Company's
growth in sales requiring with relatively fewer additional infrastructure
expenses, as existing facilities and personnel are utilized more effectively.
Interest Expense. For the nine months ended September 30, 1999,
interest income increased $1.1 million and interest expense decreased $1.1
million, or 76.6%, compared with the same period in 1998. The changes are
primarily due to reduced average borrowings and the investment of positive cash
balances. In addition, during the first nine months of 1999, the Company
utilized more prompt payment discounts as compared to the same period in 1998.
Income Tax. No tax benefit was recognized with respect the Company's
operating income in the first nine 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 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
- 15 -
<PAGE> 16
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 nine months of 1999, the Company's operating
activities provided $17.9 million of cashflow, compared to $15.2 million for the
same period in 1998. The increase from year to year relates primarily to the
Company's increased sales volume and increased accounts payable offset by
decreased Accounts receivable and merchandise inventories. Accounts payable
increased as a result of increased purchases in anticipation of the 1999 third
quarter sales.
Investing activities used cash of approximately $3.0 million during the
nine months ended September 30, 1999 compared to $9.3 million for the same
period in 1998 which included $7.8 million related to the purchase of the BTG
Division.
During the nine months ended September 30, 1999, the Company's
financing activities used cash of approximately $14.8 million, primarily
related to payments under the Company's bank notes. At September 30, 1999, the
Company had approximately $72.8 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.
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.
- 16 -
<PAGE> 17
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 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. On September 22, 1999, the Company and
its banks executed an amendment to the Credit Agreement further extending the
termination date of the Credit Agreement through the close of business on
October 27, 1999. On October 26, 1999, the Company and its banks executed an
amendment to the Credit Agreement extending the termination of the Credit
facility through the close of business on November 30, 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 September 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
- 17 -
<PAGE> 18
will be available to it on acceptable terms, if needed. At September 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. 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 believes that it has completed remedy plans for its 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 sent
questionnaires to the primary product vendors with which the Company has a
material relationship, and received responses from the majority of its primary
product vendors. As a result of the survey, the Company has determined that its
major vendor partners are substantially ready for Year 2000. 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
- 18 -
<PAGE> 19
capital expenses. The Company presently estimates its Year 2000-related costs to
be approximately $250,000, approximately $185,000 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.
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. It appears that certain
government agencies have modified spending patterns as a result of Year 2000
issues. 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 government markets,
buying patterns of the
- 19 -
<PAGE> 20
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
Inapplicable.
- 20 -
<PAGE> 21
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 - Inapplicable.
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.
- 21 -
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 15, 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
- 22 -
<PAGE> 1
GOVERNMENT TECHNOLOGY SERVICES, INC. EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income 2,748 3,960 923 618
Basic weighted average shares of common 9,211 9,788 9,291 8,333
stock outstanding
Net loss per common share and common (Basic) 0.30 0.40 0.10 0.07
share equivalent
Diluted weighted average shares of common 9,308 9,849 9,406 8,562
stock outstanding
Net loss per common share and common (Basic) 0.30 0.40 0.10 0.07
share equivalent
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 56
<SECURITIES> 0
<RECEIVABLES> 134,358
<ALLOWANCES> (2,455)
<INVENTORY> 52,549
<CURRENT-ASSETS> 189,090
<PP&E> 23,184
<DEPRECIATION> (11,190)
<TOTAL-ASSETS> 203,085
<CURRENT-LIABILITIES> 147,305
<BONDS> 0
0
0
<COMMON> 49
<OTHER-SE> 54,238
<TOTAL-LIABILITY-AND-EQUITY> 203,085
<SALES> 468,803
<TOTAL-REVENUES> 468,803
<CGS> 432,994
<TOTAL-COSTS> 432,994
<OTHER-EXPENSES> 36,145
<LOSS-PROVISION> (168)
<INTEREST-EXPENSE> (1,091)
<INCOME-PRETAX> 923
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 923
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
