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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 MARCH 31, 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 May 1, 1999
- ------------------------------ --------------------------------------
Common Stock, $0.005 par value 9,199,490
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GOVERNMENT TECHNOLOGY SERVICES, INC.
Quarterly Report on Form 10-Q
for the Quarterly Period Ended March 31, 1999
TABLE OF CONTENTS
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Reference Page
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COVER PAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements -
Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998. . . . . . . . . . . . . 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998. . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998. . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . 6
Item 2. Management's Discussion & Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . .13
PART II -- OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . .23
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
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GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
MAR. 31, DEC. 31,
ASSETS 1999 1998
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 204 $ 39
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . 81,235 106,334
Merchandise inventories . . . . . . . . . . . . . . . . . . . . 28,452 36,544
Net deferred taxes and other. . . . . . . . . . . . . . . . . . 13,317 3,099
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . 123,208 146,016
Property and equipment, net . . . . . . . . . . . . . . . . . . . 11,650 11,381
Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . 30 114
Net deferred taxes and other. . . . . . . . . . . . . . . . . . . 2,140 3,579
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 137,028 $ 161,090
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks. . . . . . . . . . . . . . . . . . . . . $ - $ 14,889
Current portion of long-term debt . . . . . . . . . . . . . . . 611 -
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 69,820 75,806
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 14,706 13,115
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . 85,137 103,810
Long-term debt, less current maturities . . . . . . . . . . . . . 1,389 -
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,978 1,956
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 88,504 105,766
---------- ----------
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 9,199,490 outstanding at March 31,
1999; and 9,806,084 issued and 9,799,490 outstanding at
December 31, 1998. . . . . . . . . . . . . . . . . . . . . . 49 49
Capital in excess of par value. . . . . . . . . . . . . . . . . 43,768 45,712
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 7,741 9,634
Treasury stock, 606,594 shares at March 31, 1999; and
6,594 shares at December 31, 1998, at cost . . . . . . . . . (3,034) (71)
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . 48,524 55,324
---------- ----------
Total liabilities and stockholders' equity . . . . . . . . . $ 137,028 $ 161,090
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 125,549 $ 99,094
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 115,477 90,562
---------- ----------
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,072 8,532
Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . 12,530 11,602
---------- ----------
Loss from operations. . . . . . . . . . . . . . . . . . . . . . . (2,458) (3,070)
Interest (income) expense, net of interest expense (income) of
$115 and ($105), respectively . . . . . . . . . . . . . . . . . (565) 439
---------- ----------
Loss before taxes . . . . . . . . . . . . . . . . . . . . . . . . (1,893) (3,509)
Income tax benefit. . . . . . . . . . . . . . . . . . . . . . . . - -
---------- ----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,893) $ (3,509)
========== ==========
Basic net loss per share. . . . . . . . . . . . . . . . . . . . . $ (0.20) $ (0.52)
========== ==========
Diluted net loss per share. . . . . . . . . . . . . . . . . . . . $ (0.20) $ (0.52)
========== ==========
Basic weighted average shares outstanding . . . . . . . . . . . . 9,466 6,756
========== ==========
Diluted weighted average shares outstanding . . . . . . . . . . . 9,466 6,756
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,893) $ (3,509)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 1,012 961
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . 22,241 8,472
Merchandise inventories . . . . . . . . . . . . . . . . . . . . 8,092 (19,188)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . (8,779) 329
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . (5,662) 19,688
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . 1,107 1,219
---------- ----------
Net cash provided by (used in) operating activities. . . . . 16,118 (7,972)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of property and equipment. . . . . . . . . . . . . . . . . (1,196) (438)
Payment related to asset purchase of BTG Division . . . . . . . - (7,826)
Net proceeds from BTG transaction . . . . . . . . . . . . . . . 132 -
---------- ----------
Net cash provided by (used in) investing activities. . . . . (1,064) (8,264)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of bank notes, net . . . . . . . . . . . . . . . . . . (14,889) (419)
Proceeds from exercises of stock options and warrants . . . . . - 23
---------- ----------
Net cash provided by (used in) financing activities. . . . . (14,889) (396)
---------- ----------
Net increase in cash. . . . . . . . . . . . . . . . . . . . . . . 165 (688)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . 39 856
---------- ----------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . $ 204 $ 168
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 339 $ 707
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. . . . . . . . . . . . (2,001) -
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.
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements of
Government Technology Services, Inc. ("GTSI" or the "Company") have been
prepared pursuant to the rules and regulations for the Securities and
Exchange Commission ("SEC") and, therefore, omit or condense certain
footnotes and other information normally included in financial statements
prepared in accordance with generally accepted accounting principles. This
report should be read in conjunction with the audited financials for the
year ended December 31, 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 three months ended March 31, 1999 and 1998, since the
effect of which would result in anti-dilutive per-share results.
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
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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 March 31, 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 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 a total of $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. Amounts
due to the lenders as of December 31, 1997 are classified as current
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8
liabilities and the available portion of the Credit Facility at December
31, 1997 was approximately $18.7 million.
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% (7.79% at September 30, 1998). 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.
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
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9
and annual financial statistical ratios. At March 31, 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. The Company is in the process of renegotiating the terms with its
credit facility for the renewal period beginning August 1, 1999.
3. ACQUISITION
On February 12, 1998, the Company entered into and closed on an Asset
Purchase Agreement with BTG, Inc. and two of its subsidiaries
(collectively, "BTG") under which the Company acquired substantially all of
the assets of the BTG division that resells computer hardware, software and
integrated systems to the Government (the "BTG Division"). The acquired
assets consisted primarily of inventory and rights under certain contracts
and intangible personal property, along with furniture, fixtures, supplies
and equipment. In addition, the Company assumed certain liabilities under
specified contracts of BTG as well as certain liabilities arising from the
ownership or operation of the acquired assets after the closing. The
Company paid at closing $7,325,265 in cash (after a $174,735 adjustment for
accrued vacation liability and satisfaction of an outstanding invoice owed
by BTG) and issued 15,375 shares, having a liquidation preference of
$15,375,000, of a new series of preferred stock designated Series C 8%
Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"). The
Company paid an additional $500,000 in cash upon the release of liens on
certain items of equipment which are part of the acquired assets. A
portion of the consideration, $800,000 in cash and 1,538 shares of Series C
Preferred Stock, is being held under an escrow agreement to secure BTG's
indemnification obligations under the Asset Purchase Agreement. Under the
Asset Purchase Agreement, BTG is obligated to repay to the Company up to
$4,500,000 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.
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10
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.
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 three months ended
March 31, 1998, assuming the acquisition occurred on January 1, 1998.
1998
----------
Revenues . . . . . . . . . . . . . . . . . . . . $ 140,231
Net loss . . . . . . . . . . . . . . . . . . . . $ (2,874)
Loss per share . . . . . . . . . . . . . . . . . $ (0.43)
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
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11
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.
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
million as a security deposit for all tenant requested improvements
associated with the lease. 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 million, as well as a liability for
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12
deferred rent of $2 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 2 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.
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13
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 or expiration of
sales contract vehicles (e.g., the addition of the SEWP II Contract, the
NIH ECS-II Contract, the TDA-1 Contract and STAMIS Contract, 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.
<PAGE>
<PAGE>
14
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that selected items within the statement of operations bear to
sales and the annual percentage changes in the dollar amounts of such
items.
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE CHANGE
OF SALES ----------
------------------ THREE
THREE MONTHS
MONTHS ENDED ENDED
MARCH 31, MAR. 31,
------------------ 1998
1999 1998 TO 1999
-------- -------- ----------
<S> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 26.7%
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 92.0 91.4 27.5
-------- --------
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . 8.0 8.6 17.9
-------- --------
Operating expenses:
Selling, general and administrative. . . . . . . . . . . . . 9.2 10.7 8.6
Depreciation and amortization. . . . . . . . . . . . . . . . 0.8 1.0 1.2
-------- --------
Total operating expenses. . . . . . . . . . . . . . . . . . . 10.0 11.7 8.0
-------- --------
Loss from operations. . . . . . . . . . . . . . . . . . . . . (2.0) (3.1) 19.7
Interest expense, net . . . . . . . . . . . . . . . . . . . . (0.5) 0.4 226.4
-------- --------
Loss before taxes . . . . . . . . . . . . . . . . . . . . . . (1.5) (3.5) 46.0
Income tax benefit. . . . . . . . . . . . . . . . . . . . . . - - -
-------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . (1.5)% (3.5)% 46.0%
======== ========
</TABLE>
The following table sets forth, for the periods indicated, the
approximate sales by sales category, along with related percentages of
total sales.
<TABLE>
<CAPTION>
SALES CATEGORY THREE MONTHS ENDED MARCH 31,
---------------------------------------
(Dollars in thousands) 1999 1998
------------------- -------------------
<S> <C> <C> <C> <C>
GSA Schedules . . . . . . . . . . . . . . $ 43,645 34.8% $ 25,965 26.2%
IDIQ Contracts. . . . . . . . . . . . . . 64,818 51.6 50,817 51.3
Open Market . . . . . . . . . . . . . . . 14,955 11.9 16,558 16.7
Other Contracts . . . . . . . . . . . . . 2,131 1.7 5,754 5.8
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . . . . $125,549 100.0% $ 99,094 100.0%
========= ========= ========= =========
</TABLE>
<PAGE>
<PAGE>
15
THREE MONTHS ENDED MARCH 31, 1999 COMPARED
WITH THE THREE MONTHS ENDED MARCH 31, 1998
SALES. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. In the first
quarter of 1999, sales increased $26.5 million or 26.7% 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 $18.4 million, or 232%, and
increased sales under indefinite-delivery/indefinite-quantity ("IDIQ")
contracts of approximately $14.0 million, or 27.6%. Management believes
that the increase in BPA sales is primarily attributable to changes in the
procurement regulations that allow the Government to purchase products by
other means (e.g., GSA schedule contracts, Government-wide Agency Contracts
("GWAC") and BPAs) in a quicker and easier manner than was the case before
such changes.
The net sales increase in IDIQ contracts was primarily a result of
increased sales under the Army's PC-2 contract, the NASA SEWP II contract,
and the U. S. Army's Standard Army Management Information Systems
("STAMIS") Computer Contract II contract, which was awarded in November
1997. These contracts contributed an additional $25.2 million in the first
quarter of 1999 versus the first quarter of 1998, in which the acquired BTG
contracts had sales from February 12, 1998, but this increase was partially
offset by contracts reaching end of life status in the first quarter of
1999.
Total booked backlog at March 31, 1999 was approximately $52.1 million
compared to $69.5 million at March 31, 1998, which included backlog
purchased as a result of the BTG Division acquisition. Total booked
backlog was $56.7 million at April 30, 1999, compared to $61.6 million at
April 30, 1998. Booked backlog represents orders received but product has
yet to ship.
GROSS MARGIN. Gross margin is sales less cost of sales, which
includes product purchase cost, freight, warranty maintenance cost, and
certain other overhead expenses related to the cost of acquiring products.
Gross margin percentages vary over time and change significantly depending
on the contract vehicle and product involved; therefore, the Company's
overall gross margin percentages are dependent on the mix and timing of
products sold and the strategic use of available contract vehicles.
During the first quarter of 1999, gross margin increased by
approximately $1.5 million, or 17.9%. Gross margin, as a percentage of
revenue decreased from 8.6% to 8.0%. The decrease in gross margin was
partially impacted by increased warranty expenses accrued under certain
IDIQ contracts. The change in gross margin percentages can be impacted by
<PAGE>
<PAGE>
16
a variety of factors and is not necessarily indicative of gross margin
percentages to be earned in future periods.
OPERATING EXPENSES. Selling, general and administrative expenses for
the three months ended March 31, 1999 increased $0.9 million or 8.0%, from
the same period in 1998. The increase was due primarily to increased
personnel costs as well as increases in the overall volume of the business.
Expressed as a percent of sales, selling, general and administrative
expenses decreased to 10.0% in the first quarter of 1999 compared to 11.7%
in the same period in 1998.
INTEREST EXPENSE. The approximately $1.0 million or 226.4% decrease
in net interest expense in the first quarter of 1999 was due primarily to
decreased average borrowings and an increase in the collections of interest
on late customer payments. In addition, the Company utilized more prompt
payment discounts as compared to the first quarter of 1998.
INCOME TAXES. No tax benefit was recognized with respect to the
Company's operating loss in the first quarter of 1999 as the Company
determined that certain net deferred tax assets did not satisfy the
recognition criteria set forth in Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
SEASONAL FLUCTUATIONS AND OTHER FACTORS
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its operations as a result
of Government buying and funding patterns, which also impact the buying
patterns of GTSI's prime contractor customers. These buying and funding
patterns historically have had a significant positive effect on GTSI's
bookings in the third quarter ending September 30 each year (the
Government's fiscal year end), and consequently on sales and net income in
the third and fourth quarters of each year. Quarterly financial results
are also affected by the timing of the award of and shipments of products
under government contracts, price competition in the microcomputer and
workstation industries, the addition of personnel or other expenses in
anticipation of sales growth, product line changes and expansions, and the
timing and costs of changes in customer and product mix. In addition,
customer order deferrals in anticipation of new product releases by leading
microcomputer and workstation hardware and software manufacturers, delays
in vendor shipments of new or existing products, a shift in sales mix to
more complex requirements contracts with more complex service costs, and
vendor delays in the processing of incentives and credits due GTSI, have
occurred (all of which are also likely to occur in the future) and have
adversely affected the Company's operating performance in particular
periods. The seasonality and the unpredictability of the factors affecting
such seasonality make GTSI's quarterly and yearly financial results
difficult to predict and subject to significant fluctuation. The Company's
<PAGE>
<PAGE>
17
stock price could be adversely affected if any such financial results fail
to meet the financial community's expectations.
Additionally, legislation is periodically introduced in Congress that
may change the Government's procurement practices. GTSI cannot predict
whether any legislative or any regulatory proposals will be adopted or, if
adopted, the impact upon its operating results. Changes in the structure,
composition and/or buying patterns of the Government, either alone or in
combination with competitive conditions or other factors, could adversely
affect future results.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of 1999, the Company's operating
activities provided $16.1 million of cash flow compared to the $8.0 million
of cash used for the three months ended March 31, 1998. The change from
period to period relates primarily to the Company's increase in sales
volume, but the current period benefitted from an actual decrease in
accounts receivable, reflecting improved collection activity and a decrease
in merchandise inventories. At March 31, 1998, merchandise inventories
increased significantly due to the acquisition of the BTG Division, which
was partially offset by increases in accounts payable.
Investing activities used cash of approximately $1.1 million during
the three months ended March 31, 1999, related to purchases of capital
equipment.
During the three months ended March 31, 1999, the Company's financing
activities included a use of cash of approximately $14.9 million, primarily
related to payments under its bank notes. At March 31, 1999, the Company
had approximately $31.6 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 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
<PAGE>
<PAGE>
18
contained in the Credit Facility and effectively eliminated the Company's
default condition with certain 1996 year-end financial covenants. The total
amount available under the Credit Facility was reduced from a total of $95
million to $60 million, with an additional $30 million reduction during the
period February 1 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. Amounts
due to the lenders as of December 31, 1997 are classified as current
liabilities and the available portion of the Credit Facility at December
31, 1997 was approximately $18.7 million.
On February 11, 1998, the 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
<PAGE>
<PAGE>
19
plus 2.25%. Prior to this event, the interest rate under the Credit
Agreement was LIBOR plus 2.45% (7.79% at September 30, 1998). 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.
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 March 31, 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. The Company is in the process of renegotiating the terms with its
credit facility for the renewal period beginning August 1, 1999.
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
<PAGE>
<PAGE>
20
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 has begun implementing
remediation plans for other material information technology systems. In
addition, the Company currently is reviewing 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. 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 presently estimates
that the cost associated with becoming Year 2000 compliant is approximately
$1 million, approximately $300,000 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
<PAGE>
<PAGE>
21
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
effected 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
<PAGE>
<PAGE>
22
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 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.
<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 -- 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
<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: May 17, 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>
25
INDEX TO EXHIBITS
===========================================================================
EXHIBIT |
NUMBER | DESCRIPTION
- ---------------------------------------------------------------------------
11 | Computation of Earnings Per Share
- ---------------------------------------------------------------------------
27 | Financial Data Schedule
===========================================================================
<PAGE>
Exhibit 11
GOVERNMENT TECHNOLOGY SERVICES, INC.
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (1,893) $ (3,509)
======== ========
Weighted average shares of common
stock outstanding (basic and diluted). . . . . . . . . 9,466 6,756
======== ========
Net loss per common share and common
share equivalent (basic and diluted) . . . . . . . . . $ (0.20) $ (0.52)
======== ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 204
<SECURITIES> 0
<RECEIVABLES> 112,177
<ALLOWANCES> (5,843)
<INVENTORY> 28,452
<CURRENT-ASSETS> 123,208
<PP&E> 21,320
<DEPRECIATION> (9,670)
<TOTAL-ASSETS> 137,028
<CURRENT-LIABILITIES> 85,137
<BONDS> 0
0
0
<COMMON> 49
<OTHER-SE> 48,475
<TOTAL-LIABILITY-AND-EQUITY> 137,028
<SALES> 125,549
<TOTAL-REVENUES> 125,549
<CGS> 115,477
<TOTAL-COSTS> 115,477
<OTHER-EXPENSES> 12,504
<LOSS-PROVISION> 26
<INTEREST-EXPENSE> (565)
<INCOME-PRETAX> (1,893)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,893)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
