-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IDt4/s+rcCni5xUBbO2hNtsIuQyVlvgxouBfRJc0PzVBa13BCMiXk2s08E1A3KUf ArCSYk+DlG1VlKblhIhsDw== 0000850483-98-000018.txt : 19980817 0000850483-98-000018.hdr.sgml : 19980817 ACCESSION NUMBER: 0000850483-98-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOVERNMENT TECHNOLOGY SERVICES INC CENTRAL INDEX KEY: 0000850483 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 541248422 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19394 FILM NUMBER: 98689428 BUSINESS ADDRESS: STREET 1: 4100 LAFAYETTE CENTER DR CITY: CHANTILLY STATE: VA ZIP: 22021-0808 BUSINESS PHONE: 7035022000 MAIL ADDRESS: STREET 1: 4100 LAFAYETTE CTR DRIVE CITY: CHANTILLY STATE: VA ZIP: 22021-0808 10-Q 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 Commission file number 0-19394 GOVERNMENT TECHNOLOGY SERVICES, INC. (Exact name of registrant as specified in its charter) Delaware 54-1248422 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 4100 LAFAYETTE CENTER DRIVE CHANTILLY, VIRGINIA 20151-1200 (Address and zip code of principal executive offices) (703) 502-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Shares Outstanding at August 1, 1998 - ------------------------------ -------------------------------------- Common Stock, $0.005 par value 9,787,547 2 GOVERNMENT TECHNOLOGY SERVICES, INC. Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 1998 INDEX ----- Table of Contents Page - ----------------- ---- COVER PAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 . . . . . . . . . . . . . 3 Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 1998 and 1997 . . . . . . . . . 4 Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 . . . . . . . . . . . 5 Notes to Consolidated Financial Statements. . . . . . . . . . . . 6 ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . .11 PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . .20 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 3 GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
JUNE 30, DECEMBER 31, ASSETS 1998 1997 ----------- ------------ (Unaudited) (Audited) Current assets: Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116 $ 856 Accounts receivable, net. . . . . . . . . . . . . . . . . . . . 104,532 90,905 Merchandise inventories . . . . . . . . . . . . . . . . . . . . 45,354 33,000 Net deferred taxes and other. . . . . . . . . . . . . . . . . . 3,051 3,423 ---------- ----------- Total current assets . . . . . . . . . . . . . . . . . . . . 153,053 128,184 Property and equipment, net . . . . . . . . . . . . . . . . . . . 7,567 8,217 Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . 282 534 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,249 529 ---------- ----------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 163,151 $ 137,464 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks. . . . . . . . . . . . . . . . . . . . . 8,856 21,569 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 94,243 67,720 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 10,234 8,035 ---------- ----------- Total current liabilities. . . . . . . . . . . . . . . . . . 113,333 97,324 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 222 266 ---------- ----------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . 113,555 97,590 ---------- ----------- 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 shares issued and 9,787,547 outstanding at June 30, 1998; and 6,806,084 shares issued and 6,756,180 outstanding at December 31, 1997 . . . . . . . . . . . . . . 49 34 Capital in excess of par value. . . . . . . . . . . . . . . . . 45,795 33,086 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 3,953 7,295 Treasury stock, 18,537 shares at June 30, 1998; and 49,904 shares at December 31, 1997, at cost. . . . . . . . . (201) (541) ---------- ----------- Total stockholders' equity . . . . . . . . . . . . . . . . . 49,596 39,874 ---------- ----------- Total liabilities and stockholders' equity . . . . . . . . . $ 163,151 $ 137,464 ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 4 GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Sales . . . . . . . . . . . . . . . . . . . . . . . . . $136,901 $ 94,464 $235,995 $182,871 Cost of sales . . . . . . . . . . . . . . . . . . . . . 124,536 87,632 215,090 168,908 -------- -------- -------- -------- Gross margin. . . . . . . . . . . . . . . . . . . . . . 12,365 6,832 20,905 13,963 Operating expenses. . . . . . . . . . . . . . . . . . . 11,789 9,770 23,391 19,886 -------- -------- -------- -------- Income (loss) from operations . . . . . . . . . . . . . 576 (2,938) (2,486) (5,923) Interest expense, net of interest income of $73 and $47 for the three months ended June 30, 1998 and 1997, respectively; and $178 and $127 for the six months ended June 30, 1998 and 1997, respectively. . . . . . 408 49 855 467 -------- -------- -------- -------- Income (loss) before taxes. . . . . . . . . . . . . . . 168 (2,987) (3,341) (6,390) Income tax provision (benefit). . . . . . . . . . . . . - - - - -------- -------- -------- -------- Net income (loss) . . . . . . . . . . . . . . . . . . . $ 168 $ (2,987) $ (3,341) $ (6,390) ======== ======== ======== ======== Basic net income (loss) per share . . . . . . . . . . . $ 0.02 $ (0.44) $ (0.44) $ (0.95) ======== ======== ======== ======== Diluted net income (loss) per share . . . . . . . . . . $ 0.02 $ (0.44) $ (0.44) $ (0.95) ======== ======== ======== ======== Basic weighted average shares outstanding . . . . . . . 8,422 6,725 7,589 6,725 ======== ======== ======== ======== Diluted weighted average shares outstanding . . . . . . 8,631 6,725 7,589 6,725 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
SIX MONTHS ENDED JUNE 30, ------------------- 1998 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,341) $ (6,390) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 1,802 1,759 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,628) 19,117 Merchandise inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 599 7,792 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,309) 12 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,523 (4,466) Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200 (3,105) -------- -------- Net cash provided by (used in) operating activities. . . . . . . . . . . 12,846 14,719 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Cost of property and equipment. . . . . . . . . . . . . . . . . . . . . . . (986) (1,716) Payment related to asset purchase of BTG Division . . . . . . . . . . . . . (7,826) - Proceeds from sales of property and equipment. . . . . . . . . . . . . . . - 21 -------- -------- Net cash provided by (used in) investing activities. . . . . . . . . . . (8,812) (1,695) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of bank notes, net . . . . . . . . . . . . . . . . . . . . . . . . (4,887) (13,058) Proceeds from exercises of stock options and warrants . . . . . . . . . . . 113 55 -------- -------- Net cash provided by (used in) financing activities. . . . . . . . . . . (4,774) (13,003) -------- -------- Net (decrease) increase in cash . . . . . . . . . . . . . . . . . . . . . . . (740) 21 Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . 856 48 -------- -------- Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116 $ 69 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,122 $ 756 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2 Supplemental disclosure of non-cash activities: The Company issued 15,375 shares of preferred stock in exchange for $15.375 million of inventory in connection with the acquisition of the BTG Division. The shares of preferred stock were subsequently converted to 3.0 million shares of common stock.
The accompanying notes are an integral part of these consolidated financial statements. 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 for the Securities and Exchange Commission ("SEC") and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. This report should be read in conjunction with the audited financials for the year ended December 31, 1997 and the accompanying Notes to the Financial Statements, contained in the Company's 1997 Annual Report on Form 10-K. In the opinion of Management, all adjustments, consisting 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 June 30, 1997 and the six month periods ended June 30, 1998 and 1997, 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 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 7 effective for financial statements issued for fiscal years beginning after December 15, 1997; however, in the initial year of application, SFAS 131 need not be applied to interim financial statements. 2. NOTES PAYABLE TO BANKS On May 2, 1996, the Company executed a three-year credit facility with a bank (the "Principal Lender") for $40.0 million and a one-year credit facility with the Other Lenders for an additional $55.0 million (collectively, the "Credit Facility"). Additionally, on June 27, 1996, the Company executed a separate $10.0 million facility with the Principal Lender for inventory financing of vendor products (the "Wholesale Financing Facility"). Interest under the inventory financing facility is accrued at a rate equal to prime plus 3.00% (11.25% at December 31, 1996). On August 23, 1996, the Company and its banks executed Amendment No. 1 to the Credit Facility, which modified certain quarterly financial covenants. On 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 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 8 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. Prior to execution of these amendments, the interest rate under the Credit Agreement was LIBOR plus 2.95% (8.64% at June 30, 1998). The limit of the Wholesale Financing Facility will remain at $20 million during the period June 1 through January 31, and 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. At June 30, 1998, the Company was in compliance with all quarterly financial covenants set forth in the Credit Agreement. 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. 3. ACQUISITION On February 12, 1998, the Company entered into and closed on an Asset Purchase Agreement with BTG, Inc. and two of its subsidiaries (collectively, "BTG") under which the Company acquired substantially all of the assets of the BTG division that resells computer hardware, software and integrated systems to the Government (the "BTG Division"). The acquired assets consisted primarily of inventory and rights under certain contracts and intangible personal property, along with furniture, fixtures, supplies and equipment. In addition, the Company assumed certain liabilities under specified contracts of BTG as well as certain liabilities arising from the ownership or operation of the acquired assets after the closing. The Company paid at closing $7,325,265 in cash (after a $174,735 adjustment for accrued vacation liability and satisfaction of an outstanding invoice owed by BTG) and issued 15,375 shares, having a liquidation preference of $15,375,000, of a new series of preferred stock designated Series C 8% Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"). The Company paid an additional $500,000 in cash upon the release of liens on certain items of equipment which are part of the acquired assets. A portion of the consideration, $800,000 in cash and 1,538 shares of Series C Preferred Stock, is being held under an escrow agreement to secure BTG's indemnification obligations under the Asset Purchase Agreement. Under the Asset Purchase Agreement, BTG is obligated to repay to the Company up to $4.5 million to the extent that there is a shortfall in the amounts that the Company receives from dispositions of certain inventory acquired. 9 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 million, 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 million of product inventory). The financial statements include the results of operation of the BTG Division since the acquisition date. The following table sets forth the unaudited pro forma results of operations of the Company and the BTG Division for the six months ended June 30, 1998 and 1997, assuming the acquisition occurred on January 1, 1997. Net loss for 1998 excludes approximately $1 million of operating cost directly attributable to the acquisition. 1998 1997 ---------- ---------- Revenues . . . . . . . . . . . . . $ 277,133 $ 326,149 Net loss . . . . . . . . . . . . . $ (3,711) $ (6,154) Loss per share . . . . . . . . . . $ (0.44) $ (0.92) 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. 10 4. PROPERTIES The Company's administrative offices are located in an approximate 190,000-square foot group of facilities in Chantilly, Virginia under a lease expiring in November 1998. In November 1997, the Company entered into an agreement to build and lease a new administrative facility consisting of approximately 100,000 square feet. The agreement has a 10-year term with one 5-year option period and will commence on December 1, 1998. The Company, as obligated under the agreement, provided to the Landlord two Letters of Credit ("LOC") in the amounts of $600,000 on December 11, 1997 and $1.4 million on April 20, 1998 as a security deposit for all tenant-requested improvements associated with the lease. The deposit will be reduced by 10% per year, over the life of the lease. In addition to the administrative offices, the Company leases a separate 200,000 square foot warehouse and distribution facility in Chantilly, Virginia, under a lease expiring December 2006. As a result of the BTG Division acquisition, the Company also has an agreement to sublease from BTG two warehouse and distribution facilities located in Chattanooga, Tennessee and Fairfax, Virginia, respectively. The Chattanooga facility's sublease will expire in March of 1999, and the Fairfax facility's sublease will expire in August of 1998. The Company also has branch sales offices located in Chicago, Illinois and Heidelberg, Germany, which operate under multi-year leases expiring at various times throughout 1998. 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, 1997. Historical results and percentage relationships among any amounts in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period. Overview GTSI is one of the largest dedicated resellers of microcomputers and Unix workstation hardware, software and networking products to the Government. The Company currently offers access to over 150,000 information technology products from more that 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 of microcomputer and workstation products through its competitive pricing, broad product selection and procurement expertise. The Company provides its vendors with a low-cost marketing and distribution channel to the millions of end users comprising the government market, while virtually insulating these vendors from most of the complex government procurement rules and regulations. The Company is committed to and focused on the government customer. The Company's primary strategy is to focus on maximizing its presence in the government market by competitively bidding as many contract vehicles as possible under various government purchasing programs, maintaining and establishing relationships with vendors which allow for a broader product offering, and focusing on increasing customer responsiveness and service. The February 12, 1998 acquisition of the BTG Division provides the Company with key government contract vehicles, especially indefinite delivery/indefinite quantity contracts, that will continued to enhance its presence in the Government market. Changes in sales throughout the Company's history have been attributed to increased or decreased unit sales, to expansion of the Company's product offerings, to the addition of new vendors and to the addition or expiration of contract sales vehicles. The Company's financial results have fluctuated seasonally, and may continue to do so because of the of the Government's buying patterns which have historically favorably impacted the last two calendar quarters and adversely affected the first two calendar quarters. 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.
PERCENTAGE CHANGE PERCENTAGE OF SALES ----------------------- -------------------------------------- THREE SIX THREE SIX MONTHS MONTHS MONTHS ENDED MONTHS ENDED ENDED ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, ------------------ ------------------ 1997 1997 1998 1997 1998 1997 TO 1998 TO 1998 -------- -------- -------- -------- ---------- ---------- Sales . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 45.0% 29.1% Cost of sales . . . . . . . . . . . . . . 91.0 92.8 91.1 92.4 42.1 27.3 -------- -------- -------- -------- Gross margin. . . . . . . . . . . . . . . 9.0 7.2 8.9 7.6 81.0 49.7 Operating expenses: Selling, general and administrative . . . 8.0 9.4 9.1 9.9 22.9 19.1 Depreciation and amortization . . . . . . 0.6 0.9 0.8 0.9 (2.8) 2.4 -------- -------- -------- -------- 8.6 10.3 9.9 10.8 20.7 17.6 -------- -------- -------- -------- Income (loss) from operations . . . . . . 0.4 (3.1) (1.0) (3.2) 119.6 58.0 Interest expense, net . . . . . . . . . . 0.3 0.1 0.4 0.3 732.7 83.1 -------- -------- -------- -------- Income (loss) before taxes. . . . . . . . 0.1 (3.2) (1.4) (3.5) 105.6 47.7 Income tax provision (benefit). . . . . . - - - - - - -------- -------- -------- -------- Net income (loss) . . . . . . . . . . . . 0.1% (3.2)% (1.4)% (3.5)% 105.6% 47.7% ======== ======== ======== ======== The following table sets forth, for the periods indicated, the approximate sales by category, along with related percentages of total sales: SALES CATEGORY THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------------- --------------------------------------- (Dollars in thousands) 1998 1997 1998 1997 ------------------- ------------------- ------------------- ------------------- GSA Schedules . . . . . . . . . . . . . . $ 40,367 29.5% $ 37,013 39.2% $ 66,238 28.1% $ 70,111 38.4% IDIQ Contracts. . . . . . . . . . . . . . 74,643 54.5 29,067 30.8 125,862 53.3 55,095 30.1 Open Market . . . . . . . . . . . . . . . 17,160 12.5 23,344 24.7 33,372 14.1 45,991 25.1 Other Contracts . . . . . . . . . . . . . 4,731 3.5 5,040 5.3 10,523 4.5 11,674 6.4 --------- --------- --------- --------- --------- --------- --------- --------- Total. . . . . . . . . . . . . . . . $136,901 100.0% $ 94,464 100.0% $ 235,995 100.0% $ 182,871 100.0% ========= ========= ========= ========= ========= ========= ========= =========
13 THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1997 SALES. Sales consist of revenues from product shipments and services rendered net of allowances for customer returns and credits. In the second quarter of 1998, sales increased $42.4 million or 45.0% from the same period in 1997. The primary reasons for the increase over the same quarter last year were the increased sales under indefinite-delivery/indefinite quantity ("IDIQ") contracts and General Services Administration ("GSA") Schedules sales of approximately $45.6 million and $3.4 million respectively. These increases were partially offset by decreased Open Market sales of approximately $6.2 million. The decline in Open Market sales, in management's belief, is primarily attributable to recent changes in the procurement regulations that allow the Government to purchase products by other means (e.g. GSA schedule contracts, Blanket Purchase Agreements ("BPAs") in a quicker and easier manner than was the case before such changes. Sales under IDIQ contracts increased primarily as a result of sales under the contract with the State Department, the Army's PC-2 contract and the U.S. Treasury Department's TDA-2 contract, totaling $38.6 million. The Company performs under these contracts as a result of the acquisition of the BTG Division. The increase in GSA Schedule sales is a result of increased BPA sales of $11.5 million, from the same period last year. The increase was offset by a decrease in sales relating to GSA Schedule A and Schedule B/C contracts of $1.7 and $7.0 million respectively, compared to the same period last year. (In 1996, GSA Schedule contracts expressly authorized agencies to procure from GSA Schedule holders under BPAs, which incorporate many terms and conditions of the GSA Schedule contracts.) Booked backlog at June 30, 1998, was approximately $65.0 million compared to $31.8 million at June 30, 1997. Booked backlog was $67.1 million at July 31, 1998, up $35.0 million, or 109.3%. The increase in booked backlog is primarily related to orders that were recorded as part of the BTG Division acquisition. Booked backlog represents orders received but product has yet to ship. GROSS MARGIN. Gross margin is sales less cost of sales, which includes product purchase cost, freight, warranty maintenance cost and certain other overhead expenses related to the cost of acquiring products. Gross Margin percentages vary over time and change significantly depending on the contract vehicle and product involved; therefore, the Company's overall gross margin percentages are dependent on the mix and timing of products sold and the strategic use of available contract vehicles. During the second quarter of 1998, gross margin increased by approximately $5.5 million or 81.0%. In addition, gross margin, as a percentage increased from 7.2% to 9.0%. The increase in gross margin was impacted by an inventory adjustment of approximately $2.2 million resulting from a June physical inventory valuation. Gross margin for the first three months of 1998 was 7.4%, factoring the impact of the inventory adjustment. 14 In addition, the increase in gross margin was impacted by the realization of greater price protection credits offset by increased warranty maintenance expense. Further, gross margin earned during the second quarter of 1997 was impacted by an $11.0 million drop shipment of product from one of the Company's vendors directly to the customer at lower than normal margins. The change in gross margin percentage is not necessary indicative of gross margin percentages to be earned in future periods. OPERATING EXPENSES. Selling, general and administrative expenses for the three months ended June 30, 1998 increased approximately $2.0 million or 20.7%, from the same period in 1997. The increase was due primarily to increased personnel costs as a result of the BTG Division acquisition as well as increases in the overall volume of the business. Expressed as a percentage of total sales, selling, general and administrative expenses decreased for the three months ended June 30, 1998, to 8.0% from 9.4%. This decrease is reflective of the growth in sales of 45.0%, requiring less additional infrastructure expenses as existing facilities and personnel are utilized more effectively. INTEREST EXPENSE. The approximate $359,000 increase in net interest expense in the second quarter of 1998 was due primarily to increased average borrowing as a result of increased sales volumes as well as additional borrowings required for the BTG Division acquisition. INCOME TAXES. No tax benefit was recognized with respect to the Company's income from operations during the second quarter of 1998 as the Company determined that certain net deferred tax assets did not satisfy the recognition criteria set forth in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1997 SALES. In the first six months of 1998, sales increased $53.1 million or 29.0% from the same period in 1997. The primary reasons for the increase over the same period last year were the increased sales under IDIQ contracts of approximately $70.8 million or 128%. The increased IDIQ contract sales were partially offset by decreased sales under GSA Schedule and Open Market contracts of approximately $3.9 million and $12.6 million, respectively. The decline in Open Market sales, in management's belief, is primarily attributable to recent changes in the procurement regulations that allow the Government to purchase products by other means (e.g. GSA schedule contracts, BPAs) in a quicker and easier manner than was the case before such changes. In addition, the decrease in sales under GSA Schedule contracts can be attributed primarily to decreased sales relating to the GSA Schedule A and Schedule B/C contracts of $3.1 million and $20.2 million respectively, from the same period last year. This decrease was partially offset by an increase in BPA sales of $18.4 million compared to last year. Sales under IDIQ contracts increased primarily as a result of sales under the contract with the State Department, the Army's PC-2 contract and the U.S. Treasury Department's TDA-2 contract, totaling $42.6 million. The 15 Company performs under these contracts as a result of the acquisition of the BTG Division. GROSS MARGIN. In the first six months of 1998, gross margin increased in absolute dollars by approximately $6.9 million or 49.7%, and increased as a percentage of sales from 7.6% to 8.9% when compared to the same period one year ago. The increase in gross margin was impacted by a one time inventory adjustment of approximately $2.2 million resulting from a June physical inventory valuation. Gross margin for the first six months of 1998 was 7.9%, factoring the impact of the inventory adjustment. In addition, the increase in gross margin was impacted by the realization of greater price protection credits offset by increased warranty maintenance expense. Further, gross margin earned during the second quarter of 1997 was impacted by an $11.0 million drop shipment of product from one of the Company's vendors directly to the customer at lower than normal margins. The change in gross margin percentage is not necessary indicative of gross margin percentages to be earned in future periods. OPERATING EXPENSES. Total operating expenses in the first six months of 1998, increased $3.5 million or 17.6%. This increase was due primarily to increased personnel costs as a result of the BTG Division acquisition as well as increases in the overall volume of the business. In addition, during the first six months of 1998, the Company incurred approximately $1.0 million of operating costs associated with the acquisition of the BTG Division. Total operating expenses, as a percentage of total sales decreased for the six months ended June 30, 1998, from 10.8% to 9.9%. This decrease is reflective of the growth in sales requiring less additional infrastructure expenses as existing facilities and personnel are utilized more effectively. INTEREST EXPENSE. The net interest expense increase of approximately $388,000 in the second quarter of 1998 was due primarily to increased average borrowing as a result of increased sales volumes as well as additional borrowings required for the BTG Division acquisition INCOME TAXES. No tax benefit was recognized with respect to the Company's operating loss for the first six months of 1998 as the Company determined that certain net deferred tax assets did not satisfy the recognition criteria set forth in FAS 109. 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 16 anticipation of sales growth, product line changes and expansions, and the timing and costs of changes in customer and product mix. In addition, customer order deferrals in anticipation of new product releases by leading microcomputer and workstation hardware and software manufacturers, delays in vendor shipments of new or existing products, a shift in sales mix to more complex requirements contracts with more complex service costs, and vendor delays in the processing of incentives and credits due GTSI, have occurred (all of which are also likely to occur in the future) and have adversely affected the Company's operating performance in particular periods. The seasonality and the unpredictability of the factors affecting such seasonality make GTSI's quarterly and yearly financial results difficult to predict and subject to significant fluctuation. The Company's stock price could be adversely affected if any such financial results fail to meet the financial community's expectations. Additionally, legislation is periodically introduced in Congress that may change the Government's procurement practices. GTSI cannot predict whether any legislative or any regulatory proposals will be adopted or, if adopted, the impact upon its operating results. Changes in the structure, composition and/or buying patterns of the Government, either alone or in combination with competitive conditions or other factors, could adversely affect future results. LIQUIDITY AND CAPITAL RESOURCES During the first six months of 1998, the Company's operating activities provided $12.8 million of cash flow, compared to $14.7 million for the six months ended June 30, 1997. The decrease from year to year relates to the Company's increase in Accounts Receivable. Accounts Receivable increased as a result of higher sales volumes. The increase in Accounts Receivable was offset by decreases in Accounts Payable. Investing activities used cash of approximately $8.8 million during the six months ended June 30, 1998. The primary reason was the cash payment in February 1998, or $7.8 million relating to the acquisition of the BTG division. During the six months ended June 30, 1998, The Company's financing activities used cash of approximately $4.7 million. The net payments against the Company's bank notes included $7.8 million used to finance the cash portion of the BTG Division acquisition. At June 30, 1998, the Company had approximately $21.1 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 $40.0 million and a one-year credit facility with the Other Lenders for an additional $55.0 million (collectively, the "Credit Facility"). Additionally, on June 27, 1996, the Company executed a separate $10.0 million facility with the Principal Lender for inventory financing of vendor products (the "Wholesale Financing Facility"). Interest under the inventory financing facility is accrued at a rate equal to prime plus 3.00% (11.25% at December 31, 1996). On August 17 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 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. Prior to execution of these amendments, the interest rate under the Credit Agreement was LIBOR plus 2.95% (8.64% at June 30, 1998). The limit of the Wholesale Financing Facility will remain at $20 million during the period June 1 18 through January 31, and 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. At June 30, 1998, the Company was in compliance with all quarterly financial covenants set forth in the Credit Agreement. 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. 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. 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 computer 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. The Company has conducted an inventory of its central systems for Year 2000 compliance, incurring costs to date of approximately $80,000. The most significant risk faced by the Company is the Just-In-Time ("JIT") application, the Company's key enterprise operations system. The Company intends to eliminate this risk by replacing JIT with IMPRESA (which is Year 2000-compliant), which replacement is scheduled to be completed by April 1, 1999 at an estimated cost of approximately $2 million. However, there can be no assurance that any undetected potential Year 2000 problem, if material, can be resolved by the Company in a timely or cost effective fashion, or that any difficulty or inability in resolving such problem will not have a material adverse effect upon the Company. 19 "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, the benefits of the BTG product reseller division acquisition, changes in laws and government procurement regulations, impact of the Year 2000 issue on the Company's business, 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. 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS -- On October 5 1997, the Company entered into a settlement agreement with the Department of Justice under which the Company will pay the Government a total of $400,000 plus $22,000 in legal fees that are to be paid in three equal installments. Interest will accrue from the date of settlement and will be paid over the installment period. The agreement resolves and releases the Company from claims relating to a GSA audit of the Company's GSA schedule sales for the years 1988 to 1997, and settles and dismisses with prejudice a qui tam lawsuit filed on behalf of the Government regarding such GSA schedule sales. The qui tam lawsuit naming the Company was filed under seal in 1995 and was subject to a court order prohibiting disclosure of the suit. The qui tam action was filed by the same individual who filed a similar suit against Novell, Inc. in 1992, which Novell settled by paying the Government $1.7 million. In December 1996, the Company settled litigation pending before the Armed Services Board of Contract Appeals related to the Company's obligation to provide "upgrades" of certain computer software under the Desktop IV Contract. The settlement required the Company to provide, without charge, certain software licenses to users who registered before February 28, 1997. At December 31, 1996, the Company recorded a liability of approximately $3.0 million, which represented management's estimate of the costs necessary to provide the "upgrades" noted above plus estimated professional services costs paid in 1997 related to the GSA audit. The balance of this reserve was approximately $800,000 as of June 30, 1998. The Company is occasionally a defendant in litigation incidental to its business. The Company believes that none of such litigation currently pending against it, individually or in the aggregate, will have a material adverse effect on the Company's financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES -- Inapplicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- Inapplicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- (a) The Company's Annual Meeting of Stockholders was held on May 12, 1998. 21 (b) At said Annual Meeting, the Company's stockholders: (1) increased the number of authorized shares of the Company's Common Stock from ten million to twenty million; (2) elected eight directors; (3) increased by one million the number of shares authorized for issuance under the Company's 1996 Stock Option Plan; and (4) approved the conversion of the Company's Series C Preferred Stock into Common Stock which, pursuant to the exemption provided under Section 4(2) of the Securities Act of 1933, as amended ("Securities Act"), was not registered under the Securities Act.
VOTES VOTES WITHHELD OR FOR AGAINST ABSTENTIONS ---------- ------------- ------------- Increase in Authorized Common Stock: 4,689,188 784,334 7,422 Directors: Tania Amochaev 5,133,087 347,857 Gerald W. Ebker 5,004,857 476,087 Lee Johnson 5,132,357 348,587 Steven Kelman, Ph.D. 5,002,857 478,087 James J. Leto 5,004,857 476,087 Lawrence J. Schoenberg 5,132,087 348,857 John M. Toups 5,133,357 347,587 M. Dendy Young 5,132,357 348,587 Increase in 1996 Stock Option Plan: 2,185,333 1,264,840 73,010 (Broker non-vote: 1,957,761) Conversion of Series C Preferred Stock: 2,185,333 1,264,840 73,010 (Broker non-vote: 1,957,761)
ITEM 5. OTHER INFORMATION -- Inapplicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -- (a) Exhibits: 10.41 Amendment, dated as of July 2, 1998, to Second Amended and Restated Business Credit and Security Agreement, dated as of July 28, 1997, among the Registrant, Certain Lenders Named [in such agreement], and Deutsche Financial Services Corporation, as a Lender and as Agent. 10.42 Amendment, dated as of July 2, 1998, to Agreement for Wholesale Financing dated as of June 27, 1996, among the Registrant and Deutsche Financial Services Corporation. 11.1 Computation of Earnings Per Share. (b) Reports on Form 8-K: (1) On May 12, 1998, the Registrant filed a Current Report on Form 8-K reporting the results of its annual meeting of stockholders held on May 12, 1998. (2) On May 21, 1998, the Registrant filed a Current Report on Form 8-K reporting that it had entered into a letter agreement with BTG, Inc. ("BTG") regarding the disposition of certain inventory received by GTSI from BTG after the closing on the sale of the BTG Technology Systems Division. 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: August 14, 1998 GOVERNMENT TECHNOLOGY SERVICES, INC. By: /s/ DENDY YOUNG ----------------------------------- Dendy Young Chairman, President and Chief Executive Officer By: /s/ STEPHEN L. WAECHTER ----------------------------------- Stephen L. Waechter Senior Vice President and Chief Financial Officer INDEX TO EXHIBITS =========================================================================== EXHIBIT | NUMBER | DESCRIPTION - --------------------------------------------------------------------------- 10.41 | Amendment, dated as of July 2, 1998, to Second Amended and Restated Business Credit and Security Agreement, dated as of July 28, 1997, among the Registrant, Certain Lenders Named [in such agreement], and Deutsche Financial Services Corporation, as a Lender and as Agent - --------------------------------------------------------------------------- 10.42 | Amendment, dated as of July 2, 1998, to Agreement for Wholesale Financing dated as of June 27, 1996, among the Registrant and Deutsche Financial Services Corporation - --------------------------------------------------------------------------- 11.1 | Computation of Earnings Per Share =========================================================================== EX-10 2 Exhibit 10.41 AMENDMENT THIS AMENDMENT ("Amendment") is entered into as of the 2nd day of July, 1998 by and among Deutsche Financial Services Corporation, as Agent and a Lender ("Agent") the other Lender signatories hereto ("Lenders") and Government Technology Services, Inc. ("Borrower"). RECITALS Agent, Lenders (and/or their successors by assignment, as applicable) and Borrower are parties to that certain Second Amended and Restated Business Credit and Security Agreement dated as of July 28, 1997 (as amended from time to time, the "Credit Agreement"). Capitalized terms used but not defined herein shall have the meanings given them in the Credit Agreement. National Bank of Canada ("NBC"), a Lender, has delivered written notice of its intention not to renew its Commitment for the one-year renewal period which would commence on July 28, 1998. In connection with: (i) such termination by NBC, (ii) the purchase by Fleet Capital Corporation ("Fleet") of a Commitment in the Total Credit, as described more fully herein, and (iii) certain other amendments to the Credit Agreement, as described more fully herein; Borrower, Fleet, Lenders and Agent now desire to amend certain provisions of the Credit Agreement on and subject to the terms hereof. NOW, THEREFORE, in consideration of the forgoing premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Amendment Effective Date; Settlement. (i) Notwithstanding anything herein to the contrary, this Amendment shall only become effective (the "Amendment Effective Date") when (a) the Borrower, the Agent, each Lender and Fleet shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmissions) the same to Agent at its address indicated in the Credit Agreement, and (b) Fleet shall have delivered to the Agent for the account of the Lenders, an amount equal to Fleet's relevant Pro Rata Share of the principal amount of the outstanding Loans and any accrued and unpaid interest under the Credit Agreement. (ii) Upon such acceptance and recording by the Agent, and payment of the amounts described above, from and after the Amendment Effective Date, the Agent shall make all payments under the Credit Agreement in respect of Fleet's interest acquired hereby (including, without limitation, all payments or principal, interest and fees (if applicable) with respect thereto) to Fleet as a Lender. 2. NBC. As of the Amendment Effective Date, NBC shall no longer be a Lender under the Credit Agreement and the other Loan Documents. Agent and NBC shall have, on or prior to the Amendment Effective Date, settled all balances and other issues necessary towards elimination of NBC's Commitment and other related matters. 3. Fleet. (i) As of the Amendment Effective Date, Fleet shall be and become a Lender under the Credit Agreement and the other Loan Documents, in the amount and on such terms as set forth herein and therein. Fleet hereby: (a) confirms that it has received a copy of the Credit Agreement and the other Loan Documents, together with copies of the financial statements referred to therein and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Amendment and to become a Lender; (b) agrees that it will, independently and without reliance upon the Agent, or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (c) appoints and authorizes the Agent to take such actions as agent on its behalf and to exercise such powers under the Credit Agreement and the other Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (d) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement and the other Loan Documents are required to be performed by it as a Lender. (ii) Neither Agent or any Lender makes any representation or warranty to Fleet and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other Loan Document. (iii) Fleet's address for notice purposes under the Credit Agreement shall be as follows: Address: 6060 J.A. Jones Drive Suite 200 Charlotte, NC 28287 Attn: Sharon Garner Fax No.: (704) 553-6738 Fleet's wiring instructions are as follows: Bank: Fleet Bank ABA Routing No.: 011 900 571 Account No.: 936-933-7552 Reference: GTSI 4. Commitments; Pro Rata Shares. Upon the Amendment Effective Date, each Lender and Fleet agrees and confirms that its Commitment under the Credit Agreement shall be as set forth on Exhibit A, attached hereto and incorporated herein, which Exhibit A shall also amend the Credit Agreement regarding the subject matter thereof. Each Lender and Fleet hereby agrees that upon the Amendment Effective Date, its Commitment and corresponding Pro Rata Share shall be determined in accordance with Exhibit A hereto. 5. Amendments to Credit Agreement. Upon the Amendment Effective Date, the Credit Agreement shall be amended as follows: (i) "Seasonal Reduction Period". The term "Seasonal Reduction Period" is hereby deleted from Section 2 of the Credit Agreement and each and every reference to such term therein and in any other Loan Document, is also deleted in its entirety. (ii) Seasonal Periods. The following new defined terms are hereby inserted into Section 2 of the Credit Agreement: "'First Seasonal Period' shall mean the period from February 1 through April 30 in any calendar year. 'Second Seasonal Period' shall mean the period from May 1 through June 30 in any calendar year. 'Third Seasonal Period' shall mean the period from July 1 through September 30 in any calendar year. 'Fourth Seasonal Period' shall mean the period from October 1 in any calendar year through January 31 in the immediately succeeding calendar year." (iii) Majority Lenders. The definition of "Majority Lenders" in Section 2 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "'Majority Lenders' shall mean, at any date of determination thereof, Lenders having Commitments representing at least 51% of the aggregate Commitments at such time: provided, however, that if any Lender shall be in breach of any of its obligations hereunder to Borrower or Agent, including any breach resulting from its failure to honor its Commitment in accordance with the terms of this Agreement, then, for so long as such breach continues, the term 'Majority Lenders' shall mean Lenders (excluding each Lender that is in breach of its obligations hereunder) having Commitments representing at least 51% of the aggregate Commitments at such time." (iv) Credit Facility. The introductory paragraph to Section 3 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "3. CREDIT FACILITY. In consideration of Borrower's payment and performance of its Obligations and subject to the terms and conditions contained in this Agreement, the Lenders agree to provide, and Borrower agrees to accept, an aggregate credit facility of up to: (i) Fifty Million Dollars ($50,000,000) during the First Seasonal Period; (ii) Thirty Million Dollars ($30,000,000) during the Second Seasonal Period; (iii) Fifty Million Dollars ($50,000,000) during the Third Seasonal Period; and (iv) Seventy-Five Million Dollars ($75,000,000) during the Fourth Seasonal Period; (collectively, the 'Total Credit'), on and subject to the terms hereof (the 'Credit Facility')." (v) Borrowing Base. Section 3.2 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "3.2 Borrowing Base. On receipt of each Borrowing Base Certificate in form and substance acceptable to Agent, which shall be delivered with each Notice of Borrowing and at least weekly (the 'Borrowing Base Certificate'), Agent will credit Borrower with eighty percent (80%) of the net amount of the Eligible Accounts which are, absent error or other discrepancy, listed in such Borrowing Base Certificate minus the face amount of all letters of credit issued or guaranteed by an LC Guarantying Lender, minus any reserves established pursuant to Section 3.12 hereof (the 'Borrowing Base'). For purposes hereof, the net amount of Eligible Accounts at any time shall be the face amount of such Eligible Accounts less any and all returns, discounts (which may, at Agent's option, be calculated on shortest terms), credits, rebates, allowances, or excise taxes of any nature at any time issued, owing claimed by Account Debtors, granted, outstanding, or payable in connection with such Accounts at such time." (vi) Interest; Calculation. Section 3.3(a) of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "(a) Interest Calculation. Borrower will pay interest on the Daily Contract Balance (as defined below) at a rate equal to the LIBOR Rate (Reserve Adjusted) plus two and forty-five one-hundredths percent (2.45%) per annum. Commencing with the fiscal quarter of Borrower ending September 30, 1998 and each quarter thereafter, if Borrower's financial statements delivered to Agent pursuant to Section 3.11(e)(i) hereof or Borrower's 10Q Reports in the form delivered to the Securities Exchange Commission, as applicable, for such quarter indicate Borrower's achievement of all of its financial covenants as set forth in Section 9.3 hereof, then from and after delivery of such financial statements showing achievement of such amounts and provided Borrower is not in Default hereunder, the rate of interest described above will be reduced to (or maintained at, as applicable), the LIBOR Rate (Reserve Adjusted) plus two and twenty-five one-hundredths percent (2.25%) per annum. If, however, such financial statements indicate Borrower has failed to achieve all of the financial covenants set forth in Section 9.3 for such quarter, the rate of interest described above will be increased to (or maintained at, as applicable), the LIBOR Rate (Reserve Adjusted) plus two and forty-five one-hundredths percent (2.45%) per annum. Such interest will: (i) be computed based on a 360 day year; (ii) be calculated with respect to each day by multiplying the Daily Rate (as defined below) by the Daily Contract Balance; and (iii) accrue from the date Agent authorizes any Electronic Transfer (as defined in Section 3.3(b) below) or otherwise advances a Loan to or for the benefit of Borrower, until Agent receives full payment of the Obligations Borrower owes the Lenders in good funds and Agent applies such payment to Borrower's principal debt in accordance with the terms of this Agreement. The 'Daily Rate' is the quotient of the applicable annual rate provided herein divided by 360. The 'Daily Contract Balance' is the amount of outstanding principal debt which Borrower owes Lenders on the Loans at the end of each day (including the amount of all Electronic Transfers authorized) after Agent has credited payments which it has received on the Loans." (vii) Administration Fee. Section 3.4(b) of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "(b) Administration Fee. Borrower agrees to pay DFS, for DFS' own account, for its services in acting as Agent hereunder, an annual administration fee (the 'Administration Fee') in an amount equal to Seventy Five Thousand Dollars ($75,000). The Administration Fee shall be payable monthly, in arrears, in equal installments of $6,250, and due pursuant to the applicable billing statement. Absent manifest error, once received by DFS, no Administration Fee shall be refundable by DFS for any reason, including early termination of this Agreement." (viii) Unused Line Fee. Section 3.4(e) of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "(e) Unused Line Fee. To the extent the unused amount of the Credit Facility exceeds thirty-three percent (33%) of the Total Credit, Borrower agrees to pay Agent for the account of all Lenders an unused line fee of three-hundred twenty-five one thousandths of one percent (.325%) per annum on the daily average of the unused amount of the Total Credit during the term of this Agreement and any renewal term. Such unused line fee shall be payable monthly in arrears and due pursuant to the applicable billing statement. Such unused amount of the Credit Facility in any month shall mean the difference between the Total Credit and the average Daily Contract Balance during such month." (ix) Letter of Credit Guarantees. Section 3.17(a) of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "(a) If requested to do so by Borrower, any Lender may, in its sole discretion, for its own account, upon prior written notice to Agent, execute a guaranty by which such Lender shall guaranty the payment or performance by Borrower of its reimbursement obligation with respect to letters of credit issued for Borrower's account by another Person (such Lender being referred to as an 'LC Guarantying Lender'); provided, however, that in no event shall any Lender be obligated to guarantee any such letter of credit if: (i) Borrower's obligations in respect of all such letters of credit then outstanding in the aggregate exceed $5,000,000, or (ii) if the expiry date of any such letter of credit shall or may under any circumstances occur on or after the last day of the then-current term of this Agreement. Borrower shall be absolutely and unconditionally liable to reimburse such LC Guarantying Lender on demand for any liability such LC Guarantying Lender may incur in connection with the issuance of any such letters of credit or guarantees, and Borrower assumes all risks in connection therewith. Borrower's obligation to reimburse any LC Guarantying Lender hereunder may, at such LC Guarantying Lender's option upon prior written notice to Agent, be funded by the making of a Loan with the proceeds disbursed solely to such LC Guarantying Lender, and in any case shall remain an Obligation of Borrower, secured by the Collateral. All documentation pursuant to which such transactions are consummated shall be delivered to Agent and shall be deemed Loan Documents hereunder." (x) Collection Days. Section 5.5 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "5.5 Collection Days. Notwithstanding anything herein to the contrary: (a) all cash, checks, instruments and other items of payment, solely for purposes of determining the occurrence of a Default or whether there is availability for any Loans, shall be applied against the Obligations on the Business Day of receipt thereof by Agent (if prior to 12:00 noon Eastern Standard Time); and (b) solely for purposes of interest calculation hereunder, all amounts received by Agent prior to 12:00 noon Eastern Standard Time will be credited by Agent to Borrower's account one (1) Business Day after Agent's receipt of notification from Borrower that good funds have been deposited into the collection account established hereunder." (xi) Capital Expenditures. Section 9.2.9 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "9.2.9 Capital Expenditures. Borrower will not make, or commit to make, any expenditure for capital improvements (including, without limitation, capitalized leases) or the acquisition of capital goods in excess of: (a) for the calendar year ending December 31, 1998, Six Million Dollars ($6,000,000), and (b) for each calendar year thereafter, One Million Seven Hundred Thousand Dollars ($1,700,000)." (xii) Financial Covenants. Section 9.3.1 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "9.3.1 Amounts. Borrower agrees that it will: (a) at all times maintain a Tangible Net Worth plus Subordinated Debt in the combined amount of not less than the amount shown below for the period corresponding thereto: Period Amount ---------------------------------------------------- Calendar quarter ending 3/31/98 $38,000,000 Calendar quarter ending 6/30/98 $40,000,000 Calendar quarter ending 9/30/98 $45,000,000 Calendar quarter ending 12/31/98 and each calendar quarter thereafter $47,000,000; (b) at all times maintain a ratio of Debt minus Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than the amount shown below for the period corresponding thereto: Period Ratio ---------------------------------------------------- Calendar quarter ending 3/31/98 4.0 to 1.0 Calendar quarter ending 6/30/98 3.0 to 1.0 Calendar quarter ending 9/30/98 5.0 to 1.0 Calendar quarter ending 12/31/98 and each calendar quarter thereafter 3.5 to 1.0; (c) at all times maintain a ratio of Current Assets to current liabilities of not less than the amount shown below for the period corresponding thereto: Period Ratio ---------------------------------------------------- Calendar quarter ending 3/31/98 1.2 to 1.0 Calendar quarter ending 6/30/98 1.2 to 1.0 Calendar quarter ending 9/30/98 1.1 to 1.0 Calendar quarter ending 12/31/98 and each calendar quarter thereafter 1.2 to 1.0 (d) for the fiscal year of Borrower ending December 31, 1998, and each and every fiscal year thereafter, Borrower shall achieve net income, before giving effect to provisions for income taxes, of at least Two Million Dollars ($2,000,000.00)." (xiii) Successor Agent. Section 13.8 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "13.8 Successor Agent. Subject to the appointment and acceptance of a successor Agent as provided below, Agent may resign at any time by giving at least 30 days written notice thereof to each Lender and Borrower. Upon any such resignation, the Majority Lenders, after prior consultation with (but without having to obtain consent of) each Lender, shall have the right to appoint a successor Agent which shall be (i) a Lender, (ii) a United States based affiliate of a Lender, or (iii) a commercial bank that is organized under the laws of the United States or of any State thereof which has a combined capital surplus of at least $100,000,000 (or any asset based lending affiliate of any such bank) and is reasonably acceptable to Borrower (and for purposes hereof, any successor to DFS shall be deemed acceptable to Borrower); provided, however, if there exists a Default or any event which, but for the passage of time or notice, or both, would be a Default, then there shall be no such obligation to seek or obtain Borrower's acceptance. Upon the acceptance by a successor Agent of an appointment as an Agent hereunder, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent without further act, deed or conveyance, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 13 (including the provisions of Section 13.5 hereof) shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. Notwithstanding anything to the contrary contained in this Agreement, any successor by merger or acquisition of the stock or assets of DFS shall continue to be Agent hereunder unless such successor shall resign in accordance with the provisions hereof." (xiv) Assignments. Sections 14.17 (a) and (b) of the Credit Agreement are hereby deleted in their entirety and replaced with the following: "(a) Assignments. Each Lender shall have the right, subject to the further provisions of this Section 14.17, to sell, assign, or negotiate all or any part of its interest in the Credit Facility, Loans, and other rights and obligations under this Agreement and related documents (such transfer, an 'Assignment') to any commercial lender, other financial institution or other entity acceptable to Agent and, provided no Default exists or there exists no event which, but for the passage of time or notice, or both, would be a Default, Borrower (which consent of Borrower shall not be unreasonably withheld) (an 'Assignee'). Upon such Assignment becoming effective as provided in Section 14.17(b), the assigning Lender shall be relieved from the portion of the Credit Facility, obligations to indemnify the Agent and other obligations hereunder to the extent assumed and undertaken by the Assignee, and to such extent the Assignee shall have the rights and obligations of a 'Lender' hereunder. Notwithstanding the foregoing, unless otherwise consented to by Agent, (i) each Assignment shall be of a constant, and not a varying, percentage of the assigning Lender's interest in the Credit Facility, (ii) each Assignment shall be in a principal amount of not less than $9,500,000 in the aggregate for all Loans and interest in the Credit Facility assigned unless the Assignee shall, prior to such Assignment, already be a Lender or an Assignee having an original interest in the Credit Facility in excess of $9,500,000, (iii) such Assignee shall pay to DFS, for DFS' own account, an administration and processing fee of $10,000, and (iv) each Assignment shall be documented by an agreement between the assigning Lender and the Assignee in a form acceptable to Agent (an 'Assignment and Assumption Agreement'). (b) Effectiveness of Assignments. An Assignment shall become effective hereunder when all of the following shall have occurred: (i) any consents to such Assignment which may have been required as provided in Section 14.17(a) above have been obtained, unless the Assignee is already a Lender under this Agreement, (ii) the Assignee shall have submitted the relevant Assignment and Assumption Agreement, or other document in which the Assignee shall have agreed in writing, among other things, to have irrevocably assumed and undertaken the transferred portion of the assigning Lender's obligations hereunder (including without limitation the obligations to indemnify the Agent hereunder and to comply with Section 14.29), to the Agent with a copy for the Borrower, and shall have provided to the Agent information the Agent shall have reasonably requested to make payments to the Assignee, and (iii) the assigning Lender and the Agent shall have agreed upon a date upon which the Assignment shall become effective. Upon the Assignment becoming effective, the Agent shall forward all payments of interest, principal, fees and other amounts that would have been made to the assigning Lender, in proportion to the percentage of the assigning Lender's rights transferred, to the Assignee." (xv) Section 3.11(e)(vii). Section 3.11(e)(vii) of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "(vii) The President or Chief Financial Officer of Borrower will certify to Agent within 45 days after the end of each fiscal quarter, or more often if reasonably requested by Agent, that to the best of his knowledge, after reasonable inquiry, Borrower is in compliance with the Financial Covenants as set forth in Section 9.3 hereof, in a form acceptable to Agent in its sole discretion;" (xvi) Ineligible Accounts Amendment. Subsection "(m)" in the definition of "Ineligible Accounts" in Section 2 of the Credit Agreement is hereby deleted in its entirety. (xvii) Obligations Amendment. The definition of "Obligations" in Section 2 of the Credit Agreement is hereby deleted in its entirety and replaced with the following new definition: "'Obligations' shall mean all liabilities and indebtedness of any kind and nature whatsoever now or hereafter arising, owing, due or payable from Borrower (and/or any of its Subsidiaries and Affiliates) to the Lenders, whether primary or secondary, joint or several, direct, contingent, fixed or otherwise, secured or unsecured, or whether arising under this Agreement or any other Loan Document now or hereafter executed by Borrower (or any of its Subsidiaries or Affiliates). Obligations will include, without limitation, any third party claims against Borrower (or any of its Subsidiaries or Affiliates) satisfied or acquired by the Agent or a Lender. Obligations will also include all obligations of Borrower to pay: (a) any and all sums reasonably advanced by the Agent or a Lender to preserve or protect the Collateral or the value of the Collateral or to preserve, protect, or perfect Agent's security interests in the Collateral; (b) in the event of any proceeding to enforce the collection of the Obligations after a Default, the reasonable expenses of retaking, holding, preparing for sale, selling or otherwise disposing of or realizing on the Collateral, or expenses of any exercise by Agent or the Lenders of their rights, together with reasonable attorneys' fees, expenses of collection and court costs, as provided in the Loan Documents; and (c) any other indebtedness or liability of Borrower to the Agent or a Lender arising under this Agreement or any other Loan Document, whether direct or indirect, absolute or contingent, now or hereafter arising." 6. No Claims. Borrower acknowledges that there are no existing claims, defenses (personal or otherwise) or rights of setoff or recoupment whatsoever with respect to any of the Loan Documents. Borrower agrees that this Amendment in no way acts as a release or relinquishment of any Liens or other rights in favor of Agent or any Lender. 7. Miscellaneous. Except to the extent specifically amended herein, all terms and conditions of the Credit Agreement and the other Loan Documents are hereby ratified and reaffirmed and shall remain in full force and effect. Borrower waives notice of Agent's and each Lender's acceptance of this Amendment. Agent and each Lender reserves all of their respective rights and remedies under the Credit Agreement and other Loan Documents. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. GOVERNMENT TECHNOLOGY SERVICES, INC. By: /s/ Stephen L. Waechter -------------------------------- Name: Stephen L. Waechter Title: CFO DEUTSCHE FINANCIAL SERVICES CORPORATION, as Agent and a Lender By: /s/ Greg Ledington ------------------------------------ Name: Greg Ledington Title: Regional Vice President CRESTAR BANK, a Lender CONGRESS FINANCIAL CORPORATION, a Lender By: /s/ Robert L. Offut By: /s/ Keith Holler ----------------------- --------------------------- Name: Robert L. Offut Name: Keith Holler Title: Vice President Title: Assistant Vice President Date: 7/2/98 Date: 7/2/98 FLEET CAPITAL CORPORATION, a Lender By: /s/ Sharon J. Garner ----------------------- Name: Sharon J. Garner Title: Vice President Date: 7/2/98 CONSENT AND ACKNOWLEDGMENT The undersigned Guarantor hereby acknowledges and consents to the terms of the foregoing Amendment, and does hereby ratify and confirm its Guaranty in all respects. FALCON MICROSYSTEMS, INC. By: /s/ Stephen L. Waechter ------------------------- Name: Stephen L. Waechter Title: CFO Date: 7/2/98 EXHIBIT A
Lender First Second Third Fourth (Pro Seasonal Seasonal Seasonal Seasonal Rata Period Period Period Period Share) Commitment Commitment Commitment Commitment (Feb-Apr) (May-June) (July-Sept) (Oct-Jan) - -------------------------------------------------------------------------------------------------- DFS (42.00%) $21,000,000 $12,600,000 $21,000,000 $31,500,000 Crestar (12.67%) $ 6,335,000 $ 3,801,000 $ 6,335,000 $ 9,500,000 Congress (12.67%) $ 6,335,000 $ 3,801,000 $ 6,335,000 $ 9,500,000 Fleet (32.66%) $16,330,000 $ 9,698,000 $16,330,000 $24,500,000 - -------------------------------------------------------------------------------------------------- Total of Commitments $50,000,000 $30,000,000 $50,000,000 $75,000,000 =========== =========== =========== ===========
EX-10 3 Exhibit 10.42 AMENDMENT TO AGREEMENT FOR WHOLESALE FINANCING This Amendment to Agreement for Wholesale Financing is made to that certain Agreement for Wholesale Financing entered into by and between Government Technology Services, Inc. ("Dealer") and Deutsche Financial Services Corporation ("DFS") as of June 27, 1996, as amended ("Agreement"). FOR VALUE RECEIVED, Dealer and DFS agree to amend the Agreement as follows: 1. Dealer hereby confirms its understanding of the discretionary nature of its credit facility established pursuant to the terms of the Agreement. The foregoing notwithstanding, DFS hereby confirms that it has established a facility available for Dealer's inventory purchases under the terms of the Agreement in the amount of $20,000,000, which such amount shall be reduced to $10,000,000 for the period commencing on February 1 and ending on May 31 in any calendar year. DFS is not permitted to increase either of the foregoing facility amounts without the prior written consent of a majority, by number, of the "Lenders" (as that terms is defined in the Credit Agreement), excluding DFS as a Lender for purposes of such calculation. 2. The following paragraph shall be inserted into the Agreement as if fully and originally set forth therein and shall replace in their entirety any previous provisions concerning the subject matter hereof: "Unused Line Fee. To the extent the unused amount of Dealer's facility under this Agreement exceeds fifty percent (50%) of the maximum facility available to Dealer hereunder, Dealer agrees to pay DFS an unused line fee of three-hundred twenty-five one thousandths of one percent (.325%) per annum on the daily average of the unused amount of the Dealer's facility under this Agreement. Said fee shall be determined monthly based upon an average of the status of the facility measured once per week in such month. The facility shall be considered utilized to the extent of advances actually made by DFS in respect of an invoice and open approvals, which are defined as amounts approved by DFS under this facility, but which, for any reason, remain unfunded by DFS for a period not to exceed 30 days from the date of such open approval. Such unused line fee shall be payable monthly in arrears and due pursuant to the applicable billing statement." 3. The following paragraph shall be incorporated into the Agreement as if fully and originally set forth therein and shall replace in their entirety any previous provisions concerning the subject matter hereof: "Financial Covenants. Dealer agrees that it will: (a) at all times maintain a Tangible Net Worth plus Subordinated Debt in the combined amount of not less than the amount shown below for the period corresponding thereto: Period Amount ---------------------------------------------------- Calendar quarter ending 3/31/98 $38,000,000 Calendar quarter ending 6/30/98 $40,000,000 Calendar quarter ending 9/30/98 $45,000,000 Calendar quarter ending 12/31/98 and each calendar quarter thereafter $47,000,000; (b) at all times maintain a ratio of Debt minus Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than the amount shown below for the period corresponding thereto: Period Ratio ---------------------------------------------------- Calendar quarter ending 3/31/98 4.0 to 1.0 Calendar quarter ending 6/30/98 3.0 to 1.0 Calendar quarter ending 9/30/98 5.0 to 1.0 Calendar quarter ending 12/31/98 and each calendar quarter thereafter 3.5 to 1.0; (c) at all times maintain a ratio of Current Assets to current liabilities of not less than the amount shown below for the period corresponding thereto: Period Ratio ---------------------------------------------------- Calendar quarter ending 3/31/98 1.2 to 1.0 Calendar quarter ending 6/30/98 1.2 to 1.0 Calendar quarter ending 9/30/98 1.1 to 1.0 Calendar quarter ending 12/31/98 and each calendar quarter thereafter 1.2 to 1.0 (d) for the fiscal year of Dealer ending December 31, 1998, and each and every fiscal year thereafter, Dealer shall achieve net income, before giving effect to provisions for income taxes, of at least Two Million Dollars ($2,000,000.00). For purposes of this paragraph: (i) 'Tangible Net Worth' means the book value of Dealer's assets less liabilities (including as liabilities all recorded reserves for contingencies and other potential liabilities), excluding from such assets all Intangibles; (ii) 'Intangibles' means and includes general intangibles (as that term is defined in the UCC); accounts receivable and advances due from officers, directors, member, owner, employees, stockholders and affiliates; leasehold improvements net of depreciation; licenses; good will; prepaid expenses (except for those determined by DFS, in its sole discretion, not to be Intangible); escrow deposits (except for those determined by DFS, in its sole discretion, not to be Intangible); covenants not to compete; the excess of cost over book value of acquired assets; franchise fees; organizational costs; finance reserves held for recourse obligations; capitalized research and development costs; and such other similar items as DFS may from time to time determine in DFS' sole discretion; (iii) 'Debt' means all of Dealer's liabilities and indebtedness for borrowed money of any kind and nature whatsoever other than Subordinated Debt (as defined below), whether direct or indirect, absolute or contingent, and including obligations under capitalized leases, guaranties or with respect to which Dealer has pledged assets to secure performance, whether or not direct recourse liability has been assumed by Dealer; (iv) 'Subordinated Debt' means all of Dealer's Debt which is subordinated to the payment of Dealer's liabilities to DFS by an agreement in form and substance satisfactory to DFS; and (v) 'Current Assets' means Dealer's current assets. The foregoing terms will be determined in accordance with GAAP consistently applied, and, if applicable, on a consolidated basis." All other terms as they appear in the Agreement, to the extent consistent with the foregoing, are ratified and remain unchanged and in full force and effect. IN WITNESS WHEREOF, Dealer and DFS have executed this Amendment to Agreement for Wholesale Financing this 2nd day of July, 1998. GOVERNMENT TECHNOLOGY SERVICES, INC. ATTEST: By: /s/ Stephen L. Waechter -------------------------------- Title: CFO /s/ Judith B. Kassel - ------------------------ (Assistant) Secretary DEUTSCHE FINANCIAL SERVICES CORPORATION By: /s/ Dwight Fairchild -------------------------------- Print Name: Dwight Fairchild Title: Senior Regional Branch Manager CONSENT AND ACKNOWLEDGMENT The undersigned Guarantor hereby acknowledges and consents to the terms of the foregoing Amendment, and does hereby ratify and confirm its Guaranty in all respects. FALCON MICROSYSTEMS, INC. By: /s/ Stephen L. Waechter ------------------------- Name: Stephen L. Waechter Title: CFO Date: 7/2/98 EX-11 4 EXHIBIT 11.1 GOVERNMENT TECHNOLOGY SERVICES, INC. COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share amounts)
THREE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 168 $ (2,987) $ (3,341) $(6,391) Basic: Weighted average shares of common stock outstanding . . . 8,422 6,725 7,589 6,725 Net loss per common share and common share equivalent . . $ 0.02 $ (0.44) $ (0.44) $ (0.95) Diluted: Weighted average shares of common stock outstanding . . . 8,631 6,725 7,589 6,725 Net loss per common share and common share equivalent . . $ 0.02 $ (0.44) $ (0.44) $ (0.95)
EX-27 5
5 1,000 6-MOS DEC-31-1997 JUN-30-1998 116 0 109,800 5,268 45,354 153,053 18,238 (10,671) 163,151 113,333 0 0 0 49 49,547 163,151 235,995 235,995 215,090 215,090 23,156 235 855 (3,341) 0 0 0 0 0 (3,341) (0.44) (0.44)
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