-----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, PhpMbRUf4d8PGgupxM/MUQ3BYwPKVyTbPVFZjgIGd+HiNNKr08jOm7vQBA+MuPqL VxWfAkJzVr4U/RbkCOONhA== 0000850483-98-000022.txt : 19981123 0000850483-98-000022.hdr.sgml : 19981123 ACCESSION NUMBER: 0000850483-98-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOVERNMENT TECHNOLOGY SERVICES INC CENTRAL INDEX KEY: 0000850483 STANDARD INDUSTRIAL CLASSIFICATION: 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: 98753499 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 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 November 1, 1998 - - ------------------------------ -------------------------------------- Common Stock, $0.005 par value 9,787,547 GOVERNMENT TECHNOLOGY SERVICES, INC. Quarterly Report on Form 10-Q for the Quarterly Period Ended September 30, 1998 TABLE OF CONTENTS ----------------- Reference Page - - --------- ---- COVER PAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements - Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997. . . . . . . . . . . 3 Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997 . . . . . . . . 5 Notes to Consolidated Financial Statements. . . . . . . . . . . 6 Item 2. Management's Discussion & Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . .12 PART II -- OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . .24 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 - 2 - GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
SEP. 30, DEC. 31, ASSETS 1998 1997 ----------- ----------- (Unaudited) (Audited) Current assets: Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 117 $ 856 Accounts receivable, net. . . . . . . . . . . . . . . . . . . . 149,892 90,905 Merchandise inventories . . . . . . . . . . . . . . . . . . . . 57,199 33,000 Net deferred taxes and other. . . . . . . . . . . . . . . . . . 3,353 3,423 ---------- ---------- Total current assets . . . . . . . . . . . . . . . . . . . . 210,561 128,184 Property and equipment, net . . . . . . . . . . . . . . . . . . . 7,630 8,217 Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . 198 534 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,317 529 ---------- ---------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 220,706 $ 137,464 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks. . . . . . . . . . . . . . . . . . . . . $ 6,978 $ 21,569 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 146,068 67,720 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 13,892 8,035 ---------- ---------- Total current liabilities. . . . . . . . . . . . . . . . . . 166,938 97,324 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 211 266 ---------- ---------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . 167,149 97,590 ---------- ---------- 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 September 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. . . . . . . . . . . . . . . . . 45,796 33,086 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 7,913 7,295 Treasury stock, 18,537 shares at September 30, 1998; and 49,904 shares at December 31, 1997, at cost. . . . . . . . . (201) (541) ---------- ---------- Total stockholders' equity . . . . . . . . . . . . . . . . . 53,557 39,874 ---------- ---------- Total liabilities and stockholders' equity . . . . . . . . . $ 220,706 $ 137,464 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. - 3 - GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Sales . . . . . . . . . . . . . . . . . . . . . . . . . $196,029 $161,759 $432,023 $344,630 Cost of sales . . . . . . . . . . . . . . . . . . . . . 178,214 150,044 393,304 318,952 -------- -------- -------- -------- Gross margin. . . . . . . . . . . . . . . . . . . . . . 17,815 11,715 38,719 25,678 Operating expenses. . . . . . . . . . . . . . . . . . . 13,535 9,629 36,926 29,515 -------- -------- -------- -------- Income (loss) from operations . . . . . . . . . . . . . 4,280 2,086 1,793 (3,837) Interest expense, net of interest income of $93 and $73 for the three months ended September 30, 1998 and 1997, respectively, and $270 and $200 for the nine months ended September 30, 1998 and 1997, respectively. . . . . . . . . . . . . . . . . . . . . 320 196 1,175 663 -------- -------- -------- -------- Income (loss) before taxes. . . . . . . . . . . . . . . 3,960 1,890 618 (4,500) Income tax provision (benefit). . . . . . . . . . . . . - - - - -------- -------- -------- -------- Net income (loss) . . . . . . . . . . . . . . . . . . . $ 3,960 $ 1,890 $ 618 $ (4,500) ======== ======== ======== ======== Basic net income (loss) per share . . . . . . . . . . . $ 0.40 $ 0.28 $ 0.07 $ (0.67) ======== ======== ======== ======== Diluted net income (loss) per share . . . . . . . . . . $ 0.40 $ 0.27 $ 0.07 $ (0.67) ======== ======== ======== ======== Basic weighted average shares outstanding . . . . . . . 9,788 6,740 8,333 6,730 ======== ======== ======== ======== Diluted weighted average shares outstanding . . . . . . 9,849 7,048 8,562 6,730 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. - 4 - GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 618 $ (4,500) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 2,086 2,640 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58,987) (27,339) Merchandise inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (11,246) (26,090) Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,382) (411) Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,348 45,835 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,803 (2,055) -------- -------- Net cash provided by (used in) operating activities. . . . . . . . . . . 15,240 (11,920) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Cost of property and equipment. . . . . . . . . . . . . . . . . . . . . . . (1,501) (2,090) 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. . . . . . . . . . . (9,327) (2,069) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of bank notes, net . . . . . . . . . . . . . . . . . . . . . . . . (6,765) 14,018 Proceeds from exercises of stock options and warrants . . . . . . . . . . . 113 65 -------- -------- Net cash provided by (used in) financing activities. . . . . . . . . . . (6,652) 14,083 -------- -------- Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . (739) 94 Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . 856 48 -------- -------- Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 117 $ 142 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,562 $ 1,073 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 and certain government contracts 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. - 5 - 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 nine months ended September 30, 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 - 6 - standards for public companies to report information about their operating segments, products and services, geographic areas and major customers. SFAS 130 is effective for financial statements issued for fiscal years beginning after December 31, 1997. Accordingly, effective January 1, 1998, the Company adopted SFAS 130 and in accordance therewith, the Company's Comprehensive Income equals reported "Net Income (Loss)." SFAS 131 is effective for financial statements issued for fiscal years beginning after December 15, 1997; 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. - 7 - On February 11, 1998, the Credit Agreement was revised to, among other things, limit the total amount available under the facility to $60 million for an additional two months. The total available under the facility was reduced to $30 million only during the period April 1, 1998 to July 31, 1998. As for the Wholesale Financing Facility, the amount available under the agreement remained at $20 million and was to be used solely for inventory purchases. The amount available was reduced to $10 million only during the period April 1, 1998 to July 31, 1998. All other material terms of both facilities remained the same. On July 2, 1998, the Company and its banks executed separate amendments adjusting, among other things, the seasonality of the total amount available under the Credit Facility and the Wholesale Financing Facility, respectively, in any calendar year. The limit of the Credit Facility will increase to $75 million during the period October 1 through January 31. During the periods February 1 through April 30 and July 1 through September 30, the total amount available under the Credit Facility will be limited to $50 million. During the period May 1 through June 30, the total amount available under the Credit Facility will be limited to $30 million. In addition, the interest rate under the Credit Facility was amended to a rate of LIBOR plus 2.45%, payable quarterly; reducing to LIBOR plus 2.25% if, commencing with the fiscal quarter ending September 30, 1998, the Company achieves certain quarterly financial covenants. At September 30, 1998, the Company was in compliance with all quarterly financial covenants set forth in the Credit Agreement. As a result, on October 28, 1998, when the Company delivered its certified financial statements to the Principal Lender, the interest rate was reduced to LIBOR plus 2.25%. Prior to this event, the interest rate under the Credit Agreement was LIBOR plus 2.45% (7.79% at September 30, 1998). On August 14, 1998, the limit of the Wholesale Financing Facility was increased via temporary overline limit of up to $10,000,000 through January 31, 1999. The limit of the Wholesale Financing Facility will remain at $20 million during the period June 1 through January 31, and decrease to $10 million during the period February 1 through May 31, of any calendar year. All other material terms of both facilities remained the same. Borrowing is limited to 80% of eligible accounts receivable. The Credit Facility is substantially secured by all of the operating assets of the Company. Current obligations are first funded and then all cash receipts are automatically applied to reduce outstanding borrowings. The Credit Facility also contains certain covenants that include restrictions on the payment of dividends and the repurchase of the Company's Common Stock, as well as provisions specifying compliance with certain quarterly and annual financial statistical ratios. - 8 - 3. Acquisition On February 12, 1998, the Company entered into and closed on an Asset Purchase Agreement with BTG, Inc. and two of its subsidiaries (collectively, "BTG") under which the Company acquired substantially all of the assets of the BTG division that resells computer hardware, software and integrated systems to the Government (the "BTG Division"). The acquired assets consisted primarily of inventory and rights under certain contracts and intangible personal property, along with furniture, fixtures, supplies and equipment. In addition, the Company assumed certain liabilities under specified contracts of BTG as well as certain liabilities arising from the ownership or operation of the acquired assets after the closing. The Company paid at closing $7,325,265 in cash (after a $174,735 adjustment for accrued vacation liability and satisfaction of an outstanding invoice owed by BTG) and issued 15,375 shares, having a liquidation preference of $15,375,000, of a new series of preferred stock designated Series C 8% Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"). The Company paid an additional $500,000 in cash upon the release of liens on certain items of equipment which are part of the acquired assets. A portion of the consideration, $800,000 in cash and 1,538 shares of Series C Preferred Stock, is being held under an escrow agreement to secure BTG's indemnification obligations under the Asset Purchase Agreement. Under the Asset Purchase Agreement, BTG is obligated to repay to the Company up to $4.5 million to the extent that there is a shortfall in the amounts that the Company receives from dispositions of certain inventory acquired. Subsequent to the closing, BTG delivered to the Company certain other inventory ("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 - 9 - 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 nine months ended September 30, 1998 and 1997, assuming the acquisition occurred on January 1, 1997. Net income for 1998 excludes approximately $1 million of operating cost and $270,000 of interest expense directly attributable to the acquisition. 1998 1997 ---------- ---------- Revenues . . . . . . . . . . . . . $ 473,162 $ 629,781 Net income (loss). . . . . . . . . $ 248 $ (6,757) Income (loss) per share. . . . . . $ 0.03 $ (0.69) This pro forma information does not purport to be indicative of the results which may have been obtained had the acquisition been consummated at the date assumed. 4. Properties The Company's administrative offices are located in an approximate 190,000-square foot group of facilities in Chantilly, Virginia under a lease expiring in November 1998. In November 1997, the Company entered into an agreement to build and lease a new administrative facility 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 - 10 - 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 1999, and the Fairfax facility's sublease expired in August 1998. The Company also has a branch sales office located in Heidelberg, Germany, under a multi-year lease expiring in December 2000, and thereafter renewing automatically for three successive one-year periods unless previously canceled. - 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 - 12 - 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. 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 NINE THREE NINE MONTHS MONTHS MONTHS ENDED MONTHS ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEP. 30, SEP. 30, ------------------ ------------------ 1998 1998 1998 1997 1998 1997 TO 1997 TO 1997 -------- -------- -------- -------- ---------- ---------- Sales . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 21.2% 25.4% Cost of sales . . . . . . . . . . . . . . 90.9 92.8 91.0 92.5 18.8 23.3 -------- -------- -------- -------- Gross margin. . . . . . . . . . . . . . . 9.1 7.2 9.0 7.5 52.1 50.8 -------- -------- -------- -------- Operating expenses: Selling, general and administrative . . . 6.4 5.4 7.9 7.8 44.2 27.3 Depreciation and amortization . . . . . . 0.5 0.5 0.7 0.8 4.2 3.1 -------- -------- -------- -------- Total operating expenses . . . . . . 6.9 5.9 8.6 8.6 40.6 25.1 -------- -------- -------- -------- Income (loss) from operations . . . . . . 2.2 1.3 0.4 (1.1) 105.2 146.7 Interest expense, net . . . . . . . . . . 0.2 0.1 0.3 0.2 63.3 77.2 -------- -------- -------- -------- Income (loss) before taxes. . . . . . . . 2.0 1.2 0.1 (1.3) 109.5 113.7 Income tax provision (benefit). . . . . . - - - - - - -------- -------- -------- -------- Net income (loss) . . . . . . . . . . . . 2.0% 1.2% 0.1% (1.3)% 109.5 113.7 ======== ======== ======== ========
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- --------------------------------------- (Dollars in thousands) 1998 1997 1998 1997 ------------------- ------------------- ------------------- ------------------- GSA Schedules . . . . . . . . . . . . . . $ 75,468 38.5% $ 77,659 48.0% $ 141,706 32.8% $ 147,769 42.9% IDIQ Contracts. . . . . . . . . . . . . . 97,441 49.7 49,369 30.5 223,303 51.7 104,465 30.3 Open Market . . . . . . . . . . . . . . . 18,269 9.3 30,373 18.8 51,641 12.0 76,364 22.2 Other Contracts . . . . . . . . . . . . . 4,851 2.5 4,358 2.7 15,373 3.5 16,032 4.6 --------- --------- --------- --------- --------- --------- --------- --------- Total. . . . . . . . . . . . . . . . $196,029 100.0% $ 161,759 100.0% $ 432,023 100.0% $ 344,630 100.0% ========= ========= ========= ========= ========= ========= ========= =========
- 13 - THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1997 SALES. Sales consist of revenues from product shipments and services rendered net of allowances for customer returns and credits. In the third quarter of 1998, sales increased $34.3 million or 21.2% from the same period in 1997. The primary reason for the increase over the same quarter last year was increased sales under indefinite-delivery/indefinite-quantity ("IDIQ") contracts of approximately $48.1 million or 97%. The increase in IDIQ contracts was partially offset by decreased GSA schedule sales and Open Market sales of approximately $2.2 million and $12.1 million, respectively. Management believes that the decline in Open Market sales 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, Government -wide Agency Contracts ("GWAC"), 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 increased sales under contracts with the State Department, the Army's PC-2 contract and NASA SEWP II, totaling $33.0 million. The Company performs, as a subcontractor, under the State Department and Army's PC-2 contract as a result of the acquisition of the BTG Division. In addition, the Company's contract with the U. S. Army's Standard Army Management Information Systems ("STAMIS") Computer Contract II, which was awarded in November 1997, produced sales of $11.9 million during the third quarter of 1998. Total booked backlog at September 30, 1998 was approximately $115.5 million compared to $89.3 million at September 30, 1997. Total booked backlog was $87.8 at October 31, 1998, up $20.6 million or 30.7% compared to October 31, 1997. 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 third quarter of 1998, gross margin increased by approximately $6.1 million or 52.1%. In addition, gross margin, as a percentage increased to 9.1% from 7.2%. The increase in gross margin was - 14 - impacted by the realization of greater price protection credits offset by increased warranty maintenance expenses on IDIQ contracts. The change in gross margin percentages can be impacted by a variety of factors and is not necessarily indicative of gross margin percentages to be earned in future periods. OPERATING EXPENSE. Selling, general and administrative expenses for the three months ended September 30, 1998 increased $3.9 million or 44.2%, from the same period in 1997. The increase was due primarily to increase personnel cost as a result of the BTG Division acquisition as well as increases in the overall volume of the business. INTEREST EXPENSE. The approximately $124,000 or 63.3% increase in net interest expense in the third quarter of 1998 was due primarily to increased average borrowings as a result of increased sales volumes as well as additional borrowings required for the BTG Division acquisition. In addition, the Company utilized more prompt payment discounts as compared to the third quarter of 1997. INCOME TAX. No provision for income tax has been recognized with respect to the Company's income from operations during the third quarter of 1998 as the Company currently has an unrecognized carry forward tax benefit of approximately $1.4 million. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1997 SALES. In the first nine months of 1998, sales increased $87.4 million or 25.4% from the same period in 1997. The primary reason for the increase over the same period last year was the increased sales under IDIQ contracts of approximately $118.8 million or 114%. The increased IDIQ sales were partially offset by decreased sales under GSA Schedule and Open Market contracts of approximately $6.1 million and $24.7 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, Government -wide Agency Contracts ("GWAC"), Blanket Purchase Agreements ("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 GSA Schedule B/C contract of $30.4 million offset by an increase in BPA sales of $26.2 million from the same period last year. In 1996, GSA schedule contracts expressly authorized agencies to procure from Schedule holders under BPAs which incorporate many terms and conditions of the GSA Schedule contracts. Additionally, BPAs offer many of the same products as - 15 - GSA schedules, often at lower prices than available on GSA Schedules. In response to GSA's authorization, the company has increased its emphasis on BPAs. GROSS MARGIN. In the first nine months of 1998, gross margin increased in absolute dollars $13.0 million or 50.8%, and increased as a percentage of sales from 7.5% to 9.0%, 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 nine months of 1998 was 8.5%, factoring the impact of the inventory adjustment. In addition, the gross margin for the nine months ended September 1998 was impacted by the realization of greater price protection credits offset by increased warranty maintenance expenses on IDIQ contracts. The change in gross margin percentages can be impacted by a variety of factors and is not necessarily indicative of gross margin percentages to be earned in future periods. OPERATING EXPENSES. Total operating expenses for the first nine months of 1998, increased $29.5 million or 25.1%. This increase was due primarily to increase personnel cost as a result of the BTG Division acquisition as well as increases in the overall volume of the business. In addition, 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 remained unchanged at 8.6%, reflecting the Company's growth in sales requiring less additional infrastructure expenses as existing facilities and personnel are utilized more effectively. INTEREST EXPENSE. The net interest expense increased approximately $512,000, or 77.2% for the nine months ended September 30, 1998 compared to the same period 1997. This increase was due primarily to increase average borrowings as a result of increased sales volumes as well as additional borrowings required for the BTG Division acquisition. In addition, the Company utilized more prompt payment discounts as compared to the same period in 1997. INCOME TAX. No provision for income tax has been recognized with respect to the Company's income from operations for the nine months ended September 30, 1998 as the Company currently has an unrecognized carry forward tax benefit of approximately $1.4 million. - 16 - SEASONAL FLUCTUATIONS AND OTHER FACTORS The Company has historically experienced and expects to continue to experience significant seasonal fluctuations in its operations as a result of Government buying and funding patterns, which also impact the buying patterns of GTSI's prime contractor customers. These buying and funding patterns historically have had a significant positive effect on GTSI's bookings in the third quarter ending September 30 each year (the Government's fiscal year end), and consequently on sales and net income in the third and fourth quarters of each year. Quarterly financial results are also affected by the timing of the award of and shipments of products under government contracts, price competition in the microcomputer and workstation industries, the addition of personnel or other expenses in anticipation of sales growth, product line changes and expansions, and the timing and costs of changes in customer and product mix. In addition, customer order deferrals in anticipation of new product releases by leading microcomputer and workstation hardware and software manufacturers, delays in vendor shipments of new or existing products, a shift in sales mix to more complex requirements contracts with more complex service costs, and vendor delays in the processing of incentives and credits due GTSI, have occurred (all of which are also likely to occur in the future) and have adversely affected the Company's operating performance in particular periods. The seasonality and the unpredictability of the factors affecting such seasonality make GTSI's quarterly and yearly financial results difficult to predict and subject to significant fluctuation. The Company's stock price could be adversely affected if any such financial results fail to meet the financial community's expectations. 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 nine months of 1998, the Company's operating activities provided $15.2 million of cash flow compared to the use of $11.9 million for the nine months ended September 30, 1997. The increase from year to year relates to the Company's increase in Accounts Payable. Accounts Payable increased as a result of increased inventory purchases in anticipation of the 1998 third quarter sales volume. - 17 - Investing activities used cash of approximately $9.3 million during the nine months ended September 30, 1998. The primary reason was the cash payment in February 1998 of $7.8 million relating to the acquisition of the BTG Division. During the nine months ended September 30, 1998, The Company's financing activities used cash of approximately $6.7 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 September 30, 1998, the Company had approximately $43.0 million available for borrowing under its 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 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. - 18 - On February 11, 1998, the Credit Agreement was revised to, among other things, limit the total amount available under the facility to $60 million for an additional two months. The total available under the facility was reduced to $30 million only during the period April 1, 1998 to July 31, 1998. As for the Wholesale Financing Facility, the amount available under the agreement remained at $20 million and was to be used solely for inventory purchases. The amount available was reduced to $10 million only during the period April 1, 1998 to July 31, 1998. All other material terms of both facilities remained the same. On July 2, 1998, the Company and its banks executed separate amendments adjusting, among other things, the seasonality of the total amount available under the Credit Facility and the Wholesale Financing Facility, respectively, in any calendar year. The limit of the Credit Facility will increase to $75 million during the period October 1 through January 31. During the periods February 1 through April 30 and July 1 through September 30, the total amount available under the Credit Facility will be limited to $50 million. During the period May 1 through June 30, the total amount available under the Credit Facility will be limited to $30 million. In addition, the interest rate under the Credit Facility was amended to a rate of LIBOR plus 2.45%, payable quarterly; reducing to LIBOR plus 2.25% if, commencing with the fiscal quarter ending September 30, 1998, the Company achieves certain quarterly financial covenants. At September 30, 1998, the Company was in compliance with all quarterly financial covenants set forth in the Credit Agreement. As a result, on October 28, 1998, when the Company delivered its certified financial statements to the Principal Lender, the interest rate was reduced to LIBOR plus 2.25%. Prior to this event, the interest rate under the Credit Agreement was LIBOR plus 2.45% (7.79% at September 30, 1998). On August 14, 1998, the limit of the Wholesale Financing Facility was increased via temporary overline limit of up to $10,000,000 through January 31, 1999. The limit of the Wholesale Financing Facility will remain at $20 million during the period June 1 through January 31, and 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 September 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 - 19 - 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 IMPACT OF YEAR 2000. The Company is aware of the issues associated with the programming code in existing computer systems as the millennium ("Year 2000") approaches. The Year 2000 problem is complex as certain computer operations will be affected in some way by the rollover of the two-digit year value to 00. The issue is whether computers systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. Assessments of the potential effects of the Year 2000 issue vary markedly among different companies, governments, consultants and economists, and it is not possible to predict what the actual impact may be. Given this uncertainty, the Company recognizes the need to remain vigilant and is continuing its analysis, assessment and planning for the various Year 2000 issues, across the entire business. STATE OF READINESS. The Company's primary focus has been on its own internal information technology systems, including all types of systems in use by the Company in its operations, marketing, finance and human resources departments, and to deal with the most critical systems first. The Company has formed an Action Team representing every functional area of the Company, with the Chairman and CEO as the Executive Sponsor, and the senior executive management staff as the Steering Committee, of the Team. The Year 2000 Plan is comprehensive and auditable, and involves generally the following phases: inventory, risk classification, assessment, remediation, and testing. The scope of the plan is broad and addresses critical suppliers, internal systems and processes, and customers. With respect to its internal information technology systems, the Company has conducted an inventory of a substantial majority of its central systems for Year 2000 compliance. The most significant risk faced by the - 20 - Company is the Just-In-Time ("JIT") application, the Company's key enterprise operations system. Although the Company initially intended to eliminate this risk by replacing JIT with IMPRESSA (which is Year 2000 compliant), the Company has determined that the more prudent approach is first to upgrade the existing JIT system to be Year 2000 compliant. This upgrade currently is scheduled to be completed by March 1, 1999. The Company currently is developing remediation plans for other material information technology systems and anticipates that the Company will begin implementation of such plans in early 1999. In addition, the Company currently is reviewing its other non-critical internal information technology systems. With respect to the Company's non-information technology systems, the Company plans to move its headquarters to a new location by the end of 1998. All systems in the new facility are Year 2000 compliant. The Company has begun to assess the potential for Year 2000 problems with the information systems of its customers and vendors. The Company is preparing questionnaires that it expects to send by December 15, 1998 to the primary product vendors with which the Company has a material relationship. The Company expects to complete the assessment with respect to such parties by February 15, 1999, subject to their ability to provide requested information by January 31, 1999. The Company does not have sufficient information to provide an estimated timetable for completion of renovation and testing that such parties with which the Company has a material relationship may undertake. The Company is unable to estimate the costs that it may incur to remedy the Year 2000 issues relating to such parties. The Company's primary customer is the Federal Government. Various departments in the Federal Government have achieved different degrees of readiness regarding Year 2000 compliance. COSTS TO ADDRESS YEAR 2000 ISSUES. The Company presently estimates that the cost associated with becoming Year 2000 compliant is approximately $2 million. The Company's costs incurred to date have not been material with respect to the total estimated costs of $2 million associated with becoming Year 2000 compliant. Any external and internal costs specifically associated with modifying internal-use software for the Year 2000 will be charged to expense as incurred in accordance with the Emerging Issues Task Force ("IETF") of the Financial Accounting Standards Board Issue No. 96-14, "Accounting for the Costs Associated with Modifying Computer Software for the Year 2000." The costs associated with the replacement of computerized systems, hardware or equipment will be capitalized and are included in the above estimate. These costs do not include any costs associated with the implementation of contingency plans. - 21 - The Company's Year 2000 program is an ongoing process and the estimate of costs and completion dates for various components of the program above are subject to change. The present cost estimates of the Company's Year 2000 identification, assessment, remediation and testing efforts and the dates on which the Company believes it will complete such efforts are based on management's best estimates, which were derived using numerous assumptions regarding future events, including among other factors the continued availability of certain resources. There can be no assurance that these estimates will prove to be accurate, and actual results could differ materially from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability and cost of personnel trained in Year 2000 issues, the ability to identify, assess, remediate, and test all relevant computer codes, third-party remediation plans, and similar uncertainties. RISKS TO THE COMPANY. The Government includes certain Year 2000 warranty clauses in its contracts, which the Company executes. The Company strives to pass the Government contract clauses on to its product vendors, however, in some instances vendors refuse to accept such clauses. There can be no assurance that the Company will not be materially adversely effected if the Government were to enforce these clauses and the Company did not have corresponding protection from such vendors. In addition, it is unknown how Government and other customer spending patterns may be impacted by Year 2000 issues. As customers focus on preparing their business for the Year 2000, information technology budgets may be spent on remediation efforts, potentially delaying the purchase and implementation of new systems, thereby creating less demand for the Company's products and services. The Year 2000 presents a number of other risks and uncertainties that could affect the Company, including utilities failures and competition for personnel skilled in the resolution of Year 2000 issues. The failure to correct a material Year 2000 problem could result in interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material adverse impact on the Company's results of operations, liquidity or financial condition. CONTINGENCY PLAN. The Company has not yet established a contingency plan to address with the most reasonably likely worst case scenario, and such scenario has not yet been identified. The Company currently plans to complete such analysis and contingency planning by December 31, 1999. - 22 - "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, increased operating efficiencies, infrastructure improvements, costs savings from the Company's new headquarters building, the benefits of the BTG product reseller division acquisition, competition in the government markets, buying patterns of the Company's customers, general economic and political conditions, 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. - 23 - 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. On October 5, 1998, the Company paid all outstanding installments and accrued interest to the Department of Justice. 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 $700,000 as of September 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. - 24 - ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- Inapplicable. ITEM 5. OTHER INFORMATION -- Inapplicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -- (a) Exhibits: 11.1 Computation of Earnings Per Share (b) Reports on Form 8-K: On August 5, 1998, the Registrant filed a Current Report on Form 8-K reporting that on July 30, 1998, Chip Lacy had acquired an 11.2% stake in GTSI Common Stock through a private purchase from BTG, Inc. of 1,100,000 shares of GTSI Common Stock acquired by BTG in the sale of its product reseller division to GTSI in February 1988, and that Mr. Lacy had signed a Standstill Agreement with GTSI. - 25 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 16, 1998 GOVERNMENT TECHNOLOGY SERVICES, INC. By: /s/ M. DENDY YOUNG -------------------------------------- M. Dendy Young Chairman and CEO By: /s/ STEPHEN L. WAECHTER ----------------------------------- Stephen L. Waechter Senior Vice President and CFO - 26 - INDEX TO EXHIBITS =========================================================================== EXHIBIT | NUMBER | DESCRIPTION - - --------------------------------------------------------------------------- 11 | Computation of Earnings Per Share - - --------------------------------------------------------------------------- 27 | Financial Data Schedule =========================================================================== EX-11 2 EXHIBIT 11 GOVERNMENT TECHNOLOGY SERVICES, INC. COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share amounts)
THREE NINE MONTHS ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 3,960 $ 1,891 $ 618 $(4,500) -------- -------- -------- -------- Weighted average shares of common stock outstanding . . . . 9,788 6,740 8,333 6,730 Weighted average effect of common share equivalents . . . . 61 308 229 N/A -------- -------- -------- -------- Weighted average shares outstanding . . . . . . . . . . . . 9,849 7,048 8,562 6,730 -------- -------- -------- -------- Net income (loss) per common share and common share equivalent. . . . . . . . . . . . . . . . . . . . . . . . $ 0.40 $ 0.27 $ 0.07 $ (0.67) ======== ======== ======== ========
EX-27 3
5 EXHIBIT 27 - FINANCIAL DATA SCHEDULE THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1998 117 0 160,086 (10,194) 57,199 210,561 18,782 (11,152) 220,706 166,938 0 0 0 49 53,508 220,706 432,023 432,023 393,304 38,719 36,926 921 1,175 618 0 0 0 0 0 618 0.07 0.07
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