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, 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 August 1, 1997
- ------------------------------ --------------------------------------
Common Stock, $0.005 par value 6,740,745
GOVERNMENT TECHNOLOGY SERVICES, INC.
Quarterly Report on Form 10-Q
for the Quarterly Period Ended June 30, 1997
INDEX
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Page Reference
--------------
COVER PAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the
Six Months Ended June 30, 1997 and 1996 . . . . . . . . . 4
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 . . . . . . . . . . . 5
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996 . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 9
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . .17
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
- 2 -
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited, consolidated financial statements of
Government Technology Services, Inc. ("GTSI" (r) or the "Company") have
been prepared in accordance with the instructions to Form 10-Q 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 financial statements for the year ended
December 31, 1996, and the accompanying Notes to Financial Statements,
which appear in the Company's Annual Report on Form 10-K filed for the year
ended December 31, 1996. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results for the interim period have been made. The
interim results reflected in the consolidated financial statements are not
necessarily indicative of results expected for the full year, or for future
periods.
- 3 -
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,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 94,464 $100,809 $182,871 $183,601
Cost of sales . . . . . . . . . . . . . . . . . . . . . 87,800 94,054 169,199 169,695
-------- -------- -------- --------
Gross margin. . . . . . . . . . . . . . . . . . . . . . 6,664 6,755 13,672 13,906
Operating expenses. . . . . . . . . . . . . . . . . . . 9,602 8,645 19,596 18,136
-------- -------- -------- --------
Loss from operations. . . . . . . . . . . . . . . . . . (2,938) (1,890) (5,924) (4,230)
Interest expense, net of interest income of $47 and $60
for the three months ended June 30, 1997 and 1996,
respectively, and $127 and $162 for the six months
ended June 30, 1997 and 1996, respectively. . . . . . 49 373 467 972
-------- -------- -------- --------
Loss before taxes . . . . . . . . . . . . . . . . . . . (2,987) (2,263) (6,391) (5,202)
Income tax benefit. . . . . . . . . . . . . . . . . . . - (853) - (1,974)
-------- -------- -------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . $ (2,987) $ (1,410) $ (6,391) $ (3,228)
======== ======== ======== ========
Net loss per share. . . . . . . . . . . . . . . . . . . $ (0.44) $ (0.21) $ (0.95) $ (0.48)
======== ======== ======== ========
Weighted average number of shares outstanding . . . . . 6,725 6,677 6,725 6,678
======== ======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
- 4 -
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
----------- ------------
(Unaudited) (Audited)
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69 $ 48
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . 71,076 90,116
Merchandise inventories . . . . . . . . . . . . . . . . . . . . 24,053 31,844
Net deferred taxes and other. . . . . . . . . . . . . . . . . . 7,451 7,367
---------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . 102,649 129,375
Property and equipment, net . . . . . . . . . . . . . . . . . . . 9,312 9,146
Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . 619 788
Net deferred taxes and other. . . . . . . . . . . . . . . . . . . 1,065 1,692
---------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 113,645 $ 141,001
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks. . . . . . . . . . . . . . . . . . . . . 2,770 15,828
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 64,242 68,707
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 7,225 10,241
---------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . 74,237 94,776
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 896 1,377
---------- -----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 75,133 96,153
---------- -----------
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, 10,000,000 shares authorized;
6,806,084 shares issued and 6,738,045 outstanding at
June 30, 1997 and 6,806,084 shares issued and 6,724,919
outstanding at December 31, 1996 . . . . . . . . . . . . . . 34 34
Capital in excess of par value. . . . . . . . . . . . . . . . . 33,208 33,295
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 6,008 12,399
Treasury stock, 68,039 shares at June 30, 1997 and 81,165
shares at December 31, 1996, at cost . . . . . . . . . . . . (738) (880)
---------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . 38,512 44,848
---------- -----------
Total liabilities and stockholders' equity . . . . . . . . . $ 113,645 $ 141,001
========== ===========
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,
-------------------
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,391) $ (3,228)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 1,759 1,699
Stock compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . - (13)
Net cash provided by changes in assets and liabilities. . . . . . . . . . . 19,351 47,677
-------- --------
Net cash provided by operating activities. . . . . . . . . . . . . . . . 14,719 46,135
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of property and equipment. . . . . . . . . . . . . . . . . . . . . . . (1,716) (933)
Proceeds from sales of property and equipment. . . . . . . . . . . . . . . 21 -
-------- --------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . (1,695) (933)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of bank notes, net . . . . . . . . . . . . . . . . . . . . . . . . (13,058) (45,287)
Proceeds from exercises of stock options and warrants . . . . . . . . . . . 55 101
-------- --------
Net cash used in financing activities. . . . . . . . . . . . . . . . . . (13,003) (45,186)
-------- --------
Net increase in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 16
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . 48 18
-------- --------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69 $ 34
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 756 $ 2,986
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5
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 consolidated financial statements have been prepared
by the Company in accordance with the accounting policies described in its
1996 Annual Report on Form 10-K and should be read in conjunction with the
Notes to Financial Statements which appear in that report. The
accompanying interim financial statements do not include all disclosures
required by generally accepted accounting principles.
Net loss per share is based on the weighted average number of shares
of common stock outstanding during each period. Common stock equivalents
have not been considered as they are anti-dilutive.
In 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS
128"). FAS 128 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 then shared in the
earnings of the entity. Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to Accounting Principles
Bulletin No. 15. FAS 128 is effective for reporting periods ending after
December 15, 1997 and, when adopted, will require restatement of prior
years' earnings per share.
Since the effect of outstanding options is anti-dilutive, they have
been excluded from the Company's computation of net loss per share.
Accordingly, Management does not believe that FAS 128 will have an impact
upon historical net income (loss) per share as reported.
Certain amounts from prior years have been reclassified to conform to
the current year financial statement presentation.
2. Notes Payable to Banks
During the fourth quarter of 1995, the Company began negotiations with
a bank (the "Principal Lender") and other lenders ("Other Lenders") to form
a new lending syndicate to obtain a $110.0 million credit facility. On
December 29, 1995, the Company executed an interim credit agreement
("Interim Agreement") with the Principal Lender for $50.0 million and an
intercreditor agreement with the Company's prior bank ("Prior Lender") for
- 7 -
an additional $30.0 million (decreasing to $20.0 million on February 1,
1996 and expiring on February 29, 1996). This intercreditor agreement with
the Prior Lender included terms and conditions similar to those existing
under the previous credit facility with the prior lending syndicate. On
May 2, 1996, the Company executed a three-year credit facility with 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"), replacing the Interim Agreement. Additionally, on June 27,
1996, the Company executed a separate $10.0 million wholesale financing
facility with the Principal Lender for inventory financing of certain
vendor products. On August 23, 1996, the Company and its banks executed
Amendment No. 1 to the Credit Facility, which modified certain financial
covenants. At December 31, 1996, the Company was not in compliance with
the Earnings Before Interest and Taxes and Tangible Net Worth covenants
contained in the Credit Facility.
As of June 30, 1997, the Company continued to be out of compliance
with certain 1996 year-end financial covenants contained in the Credit
Facility. The Principal Lender continued to provide financing to the
Company under the existing Credit Facility through July 28, 1997, at which
time the Company and its banks executed the Second Amended and Restated
Business Credit and Security Agreement (see "Subsequent Event"). All
amounts due to the Lenders as of June 30, 1997 are classified as current
liabilities. At June 30, 1997, the available portion of the Credit
Facility was $32.3 million.
3. Subsequent Event
On July 28, 1997, the Company executed the Second Amended and Restated
Business Credit and Security Agreement which modified some of the terms and
conditions contained in the Credit Facility and effectively eliminated the
Company's default condition with respect to compliance with certain 1996
year-end financial covenants contained in the Credit Facility. More
specifically, 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 from February 1 - July 31 of each year. Further, the
wholesale financing facility was increased from $10 million to $20 million,
with a $10 million reduction from March 1 - 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 certain financial covenants. Management presently
estimates that the terms of the amended Credit Facility will neither
adversely impact nor materially benefit the Company's total borrowing costs
in 1997.
- 8 -
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, 1996. 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 the largest dedicated reseller of microcomputer and Unix
workstation hardware, software and networking products to the Government.
The Company currently offers access to over 100,000 information technology
products from more than 2,000 manufacturers. GTSI also performs network
integration services, including configuring, installing and maintaining
microcomputers in local area networks. The Company sells to virtually all
departments and agencies of the Government, many state governments and
several hundred systems integrators and prime contractors that sell to the
government market. GTSI offers its customers a convenient and cost-
effective centralized source for microcomputer and workstation products
through its competitive pricing, broad product selection and procurement
expertise. The Company provides its vendors with a low-cost marketing and
distribution channel to the millions of end users comprising the government
market, while virtually insulating these vendors from most of the complex
government procurement rules and regulations.
Changes in sales throughout the Company's history have been
attributable to increased or decreased unit sales, to expansion of the
Company's product offerings (e.g., peripherals, microcomputers and
networking and workstation products, from 1985 through 1992); to the
addition of new vendors (e.g., IBM, Sun, Panasonic, Apple and Nexar, from
1988 through 1996); and to the addition or expiration of sales contract
vehicles (e.g., the addition of the Desktop IV Contract, the SEWP I
Contract, the National Institutes of Health ("NIH") Contract and the TDA-1
Contract from 1993 through 1996, and the expiration of the Companion
Contract in 1995 and Desktop IV systems ordering in 1996). The Company's
financial results have fluctuated seasonally, and may continue to do so in
the future, because of the Government's buying patterns which have
historically favorably impacted the last two calendar quarters and
adversely affected the first two calendar quarters.
The Company's primary strategy is to focus on its core General
Services Administration ("GSA") Schedule business and to compete
aggressively on bids in order to win as many contract vehicles as possible
under the various purchasing programs available to it in the government
market. With those contract vehicles in place, it is then possible for the
Company to use its significant product base and marketing knowledge to sell
products which both meet customers' requirements and provide an attractive
financial return to the Company.
- 9 -
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
1997 1996 1997 1996 TO 1996 TO 1996
-------- -------- -------- -------- ---------- ----------
Sales . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% (6.3)% (0.4)%
Cost of sales . . . . . . . . . . . . . . 92.9 93.3 92.5 92.4 (6.6) (0.3)
-------- -------- -------- --------
Gross margin. . . . . . . . . . . . . . . 7.1 6.7 7.5 7.6 (1.3) (1.7)
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative . . . 9.3 7.6 9.8 9.0 12.9 8.5
Depreciation and amortization . . . . . . 0.9 0.9 0.9 0.9 (4.9) 3.5
-------- -------- -------- --------
10.2 8.5 10.7 9.9 11.1 8.0
-------- -------- -------- --------
Loss from operations. . . . . . . . . . . (3.1) (1.8) (3.2) (2.3) 55.5 40.0
Interest expense, net . . . . . . . . . . 0.1 0.4 0.3 0.5 (86.8) (51.9)
-------- -------- -------- --------
Loss before taxes . . . . . . . . . . . . (3.2) (2.2) (3.5) (2.8) 32.1 22.9
Income tax benefit. . . . . . . . . . . . - (0.8) - (1.0) (100.0) (100.0)
-------- -------- -------- --------
Net loss. . . . . . . . . . . . . . . . . (3.2)% (1.4)% (3.5)% (1.8)% 111.6% 98.0%
======== ======== ======== ========
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) 1997 1996 1997 1996
------------------- ------------------- ------------------- -------------------
GSA Schedules . . . . . . . . . . . . . . $ 37,013 39.2% $ 43,508 43.2% $ 70,111 38.4% $ 74,238 40.4%
IDIQ Contracts. . . . . . . . . . . . . . 29,067 30.8 14,059 13.9 55,095 30.1 43,947 24.0
Open Market . . . . . . . . . . . . . . . 23,344 24.7 38,202 37.9 45,991 25.1 58,255 31.7
Other Contracts . . . . . . . . . . . . . 5,040 5.3 5,040 5.0 11,674 6.4 7,161 3.9
--------- --------- --------- --------- --------- --------- --------- ---------
Total. . . . . . . . . . . . . . . . $ 94,464 100.0% $ 100,809 100.0% $ 182,871 100.0% $ 183,601 100.0%
========= ========= ========= ========= ========= ========= ========= =========
- 10 -
THREE MONTHS ENDED JUNE 30, 1997 COMPARED
WITH THE THREE MONTHS ENDED JUNE 30, 1996
Sales. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. In the second
quarter of 1997, sales decreased $6.3 million or 6.3% for the same period
in 1996. The primary reasons for the decrease over the same quarter last
year were the decreased sales under GSA Schedules and a decline in Open
Market sales of approximately $6.5 million and $14.9 million, respectively.
These decreases were offset by increased sales under indefinite-delivery/
indefinite-quantity ("IDIQ") contracts of approximately $15.0 million. In
1996, the GSA authorized agencies to enter into Blanket Purchase Agreements
("BPAs") with Schedule holders. The BPAs are authorized by GSA and
incorporate many terms and conditions of the GSA Schedule contracts.
Additionally, they offer many of the same products, often at lower prices
than available on the GSA Schedules. The Company has been awarded nine of
these BPAs since the GSA authorized this change. The Company reports BPA
sales as part of total GSA sales activity. Sales under IDIQ contracts
increased primarily as a result of increases in sales under the Company's
contract with the NIH and the National Aeronautics and Space Administration
("NASA").
The decline in Open Market sales can be directly attributed to the
second quarter 1996 commercialization and sell-through of $15.8 million of
IBM Label product originally purchased for sale under the Company's Desktop
IV contract, which sales did not occur again in 1997. This decline
represents the majority of the decline in sales of IBM Label products which
decreased approximately $17.4 million (from $20.2 million to $2.8 million,
or 85.8%). Hewlett Packard sales also declined by $3.5 million (from $17.2
million to $13.7 million, or 20.4%), during the second quarter. These
decreases were partially offset by increased sales of Epoch, Microsoft,
Compaq and Nexar products, which increased $11.0 million (from $0 to $11.0
million, or 100.0%), $8.3 million (from $3.8 million to $12.1, or 222.0%),
$4.0 million (from $7.4 million to $11.4 million, or 53.5%) and $2.6
million (from $0.2 million to $2.8 million, or 1117.7%), respectively.
Backlog at June 30, 1997 was approximately $16.1 million, down 20.7%
from approximately $20.3 million at June 30, 1996. Backlog was $19.5
million at August 1, 1997.
Gross Margin. Gross margin is sales less cost of sales (which
includes product purchase cost, freight 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 contract vehicles that are available to sell its products.
- 11 -
During the second quarter of 1997, gross margin decreased in absolute
dollars by approximately $0.1 million, or 1.3%, and increased as a
percentage of sales from 6.7% to 7.1% when compared to the same period a
year ago. Although sales were higher during the second quarter of 1996,
the $15.8 million of open market sales associated with near-obsolete
inventory during the second quarter of 1996 was recorded with little or no
gross margin during the prior year. Further, gross margin earned during
the 1997 second quarter was impacted by the $11.0 million drop shipment of
product from one of the Company's vendors directly to the customer at a
lower than normal margin. 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. Operating expenses in the second quarter of 1997
increased approximately $1.0 million, or 11.1%, and increased as a
percentage of sales from 8.5% to 10.2%. The increase in absolute dollars
is primarily attributable to increases in personnel costs. During the 1996
second quarter, however, the Company received a payment in connection with
the settlement of certain litigation which served to decrease 1996 net
operating expenses by approximately $0.5 million. In addition to the
factors noted above, operating expenses increased as a percentage of sales
due to the lower volume of sales in the second quarter of 1997 when
compared to the same quarter in 1996.
Interest Expense. The approximate $0.3 million, or 86.8% decrease in
net interest expense in the second quarter of 1997 was due primarily to
lower average borrowings throughout the second quarter, partially offset by
higher interest rates.
Income Taxes. No tax benefit was recognized with respect to the
Company's operating loss in the second quarter of 1997 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"). In the
fourth quarter of 1996, the Company determined that $5.1 million of net
deferred tax assets did not satisfy the recognition criteria set forth in
FAS 109. As such, a valuation allowance was initially recorded against the
applicable net deferred tax assets during the fourth quarter of 1996. A
tax benefit of $0.9 million was recorded in the second quarter of 1996 as a
result of the Company's net operating loss for that period. The 1996 tax
benefit will be realized by carrying back the loss to prior years in which
the Company recognized taxable income.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED
WITH THE SIX MONTHS ENDED JUNE 30, 1996
Sales. In the first six months of 1997, sales decreased $0.7 million,
or 0.4%, from the comparable 1996 period. Decreases in GSA Schedule sales
and Open Market sales of $4.1 million and $12.3 million, respectively, were
offset by increased sales under IDIQ and Other Contracts (including sales
to both prime contractors and state and local governments) of $11.1 million
- 12 -
and $4.5 million, respectively. The decline in Open Market sales can be
directly attributed to the commercialization and sell-through of $15.8
million of IBM Label product originally purchased for sale under the
Company's Desktop IV contract during 1996 of which like sales did not occur
again in 1997. Sales under IDIQ contracts increased primarily as a result
of increased sales under the Company's contracts with NIH, NASA and the
Treasury Department, but which were offset by decreased sales under the
Desktop IV contract (systems ordering expired on February 1, 1996). In
1996, the GSA authorized agencies to enter into BPAs with Schedule holders.
The BPAs are authorized by GSA and incorporate many terms and conditions of
the GSA Schedule contracts. Additionally, such BPAs offer many of the same
products, often at lower prices than available on the GSA Schedules. The
Company has been awarded nine of these BPAs since the GSA authorized this
change. The Company reports BPA sales as part of total GSA sales activity.
Gross Margin. In the first six months of 1997, gross margin decreased
in absolute dollars by approximately $0.2 million, or 1.7%, and decreased
as a percentage of sales from 7.6% to 7.5% when compared to the same period
a year ago. The slight decline in absolute dollars is primarily
attributable to the lower gross margin percentage earned in 1997 on
comparable sales volume. The slight decline in gross margin percentage
during the first six months of 1997 was primarily attributable to the $11.0
million drop shipment of product from one of the Company's vendors directly
to the customer at a lower than normal margin. 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 in the first six months
of 1997 increased $1.5 million, or 8.0%, and increased as a percentage of
sales from 9.9% to 10.7%. This increase is primarily attributable to an
increase in personnel costs, which was partially offset by a decrease in
expenditures for contracted services (as the Company's information
technology services had been provided by an outside entity until June
1996). Additionally, in the first six months of 1996, the Company was
provided with a $0.5 million benefit from the settlement of certain
litigation, which amount was applied against related legal and program
expenses.
Interest Expense. Net interest expense decreased approximately $0.5
million, or 51.9%, in the first six months of 1997 primarily due to the
lower average borrowings outstanding during the period.
Income Taxes. No tax benefit was recognized with respect to the
Company's operating loss in the first six months of 1997 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"). In the
fourth quarter of 1996, the Company determined that $5.1 million of net
deferred tax assets did not satisfy the recognition criteria set forth in
FAS 109. As such, a valuation allowance was initially recorded against the
applicable net deferred tax assets during the fourth quarter of 1996. A
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tax benefit of $2.0 million was recorded in the first six months of 1996 as
a result of the Company's net operating loss for that period. The 1996 tax
benefit will be realized by carrying back the loss to prior years in which
the Company recognized taxable income.
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 six months of 1997, the Company generated $14.7
million of cash flow from operations, as compared to $46.1 million for the
six months ended June 30, 1996. Most of the decrease from year to year
relates to the Company's focused efforts over the past 18 months to reduce
net operating assets (accounts receivable plus merchandise inventories less
accounts payable). After reduction of approximately $1.7 million of
capital expenditures from the net cash provided by operating activities,
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overall short-term notes payable to banks decreased $13.1 million. As a
result of the Company's seasonal sales patterns, working capital levels are
traditionally lower in the first and second quarters of the year and short-
term debt levels are reduced.
During the fourth quarter of 1995, the Company began negotiations with
a bank (the "Principal Lender") and other lenders ("Other Lenders") to form
a new lending syndicate to obtain a $110.0 million credit facility. On
December 29, 1995, the Company executed an interim credit agreement
("Interim Agreement") with the Principal Lender for $50.0 million and an
intercreditor agreement with the Company's prior bank ("Prior Lender") for
an additional $30.0 million (decreasing to $20.0 million on February 1,
1996 and expiring on February 29, 1996). This intercreditor agreement with
the Prior Lender included terms and conditions similar to those existing
under the previous credit facility with the prior lending syndicate. On
May 2, 1996, the Company executed a three-year credit facility with 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"), replacing the Interim Agreement. Additionally, on June 27,
1996, the Company executed a separate $10.0 million wholesale financing
facility with the Principal Lender for inventory financing of certain
vendor products. On August 23, 1996, the Company and its banks executed
Amendment No. 1 to the Credit Facility, which modified certain financial
covenants. At December 31, 1996, the Company was not in compliance with
the Earnings Before Interest and Taxes and Tangible Net Worth covenants
contained in the Credit Facility.
As of June 30, 1997, the Company continued to be out of compliance
with certain 1996 year-end financial covenants contained in the Credit
Facility. The Principal Lender continued to provide financing to the
Company under the existing Credit Facility through July 28, 1997, at which
time the Company and its banks executed the Second Amended and Restated
Business Credit and Security Agreement. All amounts due to the Lenders as
of June 30, 1997 are classified as current liabilities. At June 30, 1997,
the available portion of the Credit Facility was $32.3 million.
On July 28, 1997, the Company executed the Second Amended and Restated
Business Credit and Security Agreement which modified some of the terms and
conditions contained in the Credit Facility and effectively eliminated the
Company's default condition with respect to compliance with certain 1996
year-end financial covenants contained in the Credit Facility. More
specifically, 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 from February 1 - July 31 of each year. Further, the
wholesale financing facility was increased from $10 million to $20 million,
with a $10 million reduction from March 1 - 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,
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and the modification of certain financial covenants. Management presently
estimates that the terms of the amended Credit Facility will neither
adversely impact nor materially benefit the Company's total borrowing costs
in 1997.
Interest under the Credit Facility is payable quarterly and is accrued
at a rate equal to the London Interbank Offered Rate ("LIBOR") plus 2.95%
(7.64% at June 30, 1997). Interest under the wholesale financing facility
is accrued at a rate equal to prime plus 3.00% (11.50% at June 30, 1997).
In addition, there is an fee of 3/8% against the unused portion of both the
Credit Facility and the wholesale financing facility. Borrowing is limited
to 80% of eligible accounts receivable. The Credit Facility is
substantially collateralized 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, including restrictions on the
payment of dividends and repurchase of stock, and provisions specifying
compliance with certain financial ratios.
The Company anticipates that it will continue to rely primarily on
operating cash flow, bank loans and vendor credit to finance its reasonably
anticipated cash needs. 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
operating requirements. The Company currently has no reason to believe
that such capital sources will not be available to it on acceptable terms,
if needed.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Statements which are not historical facts contained in the
Management's Discussion and Analysis of Financial Condition, Results of
Operations and Notes to Consolidated Financial Statements, are forward-
looking statements that involve certain risks and uncertainties. Actual
results may differ materially based on numerous factors, including but not
limited to competition in the government markets, spending patterns of the
Company's customers, general economic and political conditions, success of
negotiations with the Company's Lenders, and other risks described in this
Report and in the Company's other Securities and Exchange Commission
filings.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS --
On May 31, 1995, the Company received a civil investigative demand
("CID") from the United States Department of Justice ("DOJ") seeking
information relating to the Company's GSA Schedule sales for the years 1988
to the present. The CID sought information regarding the Company's
disclosure to the Government and use of vendor rebates and marketing funds
in connection with such GSA Schedule sales. On January 24, 1996, the
Company received a letter from the DOJ withdrawing the CID. The Company is
continuing to cooperate with a GSA audit of the Company's GSA Schedule
sales by providing information to the GSA's auditors.
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 6,
1997.
(b) At said Annual Meeting, the Company's stockholders: (1) elected
seven directors; and (2) defeated the proposed three-year
extension of the Company's Stockholder Rights Plan.
VOTES
VOTES WITHHELD OR
FOR AGAINST ABSTENTIONS
---------- ------------- -------------
DIRECTORS:
Tania Amochaev 4,828,261 317,451
Gerald W. Ebker 4,822,267 323,445
Thomas L. Hewitt 4,826,604 319,108
Lee Johnson 4,826,820 318,892
James J. Leto 4,826,483 319,229
Lawrence J. Schoenberg 4,817,045 328,667
M. Dendy Young 4,827,245 318,467
EXTENSION OF RIGHTS PLAN 1,134,244 1,624,404 10,203
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ITEM 5. OTHER INFORMATION -- On June 13, 1997, Mr. Hewitt resigned from
the Company's Board of Directors for personal reasons.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K --
(a) Exhibits:
11.1 Computation of Earnings Per Share
(b) Reports on Form 8-K: Inapplicable.
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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, 1997
GOVERNMENT TECHNOLOGY SERVICES, INC.
By: /s/ M. DENDY YOUNG
--------------------------------------
M. Dendy Young
President and Chief Executive Officer
By: /s/ CHARLES A. HASPER
--------------------------------------
Charles A. Hasper
Vice President, Controller and
Acting Chief Financial Officer
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