[GTSI Logo] Government Technology Services, Inc.
4100 Lafayette Center Drive
Chantilly, VA 20151-1200
(703) 502-2000
www.gtsi.com
LETTER TO GTSI STOCKHOLDERS
May 4, 1998
On April 23, 1998, GTSI released its first quarter results which were as
follows:
GTSI Reports Improved Operating
Performance on Higher Revenues
CHANTILLY, VA April 23, 1998 -- Government Technology
Services, Inc. (Nasdaq: GTSI) today announced unaudited financial
results for its fiscal year 1998 first quarter, which ended March
31, 1998. Revenues for the quarter increased to $99.1 million
compared to $88.4 million reported in the same period last year a
13% increase. The Company reported a net loss of $3.5 million or
$.52 per share for the quarter. In the same quarter last year,
the Company recorded a net loss of $3.4 million or $0.51 per
share. Approximately $1 million of GTSI's operating costs for the
quarter was directly attributable to the cost of the acquisition
of the BTG product reseller division.
GTSI President and CEO, Dendy Young commented that the
increased revenues are attributable to core business performance
along with beginning to realize revenues from the BTG
acquisition. He noted that the Company's booked backlog of
approximately $70 million was up 80% from last year, primarily as
a result of the acquisition of BTG's product reseller division.
"GTSI successfully completed its acquisition of BTG's
product reseller division on February 12", said Mr. Young.
"Therefore, during the quarter, we devoted considerable effort to
rapidly integrating the BTG product reseller division with GTSI's
business."
Historically, the Company's first and second quarters are
difficult due to the nature of the governments buying patterns.
With the acquisition, the Company believes it is better
positioned for the government buying season than in years past
due to new vendor relationships, which permit GTSI to offer
additional products, added contract and sales vehicles, and
increased experienced personnel. All of these factors will enable
GTSI to better serve its government customers.
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GOVERNMENT TECHNOLOGY SERVICES, INC.
(In Thousands, except per share data)
Quarter Ended
3/31/98 3/31/97
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INCOME STATEMENT DATA:
Sales $ 99,094 $ 88,407
Cost of sales 90,554 81,277
Gross margin 8,540 7,130
Operating expenses 11,602 10,115
Income (loss) from operations (3,062) (2,985)
Interest expense, net 447 419
Income (loss) before taxes (3,509) (3,404)
Income tax provision (benefit) - -
Net income (loss) (3,509) (3,404)
Net income (loss) per share (0.52) (0.51)
Weighted average shares outstanding 6,756 6,725
As we begin to emerge from the turnaround of the company, I believe it
would be worthwhile to share periodically with you in more detail our
performance and strategies.
First, we should review the performance of the Company during the first
quarter of the new fiscal year. In the Analyst Conference Call on April
23, 1998, I characterized the quarter as a "Transition Quarter." That is
because, whatever the financial results, this was a quarter when the GTSI
management was engrossed in the BTG acquisition. In the first half of the
quarter, we were concentrating on the intense due diligence activity and
the negotiations. Then, later in the quarter, we were concentrating on the
transition of the ex-BTG employees and vendors and backlog into the GTSI
systems and operations. In the middle of all of this, the "Washington
Post" kept up steady coverage of a dissident group of BTG managers who
opposed the acquisition and who challenged it with their own counter-offer.
This uncertainty was not good for our business and it suffered. In
addition, getting the BTG backlog cleanly into our IT systems was much more
difficult than we had anticipated - it therefore took longer and
incrementally affected our customer responsiveness and satisfaction.
What did we acquire? We acquired from BTG substantially all the assets of
the BTG division that is a reseller of computer hardware, software, and
integrated systems to the Federal Government, including their contracts,
inventory, backlog, certain office automation equipment, and their
personnel.
The good news is that we did a lot of things well. Before the acquisition,
GTSI had about 380 employees and BTG had 311. We carefully evaluated the
BTG personnel and selected and made offers to about 180, of which 167
joined us. Some employees were also laid off from GTSI. We have
subsequently lost 20 ex-BTG individuals for a net of 147. As of the end of
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April, we have 501 employees with openings for an additional 50. The new
BTG employees were enthusiastically welcomed to GTSI. The "Washington Post"
had picked up on a quote wherein GTSI had been characterized as "Darth
Vader" and had developed this theme to its fullest during the negotiations
period. Upon arrival at GTSI, several of our new employees expressed
surprise at having been "welcomed" and "treated professionally" by the
existing GTSI employees. Through this acquisition, we were able to attract
some very talented managers, a number of people with great customer
relationships, and a number of technical people along with some excellent
financial and accounting staff. Given the Washington area's staffing
shortage, this was an immensely valuable accomplishment. The new employees
were all accommodated in GTSI's existing facilities. I believe we have
significantly upgraded the quality of the employees and our overall
management team.
We have also acquired from BTG some excellent contracts and customer
relationships, especially Army PC-2, State Department, and the Tennessee
Valley Authority. We had a difficult time getting these very complex
contracts into our IT systems, but with methodical determination, we
succeeded, and are now operating effectively. GTSI had previously bid and
lost PC-2. We hope to see significant revenue growth from these contracts
in the coming quarters.
We are also very excited about our new vendor relationships, most notably,
Cisco. Cisco is a supplier that we have pursued for over two years.
Always, their tight relationship with BTG precluded them from working with
us. The number one complaint that we experienced from our sales force was:
"We need Cisco!" So, we were ready for Cisco and have embraced them,
investing heavily in training and technical support staff and
infrastructure. This should pay off for both Cisco and GTSI in the future.
We handled the transfer of our new employees from BTG with military
precision! We closed the acquisition late on a Thursday in Mid-February.
The following Monday all of our 167 new employees arrived at our facility
to find desks, chairs, telephones, and networked computers all ready for
them! That took a tremendous amount of effort and coordination.
Our existing warehouse is sufficiently large to handle the additional
revenue that should be generated from the acquisition. The only limitation
is the capacity of our configuration facility, which is being tripled in
size between now and July, in time for the busy season. In the interim we
are leasing back a portion of the BTG warehouse space.
From a financial perspective, we acquired hard assets in return for an
equivalent amount of cash and preferred stock - there is no good will in
this transaction to amortize against future earnings. This fact alone, in
a stock market that is getting used to high valuations, makes the
transaction uniquely advantageous for GTSI. Also, it had the effect of
recapitalizing GTSI - our net worth is now some $13 million larger!
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Looking at our marketplace, the elimination of BTG as a competitor should
be advantageous in the long term. The BTG product division was shaping up
to be our most significant Government-focused competitor. We still have
many other very significant competitors including Dell, Gateway, Micron,
Vanstar, GE Capital, and Federal Data, among others, but this change should
reduce some of the downward pressure on margins.
The letter of intent with BTG was signed on December 18, 1997. That letter
of intent anticipated the payment by GTSI to be in the form of cash and
common stock. However, as we proceeded with the negotiation of the
definitive agreement and the due diligence, the dissident managers began to
mount a competing offer, the BTG employees began to fear for their jobs,
and the "Washington Post" picked up the story. Paranoia ran rampant.
GTSI's management began to realize that if we waited the necessary five
months (because we are required to seek stockholder approval to expand the
authorized shares beyond 10 million and to approve the BTG acquisition) for
a stockholders' meeting in May, there would be nobody and no customer
relationships left at BTG to acquire. We had to move much faster, but how?
The only way out was to take advantage of an existing preferred stock
facility that was within GTSI's charter but was not being used. After
further discussion BTG and GTSI agreed to substitute preferred stock for
common stock so that the transaction could be closed expeditiously and GTSI
agreed to promptly solicit the approval of its stockholders for the
conversion of the preferred stock into common stock. The acquisition was
finally completed on February 12, 1998.
Although management was distracted by the acquisition, several other
positive events occurred during the first quarter! Most notable among
these was the award by the Army of an important Blanket Purchase Agreement
known in the industry as ET-1. This award represents a further tightening
of our relationship with our largest customer, the Army, and allows them to
easily buy a wide range of peripherals and software for their computer
systems. This should further enhance our relationship with Hewlett Packard
whose printers feature prominently in our award. Two other companies were
also given awards under this procurement, so our challenge is to out-market
them!
We broke ground on a new build-to-suit headquarters to house the Company
when our current lease runs out at the end of this year. The new facility
should greatly enhance our intra-company communications and efficiency
while taking about $1 million per year out of our facilities expense budget
for next year!
Now, as we approach the 1998 Stockholders' Meeting, we feel it is important
that the Stockholders understand the reason the GTSI Management has asked
you to vote for the conversion of the preferred stock into common stock. We
believe that such a vote is in the best interest of the Company because it
reflects the original understanding between BTG and GTSI. Please refer to
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the proxy statement for more detail and if you have any questions, please
call me at 703-502-2900 (dendy_young@gtsi.com) or Steve Waechter, Senior
Vice President and CFO, at 703-502-2199 (steve_waechter@gtsi.com).
Thank you,
Dendy Young
President and CEO
Except for historical information, all of the statements, expectations and
assumptions contained in the foregoing are "forward-looking statements"
(within the meaning of the Private Securities Litigation Reform Act of
1995) that involve a number of risks and uncertainties. It is possible that
the assumptions made by management, including, but not limited to, those
relating to the benefits of the acquisition of the BTG product reseller
division and the benefits of new contract awards may not materialize.
Actual results may differ materially from those projected or implied in any
forward-looking statements. In addition to the above factors, other
important factors that could cause actual results to differ materially are
those listed in the Company's most recent report on Form 10K and included
from time to time in other documents filed by the Company with the
Securities and Exchange Commission.
GTSI is the largest dedicated government reseller providing broad-based
information technology solutions. The Company offers access to over 100,000
information technology products from more than 2,000 manufacturers.
Headquartered in the Washington metropolitan area, GTSI employs more than
500 people and provides products and services to Federal, state and local
government customers worldwide.
GTSI is a registered service mark of Government Technology Services, Inc.
All other trademarks and service marks are proprietary to their respective
owners.
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