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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
______________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 0-19394
GOVERNMENT TECHNOLOGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1248422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4100 LAFAYETTE CENTER DRIVE
CHANTILLY, VIRGINIA 20151-1200
(Address and zip code of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 502-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.005 PAR VALUE
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the Common Stock on
February 28, 1997, as reported on The Nasdaq Stock Market, was $30,998,212.
The number of shares outstanding of the registrant's Common Stock on
February 28, 1997, was 6,724,919.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be
delivered to stockholders in connection with their Annual Meeting of
Stockholders to be held on May 6, 1997 are incorporated by reference into
Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
THE COMPANY
Government Technology Services, Inc. is the leading dedicated reseller
of microcomputer and Unix workstation hardware, software and networking
products to the Federal government market. (Unless the context indicates
otherwise, all references herein to the capitalized term "Government" shall
refer to the U.S. Federal Government, and all references herein to the non-
capitalized term "government" shall refer generally to any federal, state
or municipal government.) The Company was incorporated in Nevada in 1983
and reincorporated in Delaware in 1986.
On August 16, 1994, the Company purchased Falcon Microsystems, Inc.
("Falcon"), which was the leading reseller of Apple Computer, Inc.
("Apple") products to the Government for the ten years prior to its
acquisition. The acquisition was part of the Company's corporate strategy
to expand and build upon its presence in the Federal, state and local
government markets. (Unless the context indicates otherwise, all
references below to "GTSI" or the "Company" for periods after August 16,
1994, shall refer to Government Technology Services, Inc. and Falcon.)
GTSI (r) offers its customers a convenient and cost-effective
centralized source for microcomputer and workstation solutions through its
broad selection of popular products at competitive prices. The Company
specializes in understanding both the various information technology needs
and the procurement processes of Government customers. GTSI sells to all
departments and agencies of the Government, many state governments and
hundreds of systems integrators and prime contractors selling to the
government market. In 1996, GTSI's sales directly to Government agencies,
to prime contractors for resale to Government agencies and to state and
local government agencies accounted for 90.5%, 7.8% and 1.7% of sales,
respectively.
The Company commenced operations in 1983 and initially focused on
reselling microcomputer software to Government agencies. In 1985, the
Company expanded its product line to include peripherals and began selling
its full line of products to the state government market. In 1986, the
Company began selling microcomputers and networking products and began
performing network integration services, including configuring, installing
and maintaining microcomputers in local area networks ("LANs"). Since
1987, GTSI has been pursuing formal Government bids in addition to General
Services Administration ("GSA") Schedule contracts. In January 1992, GTSI
began reselling Unix workstations and allied software and peripherals.
GTSI currently offers access to over 75,000 information technology
products from more than 800 manufacturers, including Hewlett-Packard
Company ("Hewlett-Packard"), Compaq Computer Corporation ("Compaq"),
Panasonic (a division of Matsushita Electric Corporation of America),
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Microsoft Corporation ("Microsoft"), Sun Microsystems, Inc. ("Sun"), Apple,
and International Business Machines Corporation ("IBM"). 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.
"GTSI" is a registered service mark of Government Technology Services,
Inc. All other trademarks and service marks are proprietary to their
respective owners.
BUSINESS STRATEGY
GTSI is committed to, and focused on, the Government customer. The
Company's business strategy is to continue to broaden its product offering,
to remain the low-cost provider and to bring new technologies to Government
customers by concentrating on the following elements:
FOCUS ON THE GOVERNMENT MARKET. Because of its historical focus on
the Government market, GTSI has developed the expertise and established the
vendor and customer relationships necessary to be a leader in this market.
As a result, GTSI's marketing and sales force is effective at reaching and
servicing the Government market, which consists of tens of thousands of
procurement and contracting officers, information resource managers,
systems integrators, value-added resellers ("VARs"), prime contractors and
millions of end users. In addition, by focusing on the Government market,
the Company has avoided the significant costs of commercial retail outlets
and the relatively higher credit risk associated with selling primarily to
commercial entities.
PURSUE GOVERNMENT CONTRACTS. GTSI pursues Government contracts
ranging in size from as small as a few hundred dollars to as large as
potentially hundreds of millions of dollars in sales. The Company holds a
wide range of Government contracts, including multi-million dollar, multi-
year contracts with the Department of Defense ("DoD") and certain civilian
agencies, as well as several multiple award schedules and Blanket
Purchasing Agreements ("BPAs") with a variety of DoD and civilian agencies
(generally, "contract vehicles"). GTSI also serves as a subcontractor to
companies holding Government contracts. The Company intends to continue to
identify and pursue those contract vehicles that best leverage GTSI's broad
product selection, distribution capabilities and vendor relationships. At
various times GTSI has been awarded, in addition to the GSA Schedule
contracts, the U.S. Navy Standard Desktop Computer Companion Contract
("Companion Contract"), the U.S. Air Force Desktop IV Microsystems Contract
("Desktop IV Contract"), the National Aeronautics and Space
Administration's ("NASA") Scientific & Engineering Workstation Procurement
("SEWP I Contract"), the NASA SEWP II Contract, the U.S. Army Portable-1
Contract ("Portable-1 Contract"), the U.S. Army Portable-2 Contract
("Portable-2 Contract"), the National Institute of Health's ("NIH")
Electronic Computer Store ("ECS") Contract ("NIH Contract") and the U.S.
Treasury Department Acquisition-1 Contract ("TDA-1 Contract"), as well as
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hundreds of other Government contracts of varying dollar amounts, typically
under $100,000. The Company also has been awarded subcontracts to supply
products under the U.S. Air Force Integration for Command, Control,
Communications, Computers and Intelligence Contract ("IC4I") and the U.S.
Air Force Desktop V Microsystems Contract ("Desktop V Contract") Contract.
FOCUS ON OFFICE AUTOMATION PRODUCTS. GTSI focused initially on the
rapidly growing market for microcomputer applications software and expanded
successively into the complementary office automation market segments of
peripherals, microcomputers and networking products, including LANs. The
Company continued this product strategy by expanding its product line in
early 1992 to include hardware, software and services for RISC-based Unix
workstations manufactured by Sun and in 1993 to include the full line of
products manufactured by Apple. In 1996, GTSI began focusing on internet
and intranet products and services. In future years the Company intends to
add other complementary office automation products and expanded systems
integration services.
FOCUS ON CUSTOMER SERVICE. In the Company's process orientation and
interaction with its many customers, Company employees focus on attempting
to provide high quality customer service(s) associated with the order,
delivery, installation and repair of microcomputer and workstation
products. By following a "one person - one transaction - one time"
approach to customer service, the Company's employees strive to ensure
customer satisfaction and thereby increase the possibilities for future
business.
PROVIDE A CENTRALIZED SOURCE FOR PROCURING OFFICE AUTOMATION PRODUCTS
AND SERVICES. In addition to offering a full line of microcomputer
hardware, software and peripheral products as well as the leading brand of
workstations, GTSI offers its customers pre- and post-sale technical
support and assistance in the selection, configuration, installation and
maintenance of the products and systems that GTSI sells. Furthermore, by
offering a wide range of microcomputer and workstation products through a
variety of procurement mechanisms, GTSI offers its customers the
convenience, flexibility and cost savings of purchasing from a centralized
source. GTSI believes that its convenient "one-stop shop" for microcom-
puter and workstation products is an important factor in its success in the
government market.
MAINTAIN COMPETITIVE PRICING AND IMPROVE OPERATING EFFICIENCIES. The
government market is price-sensitive. GTSI therefore focuses both on
offering competitive pricing to its customers and on constantly improving
operating efficiencies.
ESTABLISH AND MAINTAIN STRONG VENDOR RELATIONSHIPS. In order to
provide a centralized source of products for its customers, GTSI maintains
strong relationships with leading hardware and software vendors. GTSI
offers its vendors a wide range of marketing and sales services which
provide them with access to the millions of end users comprising the
government market. In addition, the Company virtually insulates its
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vendors from most of the procurement regulatory complexities, costs,
extensive paperwork and complicated billing requirements associated with
the government market.
THE GOVERNMENT PROCUREMENT PROCESS
Most of the Company's 1996 revenues were derived from sales directly
to departments and agencies of the Government and to prime contractors
reselling to the Government market. The Company's sales fall into five
categories: GSA Schedule contracts, formal bids, subcontracts, BPAs, and
open market.
GSA SCHEDULE CONTRACTS
GTSI currently holds four GSA Schedule contracts: Schedule A,
Schedule B/C, Schedule 58 Part VI and VII, and Schedule E. Schedule
contracts are negotiated by the GSA, which is the central procurement
agency of the Executive Branch of the Government. Although Government
agencies are not required to purchase products under GSA Schedule
contracts, these contracts provide all Government agencies, certain
international organizations and authorized prime contractors with an
efficient and cost-effective means for buying commercial products.
Government agencies and other authorized purchasers (collectively,
"GSA Schedule Purchasers") may purchase goods under GSA Schedule contracts
at predetermined ceiling prices, terms and conditions. GSA Schedule
Purchasers may place unlimited orders for products under GSA Schedule
contracts. However, agencies are instructed to seek lower prices for
orders exceeding a "maximum order" threshold. For the Schedule B/C
contract, this threshold is $25,000 per order for classroom training,
$50,000 per order for shrinkwrap software and $500,000 per order for other
software and hardware. For Schedules A, 58 and E, this threshold, as
applied to all product and service categories, is $500,000 per order.
GSA Schedule contracts are awarded on the basis of a number of
factors, the most important of which are compliance with applicable
Government regulations and the prices of the products to be sold. Any
number of competing vendors may be awarded a GSA Schedule contract for a
given product. GSA Schedule contracts require that each bidder must either
be the manufacturer of the product covered by the contract or furnish
evidence of capability to provide a manufacturer's product for the period
of the GSA Schedule contract. Products may be added to a GSA Schedule
contract during its term under certain circumstances with the consent of
both the contractor and Government. GSA Schedule contracts include a 1%
GSA administrative fee calculated in the product prices, which fee is
collected by the Company and is remitted quarterly to the GSA.
GTSI's GSA Schedule contracts require the Government to pay for
product shipped under the contracts within 30 days of acceptance by the
Government. The GSA Schedule contracts also permit payment by Government-
issued credit cards. When payment is made by credit card, the Company
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often receives payment in less than 30 days. The Government may require
GTSI to accept returns only of incorrectly shipped product. GTSI's GSA
Schedule contracts require GTSI to pass on to customers the vendor's
warranty and to provide for on-site or depot maintenance at a pre-paid flat
fee. GTSI's GSA Schedule contracts also contain price reduction clauses
requiring, among other things, that GTSI pass on to Government customers
certain reduced prices GTSI may receive from its vendors during a
contract's term but prohibiting GTSI to pass on vendor price increases. To
mitigate the potential adverse impact of any such price increase, the
Company requires virtually all vendors acting as suppliers to GTSI under
its GSA Schedule contracts to provide GTSI with supply and price protection
for the duration of the contracts. Multi-year Schedules include an
economic price adjustment clause that permits the Company to adjust
contract prices upward if certain conditions have been satisfied.
Several of the GSA Schedule contracts that have been awarded to the
Company are multi-year. GTSI's current GSA Schedule B/C contract has a
three-year term, from April 1, 1996 to March 31, 1999. Schedule B/C
contracts include general purpose automatic data processing equipment (end-
user computers, normally microcomputers and related computer software) for
use in an office environment. In 1996, the GSA extended GTSI's Schedule A
contract for one year. As amended, GTSI's Schedule A contract expires on
September 30, 1997. Schedule A contracts include general purpose
commercial automatic data processing equipment and software, including
workstations and connected peripheral equipment. In March 1996, the GSA
awarded the Company a Schedule 58, Part VI and VII for telecommunications
products. The contract will continue until September 30, 2000. In May
1995, the GSA awarded the Company a Schedule E contract for electronic
commerce products and services. The contract will continue until September
30, 1997.
FORMAL BIDS
A significant portion of Government purchases of computer products and
services are made under contracts or purchase orders awarded through formal
competitive bids and negotiated procurements. Since 1987, in addition to
its GSA Schedule and open market business, GTSI has pursued formal
Government bids. Since substantially all of these bids are awarded on the
basis of "best value" to the Government (which, depending on the bid, can
be a combination of price, technical, past performance on other Government
contracts and other factors), GTSI has sought to use its vendor contacts,
purchasing power, distribution strength and procurement expertise to
successfully compete for the business. These major procurements can exceed
millions of dollars in total revenues, span many years, and provide a
purchasing vehicle for many agencies. The vast majority of the contracts
pursued by GTSI have been fixed-price (i.e., at the time of initial award,
the end-user selling prices are set for the duration of the contract at a
specified level or at specified levels varying over time) and indefinite-
delivery/indefinite-quantity ("IDIQ") (i.e., the contract provides no pre-
set delivery schedules or minimum purchase levels). All of the Company's
bid, proposal and protest costs are expensed as incurred.
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GTSI's bids group is responsible for evaluating bid opportunities,
identifying key products or services needed to respond to bids, negotiating
favorable agreements with suppliers and subcontractors, preparing written
responses to the solicitation document, meeting all mandatory technical
requirements and, in general, successfully managing the proposal effort.
GTSI's competitors for these contracts typically include major systems
integrators, computer manufacturers and a variety of other systems
integrators, VARs and commercial resellers.
COMPANION CONTRACT. In August 1991, GTSI commenced shipments under
the Companion Contract. The Companion Contract is a fixed-price, IDIQ
contract covering the worldwide sale to all DoD agencies of microcomputer
software (including MS-DOS, Unix and Windows software), peripherals
(including modems, printers, storage devices, power units, video sub-
systems, memory expansion boards, PC facsimiles and microprocessor
upgrades), spare parts, maintenance, supplies and training. The contract
is non-mandatory except for the Defense Logistics Agency ("DLA") and,
excluding certain software products, the Air Force. Product purchases on
the original Companion Contract expired on September 30, 1994; however, on
February 6, 1995, the Navy agreed to a product purchasing extension through
September 30, 1995. In the fourth quarter of 1995, the Navy informed GTSI
that it did not intend to exercise its option for two annual renewal
periods for other services and replacement parts. Sales under the
Companion Contract in 1995, 1994 and 1993 were approximately $21.1 million,
$50.5 million and $48.3 million, respectively.
DESKTOP IV CONTRACT. In February 1993, GTSI and Zenith Data Systems
("Zenith") were jointly awarded the Desktop IV Contract. In May 1993,
following a protest filed by several losing bidders at the General Services
Board of Contract Appeals ("GSBCA"), the Desktop IV Contract award to GTSI
and Zenith was affirmed. In August 1993, GTSI began shipments under this
contract. The Desktop IV Contract is a non-mandatory, fixed-price, IDIQ
contract covering the worldwide sale of microcomputer systems, peripherals
and software, along with maintenance, supplies and training to all DoD
agencies, as well as certain other Government agencies. The original
expiration date for systems orders was February 1, 1995, with one option to
extend, solely at the discretion of the Air Force, for a one-year period.
The Air Force exercised its one-year option, which expired February 1,
1996. The Air Force exercised a separate option to procure maintenance and
User Installable Components ("UICs") from February 2, 1996 through February
1, 1997. The Air Force has executed a separate option to procure
maintenance and UICs from February 1, 1997 through February 1, 1998. The
Government's maximum evaluated dollar value for the contract awarded to
GTSI over its three-year maximum life is approximately $655.0 million. The
Company settled an appeal filed at the Armed Services Board of Contract
Appeals in December 1996 regarding certain Desktop IV Contract matters.
See "Legal Proceedings." Sales under the Desktop IV Contract in 1996, 1995
and 1994 were approximately $29.8 million, $93.4 million and $196.0
million, respectively.
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SEWP I CONTRACT. In February 1993, GTSI was awarded its SEWP I
Contract, which is one of seven workstation contracts and two peripheral
contracts awarded by NASA under the SEWP program. In August 1995, GTSI
became the first IDIQ contractor to implement Internet credit card and
Electronic Data Interchange ("EDI") ordering for its SEWP customer base.
GTSI's fixed discount, IDIQ contract covers the sale of specified Unix-
based X-terminals, printers, application software and related peripherals
to all NASA centers as well as certain non-NASA agencies and approved prime
contractors. Products may be added to the contract at fixed discounts from
the manufacturer's catalogue, list, GSA or other published pricing base by
mutual agreement with the Government. Product discounts must be maintained
throughout the applicable contract period provided that the computed price
to the Government cannot exceed GSA Schedule pricing. The contract's
original expiration date was February 18, 1994, with four successive one-
year options. The Government has exercised its third one-year option,
which expired on February 18, 1997. Sales under GTSI's SEWP I Contract in
1996, 1995 and 1994 were approximately $23.8 million, $8.9 million and $7.1
million, respectively.
PORTABLE-1 CONTRACT. In December 1994, GTSI and International Data
Products, Inc. ("IDP") were jointly awarded the Portable-1 Contract by the
Department of the Army. In February 1995, following a protest filed at the
GSBCA by one of the losing bidders, the Portable-1 Contract award to GTSI
and IDP was affirmed. In February 1995, GTSI began shipments under this
contract. The Portable-1 Contract is a fixed-price, IDIQ contract covering
the world-wide sale of portable microcomputer systems, peripherals and
software, along with maintenance supplies to the Army, DLA and other
Government agencies, excluding the Navy and Air Force. Hardware products
may be added to the contract at to-be-negotiated prices by mutual agreement
with the Government. In such cases, GTSI will likely be required to
provide such updated versions of products to the Government at the same or
at lower prices as the products originally bid. The contract is non-
mandatory and expired on January 24, 1997. The Government's maximum
evaluated dollar value for the contract over its two-year maximum life is
approximately $115.0 million. Sales under the Portable-1 Contract in 1996
and 1995 were approximately $24.0 million and $25.2 million, respectively.
NIH ECS CONTRACT. In September 1995, GTSI and 16 other contractors
were jointly awarded the Electronic Computer Store ("ECS") Contract to
provide commercial off-the-shelf personal computer equipment (including
laptops, peripherals, software and operating systems) and related warranty
service to the National Institutes of Health and other agencies of the U.S.
Department of Health and Human Services. The contract is a non-mandatory,
fixed price, IDIQ contract with an original expiration date of September
30, 1996. The Government has exercised one option to extend the contract
to September 30, 1997. The Government's maximum evaluated dollar value for
the ECS Contract over its two-year maximum life is approximately $96.8
million. Sales under the ECS Contract in 1996 and 1995 were approximately
$34.2 million and $400,000, respectively.
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TDA-1 CONTRACT. In March 1996, GTSI was awarded the TDA-1 Contract.
The TDA-1 Contract is a fixed-price, IDIQ contract which calls for GTSI to
provide desktop and laptop computers, as well as software and peripherals,
to the U.S. Treasury Department. The contract is non-mandatory with an
original expiration date of March 3, 1997, with one option to extend for a
one-year period. The Government has exercised its option to extend the
contract to March 3, 1998. The Government's maximum evaluated dollar value
for the contract over its two-year maximum life is approximately $50.0
million. Shipments under the TDA-1 Contract began in August 1996. Sales
under the TDA-1 Contract in 1996 were approximately $2.1 million.
SEWP II CONTRACT. In November 1996, the Company was awarded two SEWP
II Contracts out of 20 awarded by NASA under the SEWP program. The
contract was available for orders in January 1997. Thereafter, NASA
consolidated the contracts so that there are now 16 contracts, of which
GTSI holds one. The SEWP II Contract is a non-mandatory, fixed price, IDIQ
contract for specified Unix-based x-terminals, printers, application
software and related peripherals to the entire Government and all NASA
prime contractors. Products may be added to the contract at fixed
discounts from the manufacturer's catalogue, list, GSA or other published
pricing base by mutual agreement with the Government. Product discounts
must be maintained throughout the applicable contract period provided that
the computed price to the Government cannot exceed GSA Schedule pricing.
The contract expires on November 15, 1997 and includes three one-year
extension options.
PORTABLE-2 CONTRACT. In December 1996, GTSI was awarded the
Portable-2 Contract, a follow-on to the Portable-1 Contract. The
Portable-2 Contract is a fixed-price, IDIQ contract which calls for GTSI to
provide world-wide sales of notebook computers, application software,
monitors, printers, notebook peripherals and maintenance to the Army, the
Defense Logistics Agency and other Government agencies, excluding the Navy
and the Air Force. The contract is a two-year, dual award contract. Two
competitors protested the award of the contract. Resolution of the
protests is expected in April 1997. The Government's maximum evaluated
dollar value for the contract over its two-year maximum life is
approximately $237 million. Sales under the Portable-2 Contract have been
suspended pending resolution of the protests.
SUBCONTRACTS
The Company's business expanded during 1996 to include significant
subcontracts for product supply to companies holding Government integrator
prime contracts.
IC4I CONTRACT. In June 1996, the Company was awarded a subcontract by
Systems Research Applications Corporation ("SRA") to provide hardware and
software for use by the Government in connection with SRA's IC4I Contract.
The subcontract expires in June 1998 and includes three one-year extension
options. The IC4I Contract is non-mandatory, fixed-price, IDIQ contract
which expires in June 1998 and includes three one-year extension options.
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Shipments under the IC4I Contract began in October 1996. Sales under the
subcontract in 1996 were approximately $250,000.
DESKTOP V CONTRACT. In November 1996, the Company was awarded a
subcontract with Hughes Data Systems to provide monitors and notebooks for
use by the Air Force in connection with the Desktop V Contract. The
subcontract expires in May 2002. Shipments under the subcontract began in
July 1996, and sales under the subcontract in 1996 were approximately $3.9
million.
BLANKET PURCHASE AGREEMENTS
Historically, the Company has held hundreds of BPAs with federal
agencies. A BPA is a simplified but non-mandatory, fixed price, IDIQ
contract for the Government to purchase products, usually by establishing
charge accounts with qualified sources. Agencies typically enter into BPAs
for similar products with several companies. BPAs generally include a list
of products at established prices, individual purchase limits for
authorized purchasers, and other pre-negotiated terms and conditions.
Purchases under BPAs are often paid for with a Government-issued credit
card.
In 1996, the GSA authorized agencies to enter into BPAs with Schedule
holders. The GSA-authorized BPAs incorporate many terms and conditions of
the GSA Schedule contracts, and incorporate many products offered on GSA
Schedule contracts, often at lower prices than available on the GSA
Schedules. The Company normally enters into separate agreements with
vendors in order to offer reduced BPA prices to the Government. The BPA
sales vehicle allows the Company to focus specific vendor relationships on
specific sets of customers. In response to the GSA's authorization, the
Company has increased its emphasis on BPAs.
The Company's BPAs include: the Naval Information Systems Management
Center BPA for notebook computers and associated equipment, with estimated
aggregate sales among the BPA awardees of $98 million; and the Naval
Information Systems Management Center BPA for desktop and associated
equipment, with estimated sales among the BPA awardees of 7,500 computers
per year; and the GSA Federal Telecommunications Service BPA for computer
equipment.
OPEN MARKET
Many microcomputer and workstation products may also be resold by GTSI
through open market procurements. These procurements are separate and
apart from GSA Schedules or formal competitive bids, and include small
purchase procedures, requests for quotes, invitations for bids and requests
for proposals. The Company is on most Government bid lists relevant to its
product offerings and responds with proposals to hundreds of such bid
solicitations each year. When awarding contracts, the Company's customers
often evaluate, in addition to price, which is typically the most important
factor, a number of other factors, such as the vendor's experience,
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performance record, service, support and financial strength. Unless
purchasing electronically, Government agencies procuring products not on a
Schedule or other contract vehicle must typically publicize their
procurements over $25,000 to allow competitors to submit price quotes. The
Company also sells to Government prime contractors, including systems
integrators, typically through open market procurements.
STATE AND LOCAL CONTRACTS
Most purchases in the state government market are made through
individual competitive procurements, although many state governments issue
invitations for bid for statewide computer term contracts. State and local
procurements typically require formal responses and the posting of "bid
bonds" or "performance bonds" to ensure complete and proper service by a
prospective bidder. Each state maintains a separate code of procurement
regulations which must be understood and complied with in order to
successfully market and sell to that state. GTSI currently maintains
several state and local microcomputer contracts, submits oral and written
bids to state and local governments each month and is on a number of state
and local government bid lists.
GOVERNMENT MARKET CONSIDERATIONS
A substantial portion of the Company's contracts are fixed-price and
IDIQ. The uncertainties related to future contract performance costs,
product life cycles, quantities to be shipped and dates of delivery, among
other factors, make it difficult to predict the future sales and profits,
if any, that may result from such contracts.
Under applicable Government regulations, GTSI currently qualifies as a
"small business" by virtue of it being a non-manufacturing entity with a
rolling average over the prior 12 months of 500 or fewer employees (404
employees on a rolling average basis as of February 28, 1997). As a small
business, GTSI enjoys a number of significant benefits, including being
able to: compete for designated small business set-aside contracts; bid
pursuant to preferential small purchase procedures for open market
purchases under $100,000 directed to non-manufacturer small businesses;
qualify as a small business subcontractor to prime contractors on contracts
over $500,000 in which the prime contractor must submit to the Government a
small business subcontracting plan; offer Government agencies the advantage
of having their purchases from GTSI count toward fulfilling their internal
small purchase goals; and avoid having to establish small business
subcontracting plans in order to compete for certain large Government
contracts.
GTSI presently anticipates being classified as a non-manufacturer
small business during 1997; however, the possibility exists that the
Company could lose its small business status going forward through internal
growth, acquisition(s) or otherwise. GTSI also has a number of possible
actions available to it to seek to mitigate the possibly material adverse
impact to GTSI of a future loss of its small business status, including the
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following: increasing sales through the large number of Government
contracts which are not subject to small purchase procedures; aggressively
implementing GTSI's low-cost, one-stop shop strategy to economically
encourage customers to continue to place orders with GTSI; expanding its
sales to prime contractors qualifying as small or minority-owned
businesses; and increasing its sales to state and other markets not subject
to Government small business regulations. Currently, GTSI cannot precisely
quantify the extent of the impact, if any, on its future results from a
loss of its small business status.
Noncompliance with Government procurement regulations or contract
provisions could result in termination of Government contracts, substantial
monetary fines or damages, suspension or debarment from doing business with
the Government and even civil or criminal liability. During the term of
any suspension or debarment by any Government agency, the contractor could
be prohibited from competing for or being awarded any contract by any
Government agency. In addition, virtually all of the Company's Government
contracts are terminable at any time at the convenience of the Government
or upon default. Upon termination of a Government contract for default,
the Government may also seek to recover from the defaulting contractor the
increased costs of procuring the specified goods and services from a
different contractor. The effect of any of these possible Government
actions or the adoption of new or modified procurement regulations or
practices could materially adversely affect the Company.
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. Although these patterns have
historically led to sales being concentrated in the Company's third and
fourth quarters, 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.
PRODUCTS
The Company currently offers access to over 75,000 information
technology products from more than 800 hardware and software vendors. The
Company continuously monitors sales of existing and newly introduced
products to ensure that it carries the leading products.
HARDWARE. The Company currently resells microcomputers from major
brand name manufacturers, including Compaq, Panasonic, Nexar Technologies,
Inc. ("Nexar"), Sun and Apple; and peripherals from major brand name
manufacturers, including Hewlett-Packard, Tektronix, Sony, Iomega and
Kodak. The Company began selling RISC-based Unix workstations manufactured
by Sun in 1992. In 1993, the Company began selling the full line of
products manufactured by Apple and, in connection with the Desktop IV
Contract, GTSI's own private label microcomputers -- GTSI DeskTop (tm) --
manufactured by IBM. The Company no longer sells the GTSI DeskTop product.
Peripherals carried by the Company include disk drives, CD-ROM drives,
printers, video display monitors, plug-in circuit boards, modems and
- 13 -
related products. GTSI's LAN hardware products are supplemented by the
Company's LAN services, which include assisting customers in selecting,
configuring, installing and maintaining LANs.
SOFTWARE. The Company carries microcomputer software from virtually
every leading MS-DOS and Windows microcomputer software vendor, as well as
Sun workstation and Apple software from a number of leading software
publishers. The Company sells packaged application software or licenses
therefor, including word processing, database management, spreadsheet and
graphics programs, for use on IBM, IBM-compatible microcomputers, Apple and
Apple-compatible microcomputers, and on Sun workstations. The Company's
microcomputer software vendors include Microsoft, Unisys, Symantec
(including Delrina), Netscape and Novell. GTSI also sells networking
software, including that published by Novell.
MARKETING AND SALES
The Company's marketing and sales personnel design and direct the
Company's sales efforts and its market research, telemarketing and direct
mail campaigns; Company-sponsored catalogues and seminars; advertising in
specialty publications; and participation in major trade shows. GTSI
provides training to its marketing and sales force on various government
procurement processes and technical features of the products and services
it offers. All sales personnel have been trained on, and have online
access to, GTSI's computerized system for maintaining price, product
availability, bid, ordering and order-status information.
From inception, GTSI recognized that the size and diversity of the
government market made it imperative to identify and understand the needs
of customers. Through years of intensive effort, GTSI has compiled and
continuously updates one of the most comprehensive databases of federal,
state and local government microcomputer users and their buying patterns.
This proprietary, on-line computerized database currently contains over
235,000 entries, including an extensive list of agency procurement and
contracting officers, information resource managers, end users, systems
integrators, VARs and prime contractors. GTSI uses this database, among
other things, for targeting telemarketing and direct mail campaigns. The
Company conducts direct mail campaigns consisting of brochures, fliers,
questionnaires, reply cards and other promotional items.
In addition to being an active participant in major federal and state
government trade shows, GTSI sponsors and produces its own federal and
state government seminars and agency-specific shows, many of which attract
hundreds of attendees. GTSI designs these seminars and shows to provide
training and information about microcomputers and workstations and related
services which are of significant interest to government users. GTSI also
produces its own "Expos" in which GTSI and specific agencies work together
to showcase products to key end users and decision makers. These seminars,
shows and expositions are supplemented by technical support hot lines,
customer bulletin boards and an evaluation library of microcomputer and
workstation product profiles, technical literature and demonstration
- 14 -
hardware and software. The Company also offers simplified software upgrade
policies designed specifically for the Government.
The Company publicly introduced its web site, GTSI Online, (sm) on the
Internet's world wide web (http:\\www.gtsi.com) in early 1995. The site
presently provides access to certain product, contract and Company
information. Additional features for GTSI's web site, including electronic
order submission, system configuration, technical assistance and order
status checking, are in various stages of development, testing and
implementation. The Company presently intends to make extensive use of its
evolving web site as a sales and marketing tool.
VENDOR RELATIONSHIPS
In order to offer its customers a centralized source for their
microcomputer and workstation needs, the Company establishes and maintains
relationships with key vendors and offers them a number of profitable
opportunities to expand their sales to the government market, including:
o Access to the government market through a significant number of
diverse contract vehicles.
o Substantial relief from the cost of compliance with procurement
regulations involved in selling directly to the government
market.
o Lower operating costs related to reduction or elimination of
selling and marketing programs, and elimination of non-commercial
billing and collection costs related to the government market.
o Participation in value-added services, including numerous
government-specific marketing programs and end-user technical
support.
The terms of the Company's agreements with its vendors vary widely,
but typically permit the Company to purchase product for resale to at least
the government market. Virtually none of the Company's vendor agreements
requires the Company to purchase any specified quantities of product. The
Company typically requires vendors acting as suppliers to GTSI under its
term Government contracts to provide GTSI with supply and price protection
for the duration of such contracts. Other than supply agreements under
term Government contracts, the Company's vendor agreements are typically
terminable by the vendor on short notice, at will or immediately upon
default by GTSI. These vendor agreements also generally permit GTSI to
return previous product purchases at no charge within certain time limits,
for a restocking fee up to 10% and/or in exchange for other products of
such vendor. The Company also purchases some products from independent
distributors.
- 15 -
Vendors provide the Company with various forms of marketing and sales
assistance, including but not limited to sales incentives and market
development funds. Vendors provide sell-through and other sales incentives
in connection with certain product promotions. Additionally, key vendors
participate with the Company in cooperative advertising and sales events
and typically provide funding which offsets the costs of such efforts. A
reduction in or discontinuance of any of these incentives or significant
delays in receiving reimbursements could materially adversely affect the
Company.
As a non-manufacturing reseller, the Company must continue to obtain
products at competitive prices from leading vendors in order to provide a
centralized source of price-competitive products for its customers and to
be awarded government contracts. Although almost all of GTSI's vendors
currently do not have all of their own computer products on a GSA Schedule
contract, one or more may elect to apply for its own GSA Schedule contract
and may do so at lower end-user selling prices than those GTSI currently
offers or could profitably offer. Although GTSI believes its relationships
with its key vendors to be good, a decision by one or more to sell directly
to the Government (especially if at significantly lower prices than GTSI),
to sell their products to GTSI's competitors on more favorable terms than
to GTSI, to allow additional resellers to represent their products on a GSA
Schedule contract, to restrict or terminate GTSI's rights to sell their
products or restrict their products from being carried on a GSA Schedule
contract, could materially adversely affect the Company.
CUSTOMERS
The Company's customers are primarily federal, state and local
government agencies and prime contractors to the Government, including
systems integrators. In 1996, the Company sold products or services to
thousands of different customers, including to all agencies and major
departments of the Government, to many state governments and to hundreds of
prime contractors. Although no single customer accounted for greater than
5% of the Company's 1996 sales, aggregate 1996 sales to the Government's
Departments of the Army, Navy and Air Force were 15.0%, 13.2% and 12.9%,
respectively, of GTSI's 1996 sales.
The Company's sales are highly dependent on the Government's demand
for microcomputer and workstation products. Although the Company does not
believe that the loss of any single customer would have a materially
adverse effect on it, a material decline in its overall sales to the
Government as a whole or to certain key agencies thereof could have such an
effect. Reductions in DoD or other Government outlays could occur and may
adversely affect the Company. Furthermore, legislation is periodically
introduced in Congress that, if enacted, may change the Government's
current procurement processes. GTSI cannot predict whether any such
legislative or 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 could affect the Company's future
operating results.
- 16 -
BACKLOG
At February 28, 1997 and December 31, 1996, the Company's backlog of
orders was approximately $12.7 million and $19.8 million, respectively, as
compared with approximately $26.1 million and $19.0 million at March 20,
1996 and December 31, 1995, respectively. Backlog consists of written
purchase orders received and accepted by GTSI for shipment subject only to
the availability of inventory to fill the order and the occurrence of the
customer-specified shipment date (which must be within 30 days to be
considered backlog). Backlog fluctuates significantly from quarter to
quarter principally because of the seasonality of Government ordering
patterns and the periodic inventory shortages resulting from constrained
products (historically, primarily from microcomputer hardware
manufacturers).
SERVICE AND WARRANTY
GTSI provides post-sale field service for most of the products it
sells primarily through subcontractors and to a limited extent through the
Company's in-house technical staff. The Company typically warrants
products sold to the Government and certain other customers for the same
term as the manufacturer's warranty period. Product repaired while under
the manufacturer's warranty is at its expense; product repaired after
expiration of the manufacturer's and GTSI's warranty, if longer, is at the
customer's expense.
COMPETITION
The government microcomputer and workstation market is intensely
competitive and subject to rapid change. GTSI competes with certain
leading microcomputer and/or workstation hardware manufacturers, which sell
to the government market directly and/or through representatives other than
the Company, and with a number of systems integrators, government and
commercial resellers and commercial computer retail chains, distributors
and VARs (including companies qualifying as minority-owned, disadvantaged
or small businesses under applicable Government regulations) seeking to
enter or expand their presence in the government market. Some of GTSI's
existing and potential competitors have greater financial, sales, marketing
and technological resources than the Company.
The Company believes that the principal competitive factors in the
government microcomputer market are price, expertise in the applicable
government procurement processes, breadth of product line, customer and
vendor relationships, financial strength, the technical and other skills of
marketing and sales personnel, distribution capability, available inventory
and customer service and support. The Company believes that the principal
competitive factors in the government workstation market are essentially
the same, except that technical expertise and customer service and support
are often more important and breadth of product line and available
inventory are often less important. The Company believes that it competes
favorably on each of these factors, although to a lesser degree with
- 17 -
respect to technical expertise. GTSI also believes that it has a
competitive advantage over certain of its competitors because of its
procurement expertise and avoidance of costly overhead related to selling
into multiple market segments and maintaining numerous retail outlets. In
addition, the Company's ability to offer a centralized source for purchases
of a wide variety of leading computer products from numerous manufacturers
often provides a competitive advantage over manufacturers who sell only
their own line of products directly to the government.
EMPLOYEES
At February 28, 1997, the Company had 413 employees, including 267 in
sales, marketing and contract management; 67 in operations; and 79 in
executive, finance, information technology, human resources and legal.
None of the Company's employees is represented by a labor union, and the
Company has experienced no labor-related work stoppages.
- 18 -
ITEM 2. PROPERTIES.
The Company's executive offices are located in an approximately
190,000-square foot group of facilities in Chantilly, Virginia under a
lease expiring in November 1998. GTSI's warehousing and distribution
operations are also located in Chantilly, Virginia in a separate
205,000-square foot facility under a lease expiring in December 2006. The
Company also has branch sales offices occupying an aggregate of 7,742
square feet under various multi-year leases expiring at various times up to
October 31, 1998. The Company's five branch sales offices are located in
Atlanta, Georgia; Chicago, Illinois; La Palma, California; Norfolk,
Virginia; and Heidelberg, Germany.
ITEM 3. 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.
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 requires the Company to provide,
without charge, certain software licenses to users who register before
February 28, 1997.
At December 31, 1996, the Company recorded a liability of
approximately $3.0 million, which represents management's estimate of the
costs necessary to provide the "upgrades" noted above plus estimated
professional services costs to be paid in 1997 related to the ongoing GSA
audit.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
- 19 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
STOCK DATA. The Company's common stock trades on the Nasdaq National
Market tier of The Nasdaq Stock Market under the symbol "GTSI." As of
December 31, 1996, there were 227 record holders of the Company's common
stock based on information provided by the Company's transfer agent. The
following table sets forth, for the periods indicated, the high and low
closing prices for the Company's common stock.
1996 1995
----------------- -----------------
Quarter High Low High Low
------- ------- ------- ------- -------
First $ 5 1/4 $ 3 1/4 $11 $ 6
Second $ 6 7/8 $ 5 $ 8 1/4 $ 4 3/4
Third $ 6 1/4 $ 5 1/8 $ 7 3/4 $ 5 3/4
Fourth $ 7 3/8 $ 5 3/8 $ 7 $ 3 1/2
The Company has never paid cash dividends. It is the present policy
of the Company to retain earnings to finance the growth and development of
its business, and therefore the Company does not anticipate paying cash
dividends on its common stock in the foreseeable future. Furthermore,
certain financial covenants in the Company's bank credit agreement restrict
the Company's ability to pay cash dividends.
ADDITIONAL INVESTOR RELATIONS INFORMATION. All of the Company's
current required filings with the Securities and Exchange Commission, as
well as press releases and other investor relations information, may be
found at http://www.gtsi.com on the Internet's World Wide Web. For those
without Internet access, such information may be obtained without charge by
request to the company addressed to: Investor Relations, Government
Technology Services, Inc., 4100 Lafayette Center Drive, Chantilly, Virginia
20151-1200.
TRANSFER AGENT. The Company's transfer agent is First Union National
Bank, 230 South Tryon Street, 10th Floor, Charlotte, NC 28288-1154;
telephone 1-800-829-8432.
ANNUAL MEETING. The annual meeting of stockholders will be held at
9:00 a.m. on Tuesday, May 6, 1997, at the Company's new distribution center
at 3900A Stonecroft Boulevard in Chantilly, Virginia.
- 20 -
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data for the three years ended December 31,
1996, 1995 and 1994 are derived from, and are qualified in their entirety
by reference to, the Company's audited Financial Statements and Notes
thereto included elsewhere in this Form 10-K. The December 31, 1996
Financial Statements of the Company have been audited by Arthur Andersen
LLP, as indicated in their report, which is also included elsewhere in this
Form 10-K. The December 31, 1995 and 1994 Financial Statements of the
Company were audited by Coopers & Lybrand L.L.P., independent accountants,
whose reports are also included in this Form 10-K. The selected financial
data for all other periods are derived from audited financial statements of
the Company which are not included in this Form 10-K.
(In thousands, except per share amounts) TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------------------------------------------
1996(1) 1995(2) 1994(3) 1993(4) 1992 1991 1990
INCOME STATEMENT DATA: -------- -------- -------- -------- -------- -------- --------
Sales . . . . . . . . . . . . . . . . . . . . $491,642 $526,962 $617,220 $523,612 $396,555 $359,384 $300,193
Cost of sales . . . . . . . . . . . . . . . . 458,076 488,348 569,827 472,909 350,791 309,692 253,475
-------- -------- -------- -------- -------- -------- --------
Gross margin. . . . . . . . . . . . . . . . . 33,566 38,614 47,393 50,703 45,764 49,692 46,718
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Selling, general and administrative. . . . 36,841 39,645 38,701 33,119 32,080 34,308 34,993
Depreciation and amortization. . . . . . . 13,456 3,090 2,358 1,608 1,622 1,529 1,951
Restructuring charges. . . . . . . . . . . - 2,953 - - - - -
-------- -------- -------- -------- -------- -------- --------
Total operating expenses. . . . . . . . . . . 50,297 45,688 41,059 34,727 33,702 35,837 36,944
-------- -------- -------- -------- -------- -------- --------
(Loss) income from operations . . . . . . . . (16,731) (7,074) 6,334 15,976 12,062 13,855 9,774
Interest expense, net . . . . . . . . . . . . 3,138 4,538 2,172 2,010 2,642 1,560 499
-------- -------- -------- -------- -------- -------- --------
(Loss) income before taxes. . . . . . . . . . (19,869) (11,612) 4,162 13,966 9,420 12,295 9,275
Income tax (benefit) provision. . . . . . . . (2,031) (4,435) 1,576 5,330 3,649 4,715 3,422
-------- -------- -------- -------- -------- -------- --------
Net (loss) income . . . . . . . . . . . . . . $(17,838) $ (7,177) $ 2,586 $ 8,636 $ 5,771 $ 7,580 $ 5,853
======== ======== ======== ======== ======== ======== ========
(Loss) earnings per share . . . . . . . . . . $ (2.67) $ (1.09) $ 0.37 $ 1.30 $ 0.91 $ 1.49 $ 1.30
======== ======== ======== ======== ======== ======== ========
Weighted average number
of common and common
equivalent shares outstanding. . . . . . . 6,690 6,604 6,898 6,654 6,355 5,057 4,521
======== ======== ======== ======== ======== ======== ========
(1) The quarter ended December 31, 1996 includes a pretax charge of $9,100 ($8,200 after tax, or $1.22 per share) related to the
impairment of intangible assets acquired as part of the acquisition of Falcon in 1994.
(2) The quarter ended December 31, 1995 includes a pretax charge of $7,900 ($4,900 after tax, or $0.74 per share) associated with
the valuation of inventory and receivables, software licenses, headcount reductions and the consolidation of certain office
and warehouse facilities.
(3) The quarter ended December 31, 1994 includes a pretax charge of $9,900 ($6,138 after tax, or $0.89 per share) related to
certain contracts and general merchandise inventories.
(4) The quarter ended December 31, 1993 includes a pretax charge of $1,208 ($748 after tax, or $0.11 per share) associated with
the valuation of inventory and receivables.
(In thousands) DECEMBER 31,
1996 1995 1994 1993 1992 1991 1990
BALANCE SHEET DATA: -------- -------- -------- -------- -------- -------- --------
Working capital . . . . . . . . . . . . . . . $ 34,598 $ 45,597 $ 49,355 $ 63,467 $ 54,181 $ 46,321 $ 18,486
Total assets. . . . . . . . . . . . . . . . . 141,001 197,318 209,573 237,342 138,129 127,682 79,238
Notes payable to banks. . . . . . . . . . . . 15,828 56,496 70,120 45,007 50,724 45,111 36,367
Total liabilities . . . . . . . . . . . . . . 96,154 134,841 140,413 169,774 81,862 78,043 57,210
Stockholders' equity. . . . . . . . . . . . . 44,847 62,477 69,160 67,568 56,267 49,639 22,028
- 21 -
ITEM 7. MANAGEMENT'S DISCUSSION AND 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 Financial
Statements and Notes. Historical results and percentage relationships
among any amounts in the 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 75,000 information technology
products from more than 800 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 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 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.
- 22 -
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the
percentages that selected items within the income statement bear to sales
and the annual percentage changes in the dollar amounts of such items.
Percentage Change
Percentage of Sales Years Ended
------------------------------ December 31,
Years Ended December 31, ------------------
------------------------------ 1995 1994
1996(1) 1995(2) 1994(3) to 1996 to 1995
-------- -------- -------- -------- --------
Sales . . . . . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % (6.7)% (14.6)%
Cost of sales . . . . . . . . . . . . . . . . 93.2 92.7 92.3 (6.2) (14.3)
-------- -------- --------
Gross margin. . . . . . . . . . . . . . . . . 6.8 7.3 7.7 (13.1) (18.5)
Operating expenses: ======== ======== ========
Selling, general and administrative. . . . 7.5 7.5 6.3 (7.0) 2.4
Depreciation and amortization. . . . . . . 2.7 0.6 0.4 335.5 31.0
Restructuring charges. . . . . . . . . . . - 0.6 - (100.0) 100.0
-------- -------- --------
Total operating expenses. . . . . . . . . . . 10.2 8.7 6.7 10.1 11.3
-------- -------- --------
(Loss) income from operations . . . . . . . . (3.4) (1.4) 1.0 136.5 (211.7)
Interest expense, net . . . . . . . . . . . . 0.6 0.8 0.3 (30.8) 108.9
-------- -------- --------
(Loss) income before taxes. . . . . . . . . . (4.0) (2.2) 0.7 71.1 (379.0)
Income tax (benefit) provision. . . . . . . . (0.4) (0.8) 0.3 (54.2) (381.4)
-------- -------- --------
Net (loss) income . . . . . . . . . . . . . . (3.6)% (1.4)% 0.4 % 148.5 (377.5)
======== ======== ========
(1) The quarter ended December 31, 1996 includes a pretax charge of $9.1 million ($8.2 million after tax, or $1.22 per share)
related to the impairment of intangible assets acquired as part of the acquisition of Falcon in 1994.
(2) The quarter ended December 31, 1995 includes a pretax charge of $7.9 million ($4.9 million after tax, or $0.74 per share)
associated with the valuation of inventory and receivables, software licenses, headcount reductions and the consolidation of
certain office and warehouse facilities.
(3) The quarter ended December 31, 1994 includes a pretax charge of $9.9 million ($6.1 million after tax, or $0.89 per share)
related to certain contracts and general merchandise inventories.
The following tables set forth, for the periods indicated, the
approximate sales by product, by contract vehicle and by vendor, along with
related percentages of total sales.
PRODUCT CATEGORY
(Dollars in millions) Years Ended December 31,
--------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Hardware. . . . . . . . . . . . . . . . . . . $ 429.7 87.4% $ 456.6 86.6% $ 516.1 83.6%
Software. . . . . . . . . . . . . . . . . . . 50.2 10.2 55.8 10.6 72.8 11.8
Services. . . . . . . . . . . . . . . . . . . 11.7 2.4 14.6 2.8 28.3 4.6
-------- -------- -------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . . $ 491.6 100.0% $ 527.0 100.0% $ 617.2 100.0%
======== ======== ======== ======== ======== ========
CONTRACT VEHICLES
(Dollars in millions) Years Ended December 31,
--------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
IDIQ contracts. . . . . . . . . . . . . . . . $ 117.8 24.0 $ 148.6 28.2% $ 253.6 41.1%
GSA Schedules . . . . . . . . . . . . . . . . 236.6 48.1 234.9 44.6 175.1 28.4
Open Market . . . . . . . . . . . . . . . . . 120.1 24.4 116.0 22.0 161.8 26.2
Other Contracts . . . . . . . . . . . . . . . 17.1 3.5 27.5 5.2 26.7 4.3
-------- -------- -------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . . $ 491.6 100.0% $ 527.0 100.0% $ 617.2 100.0%
======== ======== ======== ======== ======== ========
- 23 -
VENDOR CATEGORY
(Dollars in millions) Years Ended December 31,
--------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
Hewlett-Packard . . . . . . . . . . . . . . . $ 95.6 19.4% $ 99.2 18.8% $ 95.9 15.5%
Compaq. . . . . . . . . . . . . . . . . . . . 50.5 10.3 49.5 9.4 21.7 3.5
Panasonic . . . . . . . . . . . . . . . . . . 31.9 6.5 24.7 4.7 3.7 0.6
Microsoft . . . . . . . . . . . . . . . . . . 31.6 6.4 16.8 3.2 15.2 2.5
Private Label . . . . . . . . . . . . . . . . 0.0 0.0 64.3 12.2 159.1 25.8
Sun . . . . . . . . . . . . . . . . . . . . . 28.4 5.8 32.1 6.1 34.0 5.5
Apple . . . . . . . . . . . . . . . . . . . . 22.7 4.6 43.2 8.2 51.5 8.3
IBM label . . . . . . . . . . . . . . . . . . 43.7 8.9 25.2 4.8 36.9 6.0
Other . . . . . . . . . . . . . . . . . . . . 187.2 38.1 172.0 32.6 199.2 32.3
-------- -------- -------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . . $ 491.6 100.0% $ 527.0 100.0% $ 617.2 100.0%
======== ======== ======== ======== ======== ========
1996 COMPARED WITH 1995
SALES. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. During 1996,
sales decreased $35.3 million or 6.7%. Decreases in sales under IDIQ
contracts and sales from Other Contracts of $30.8 million and $10.4
million, respectively, were partially offset by increased Open Market sales
and sales under GSA schedule contracts. The increase in Open Market sales
primarily resulted from the inclusion of $15.8 million of IBM label product
originally purchased for sale under the Company's Desktop IV Contract which
was commercialized and sold via the open market during the first six months
of 1996. If this product had been sold under the Desktop IV Contract as
originally intended, Open Market sales in 1996 would have declined $5.4
million when compared to the prior year. It is manage ment's belief 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) in a
quicker and easier manner than was the case before such changes. Sales
under IDIQ contracts declined during 1996 primarily as a result of
decreased sales under the Company's Desktop IV Contract and the lack of
sales under the Companion contract (which expired September 30, 1995) of
$63.6 million and $20.9 million, respectively. These decreases were
partially offset by increases in sales under the Company's NIH contract of
$33.6 million and its SEWP contract of $14.9 million. Other new contracts
procured by the Company during 1996 took longer than expected to be awarded
- 24 -
and, upon award to the Company, did not generate sufficient revenue to
offset the declining sales under contracts which had ended or were near
completion. The slight increase in sales under the Company's GSA Schedule
contracts was primarily comprised of $24.3 million of increased GSA
Schedule B/C sales offset by a decline in sales under GSA schedule A of
$23.3. million.
During 1996, there were no sales of the Company's private label
hardware, which was introduced in 1993 under the Desktop IV Contract (a
decrease of 100.0%). Additionally, sales of Apple products decreased
approximately $20.5 million (47.5%). These decreases were partially offset
by sales of Microsoft and Panasonic products which increased approximately
88.1% and 29.1%, respectively, from $16.8 million to $31.6 million and from
$24.7 million to $31.9 million, respectively. Sales of IBM label products
also increased during 1996 from $25.2 million to $43.7 million (73.5%)
primarily as a result of the company's inclusion of this product on its
Desktop IV Contract. As noted above, $15.8 million of this product was
ultimately sold via the Open Market during the first six months of 1996.
During the period from August 16, 1994 (date of the Falcon
acquisition) to September 1, 1995, the number of employees exceeded
applicable size standards necessary to qualify the Company as a "small
business." Although the Company cannot precisely quantify the specific
effect of this change on its operations, it is believed that sales were
negatively impacted during the period in which the Company was not a
qualified "small business." Beginning September 1, 1995, the Company once
again began to compete for opportunities exclusively reserved for small
business non-manufacturers.
During the fourth quarter of 1995 and the first quarter of 1996, the
executive and legislative branches of the Government could not agree on a
budget for fiscal year 1996. Although the Company cannot precisely
quantify the specific effect of the Government's work stoppage on the
Company's operations, it is believed that sales were negatively impacted
during these periods.
Backlog at December 31, 1996, was approximately $19.8 million, up 4.2%
from approximately $19.0 million at December 31, 1995. Backlog was $12.7
million at February 28, 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). Over the last seven years,
GTSI has experienced lower gross margin percentages because of pressure on
end-user prices caused by: (1) the leverage of government agencies and
other customers in negotiating low prices; (2) the increasing maturation
and shorter life cycles of leading microcomputer hardware and software
products which causes customers to focus on price as the primary
distinguishing factor among sellers of such products; and (3) the use of
low prices by competitors as the primary means to obtain government market
share. In addition, IDIQ contracts are complex and require service
- 25 -
procured by the Company during 1996 took longer than expected to be awarded
expenses, including warranty support and software upgrades. 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.
Gross margin decreased in 1996 by approximately $5.0 million or 13.1%,
and decreased as a percentage of sales from 7.3% to 6.8%. The decrease in
absolute dollars is primarily attributable to lower sales volume and
adjustments of approximately $2.2 million recorded by the Company in the
fourth quarter of 1996. Such adjustments were deemed necessary to provide
for contractual obligations, and to reduce certain trade credits to the
amounts ultimately expected to be realized. These adjustments were also
the primary reason for the decline in gross margin percentage. Other
factors that contributed to the decline in gross margin percentage during
1996 include the open market sale of near-obsolete inventory noted above
(which earned little or no gross margin), a large drop shipment of product
from one of the Company's vendors directly to the customer at a lower than
normal margin, several large software orders and the increased
concentration of sales under the GSA Schedule B/C. GSA Schedule B/C sales
accounted for 48.1% of 1996 sales (as compared with 44.6% of 1995 sales).
In 1996, these sales earned margins lower than other Company sales.
OPERATING EXPENSES. Operating expenses in 1996 increased
approximately $7.6 million, or 17.7%, and increased as a percentage of
sales from 8.1% to 10.2%. This increase is primarily attributable to a
$9.1 million increase in amortization expense associated with the
accelerated write-down of intangible assets which was recognized during the
fourth quarter of 1996. This change was offset by decreases in the
provision for doubtful accounts receivable, personnel expenses and expenses
for contracted services.
RESTRUCTURING CHARGE. For the year ended December 31, 1995, the
Company recorded a $3.0 million restructuring charge ($1.8 million after
tax, or $0.28 per share). No such charge was recorded for the year ended
December 31, 1996.
INTEREST EXPENSE. The approximate $1.4 million or 30.8% decrease in
net interest expense in 1996 was due to a combination of lower average
borrowings, lower interest rates and decreased bank fees throughout 1996.
INCOME TAXES. A tax benefit of $2.0 million was recorded in 1996 as a
result of the Company's current year net operating loss. This benefit will
be realized by carrying back the loss to prior years in which the Company
recognized taxable income. In 1996, the Company determined that $5.1
million of 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"). Accordingly, a valuation
allowance was recorded against the applicable net deferred tax assets. In
1995, the Company recorded a tax benefit of $4.4 million.
- 26 -
1995 COMPARED WITH 1994
SALES. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. In 1995,
sales decreased by $90.2 million, or 14.6%. With respect to customers,
Federal Government sales decreased $98.5 million, or 18.0%, which was
offset by increases in shipments to prime contractors and state and local
governments of $4.1 million and $4.2 million, respectively. The decline in
Federal Government sales was primarily attributable to a decrease in sales
under the Desktop IV Contract, which accounted for $93.4 million, or 17.7%,
of 1995 sales, a decrease of $102.6 million (or 52.3%) from 1994. In April
1995, the Air Force reached its ordering limit for the purchase of central
processing units ("CPUs"), although shipments continued under the contract
for non-CPUs and CPU shipments to civilian agencies. On August 8, 1995, a
CPU extension for 100,000 units re-opened this contract for ordering by the
Air Force until its completion on February 1, 1996. Sales under the
Companion contract decreased $29.4 million, or 58.2%, from 1994, primarily
due to its expiration on September 30, 1995. These decreases were
partially offset by increased sales on the Portable-1 and SEWP contracts
which were up $25.2 million and $1.8 million, respectively. Sales under
the Company's GSA Schedule B/C represented $191.1 million, or 36.3%, of
1995 sales, up $48.8 million, or 34.2%, from 1994. Sales under the
Company's GSA Schedule A accounted for $41.8 million of 1995 sales, up
$10.0 million, or 31.4%, from 1994. Sales in 1994 include contributions
from Falcon from its date of acquisition on August 16, 1994.
Sales of the Company's private label hardware, which was introduced in
1993 under the Desktop IV Contract, decreased 59.6% to $64.3 million.
Additionally, sales of IBM label and Apple products decreased approximately
$11.7 million (31.7%) and $8.4 million (16.3%), respectively. These
decreases were offset by sales of Compaq and Panasonic products which
increased approximately 128.4% and 567.1%, respectively, from $21.7 million
to $49.5 million and from $3.7 million to $24.7 million, respectively.
During the period from August 16, 1994 (date of the Falcon
acquisition) to September 1, 1995, the number of employees exceeded
applicable size standards necessary to qualify the Company as a "small
business." Although the Company cannot precisely quantify the specific
effect of this change on its operations, it is believed that sales were
negatively impacted during the period in which the Company was not a
qualified "small business." Beginning September 1, 1995, the Company has
once again begun to compete for opportunities exclusively reserved for
small business non-manufacturers.
During the fourth quarter of 1995, the executive and legislative
branches of the Government could not agree on a budget for fiscal year
1996. As a result, during November and December 1995, a substantial
portion of the Government was not operating or was operating at less than
full capacity. Although the Company cannot precisely quantify the specific
effect of the Government's work stoppage on the Company's operations, it is
believed that sales were negatively impacted during this period.
- 27 -
Backlog at December 31, 1995, was approximately $19.0 million ($6.8
million of which was related to Desktop IV Contract orders), up 32.9% from
approximately $14.3 million at December 31, 1994. Backlog was $26.1
million at March 20, 1996.
GROSS MARGIN. Gross margin decreased in 1995 by approximately $8.8
million or 18.5%, and decreased as a percentage of sales from 7.7% to 7.3%.
The decrease in absolute dollars is primarily attributable to lower sales
volume and adjustments of approximately $3.1 million recorded by the
Company in the fourth quarter of 1995. Such adjustments were deemed
necessary to provide for contractual obligations, and to reduce selected
inventory products to the lower of cost or market values. These
adjustments were also the primary reason for the decline in gross margin
percentage. Gross margin percentage also declined due to the increased
concentration of sales under the GSA Schedule B/C, which accounted for
44.6% of 1995 sales (as compared with 28.4% of 1994 sales). In 1995, these
sales earned margins lower than other Company sales.
OPERATING EXPENSES. Operating expenses in 1995 increased
approximately $1.7 million, or 4.1%, and increased as a percentage of sales
from 6.7% to 8.1%. This increase is primarily attributable to increases in
the allowance for uncollectible accounts receivable, depreciation,
amortization and personnel costs (primarily related to the Falcon
acquisition) and consultants (in connection with enhanced contract bidding
activities).
RESTRUCTURING CHARGE. For the year ended December 31, 1995, the
Company recorded a $3.0 million restructuring charge ($1.8 million after
tax, or $0.28 per share). This amount includes $1.6 million for headcount
reductions and $1.4 million for the consolidation of certain office and
warehouse facilities.
INTEREST EXPENSE. The approximate $2.4 million or 108.9% increase in
net interest expense in 1995 was due to a combination of higher average
borrowings (including funds required to purchase Falcon), higher interest
rates and increased bank fees related to the credit agreement amendments
executed throughout 1995.
INCOME TAXES. A tax benefit of $4.4 million was recorded in 1995 as a
result of the Company's current year net operating loss. This benefit will
be realized by carrying back the loss to prior years in which the Company
recorded net income. GTSI's effective tax rate was 37.9% in 1994.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" ("FAS 121"), which is effective for fiscal years beginning
after December 15, 1995. This statement requires that long-lived assets
and certain identifiable intangibles to be held and used by the Company be
- 28 -
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123").
This statement requires that companies determine the fair value for all
stock-based compensation using one of several option-pricing models and is
effective for fiscal years beginning after December 15, 1995.
EFFECT OF INFLATION
The Company believes that inflation has not had a material effect on
its operations. However, in the event inflation increases in the future it
could at least temporarily adversely affect the profitability of GTSI's
sales under its Government fixed-price contracts, which generally preclude
the Company from passing on inflation-related or other increases in product
costs to Government customers during the term of a pre-existing contract.
The Company mitigates this risk in part by often obtaining agreements from
certain of its suppliers prohibiting them from increasing their prices to
GTSI during fixed-price, term contracts.
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.
- 29 -
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 1996, the Company generated $45.2 million of cash flow from
operations, as compared to $16.1 million for the year ended December 31,
1995. Most of the increase from year to year relates to a significant
reduction in net operating assets (accounts receivable plus merchandise
inventories less accounts payable). After reduction of approximately $4.8
million of capital expenditures, (approximately $1.2 million for equipment
and leasehold improvements related to the Company's new distribution center
and approximately $1.1 million related to the Company's new financial
information system, the operation of which began on January 1, 1997) from
the net cash provided by operating activities, overall short-term notes
payable to banks decreased $40.7 million.
During the fourth quarter of 1995, the Company began negotiations with
a bank ("Principal Lender") and other lenders ("Other Lenders")
(collectively, "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 March 26, 1996, the Company and its Principal Lender
executed Amendment No. 1 to the Interim Agreement which modified certain
financial covenants.
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 facility with the
Principal Lender for inventory financing of vendor products. Interest
under the inventory financing facility is accrued at a rate equal to prime
plus 3.00% (11.25% at December 31, 1996). At June 30, 1996, the Company
was not in compliance with two covenants contained in the Credit Facility.
On August 12, 1996, the Company's Lenders agreed to waive compliance with
the June 30, 1996 application of these covenants. On August 23, 1996, the
Company and its Lenders executed Amendment No. 1 to the Credit Facility,
which modified certain financial covenants. At December 31, 1996, the
unused portion of the Credit Facility was $34.8 million.
- 30 -
Interest under the Credit Facility is payable quarterly and is accrued
at a rate equal to the London Interbank Offered Rate ("LIBOR") plus 2.24%
(7.48% at December 31, 1996). Borrowing is limited to 85% 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. 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. Although the Principal Lender
has the right to discontinue making any new loans and to call the
outstanding loan, such Principal Lender has continued to provide financing
to the Company under the existing Credit Facility. All amounts due to the
Lenders as of December 31, 196 are classified as current liabilities.
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
requirements. The Company currently has no reason to believe that such
capital sources will not be available to it on acceptable terms, if needed.
The weighted average number of common and common equivalent shares
outstanding reflects the issuance of 1,815,000 shares of common stock sold
by the Company in its 1991 initial public offering, and the effect of
outstanding option and warrant transactions to date. In 1994, the Board of
Directors authorized a stock repurchase program of the Company. To date,
194,800 shares have been acquired as Treasury Stock. See Note 7 to
Financial Statements.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The renegotiation of the financial covenants contained in the Credit
Facility, and the statements which are not historical facts contained in
this 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 Annual Report on Form 10-K and in the Company's other
Securities and Exchange Commission filings.
- 31 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements and Schedule of Government
Technology Services, Inc. and Subsidiary are filed as part of this Form
10-K. Supplemental quarterly financial information is included in Note 13
of Notes to Consolidated Financial Statements.
Index to Financial Statements and Schedule Page
FINANCIAL STATEMENTS:
Reports of Independent Public Accountants. . . . . . . . . . . . . .33
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . .35
Consolidated Balance Sheets as of December 31, 1996 and
1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . .37
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994. . . . . .38
Notes to Consolidated Financial Statements . . . . . . . . . . . . .39
SCHEDULE:
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . .57
Schedules not listed above have been omitted because they are not
applicable or the information required to be set forth therein is included
in the financial statements or notes thereto.
- 32 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Government Technology Services, Inc.
We have audited the accompanying consolidated balance sheet of
Government Technology Services, Inc. and subsidiary as of December 31,
1996, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows, and financial statement schedule, for
the year then ended. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsi
bility is to express an opinion on these financial statements and financial
statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Government
Technology Services, Inc. and subsidiary as of December 31, 1996, and the
results of their operations and their cash flows for the year then ended,
in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 17, 1997
- 33 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Government Technology Services, Inc.
We have audited the consolidated financial statements and financial
statement schedule of Government Technology Services, Inc. and Subsidiary
listed in Item 14(a) of this Form 10-K as of December 31, 1995 and for each
of the two years in the period ended December 31, 1995. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Government Technology Services, Inc. and Subsidiary as of December 31,
1995, and the consolidated results of their operations and their cash flows
for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. In addition, in
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND, L.L.P.
Washington, D.C.
March 1, 1996,
except as to Note 5,
as to which the date was March 26, 1996
- 34 -
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended
December 31,
------------------------------
(In thousands, except per share amounts) 1996 1995 1994
-------- -------- --------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $491,642 $526,962 $617,220
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 458,076 488,348 569,827
-------- -------- --------
Gross margin. . . . . . . . . . . . . . . . . . . . . . . 33,566 38,614 47,393
Operating expenses. . . . . . . . . . . . . . . . . . . . 50,297 42,735 41,059
Restructuring charges . . . . . . . . . . . . . . . . . . - 2,953 -
-------- -------- --------
(Loss) income from operations . . . . . . . . . . . . . . (16,731) (7,074) 6,334
Interest expense, net of interest income of $265,
$243 and $225, respectively . . . . . . . . . . . . . . 3,138 4,538 2,172
-------- -------- --------
(Loss) income before taxes. . . . . . . . . . . . . . . . (19,869) (11,612) 4,162
Income tax (benefit) provision. . . . . . . . . . . . . . (2,031) (4,435) 1,576
-------- -------- --------
Net (loss) income . . . . . . . . . . . . . . . . . . . . $(17,838) $ (7,177) $ 2,586
======== ======== ========
Net (loss) income per share . . . . . . . . . . . . . . . $ (2.67) $ (1.09) $ 0.37
======== ======== ========
Weighted average number of shares outstanding . . . . . . 6,690 6,604 6,898
======== ======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
- 35 -
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------
(In thousands, except share data) 1996 1995
-------- --------
ASSETS
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 48 $ 18
Accounts receivable, net. . . . . . . . . . . . . . . . 90,116 103,165
Merchandise inventories . . . . . . . . . . . . . . . . 31,844 64,515
Net deferred taxes and other. . . . . . . . . . . . . . 7,367 10,381
Total current assets . . . . . . . . . . . . . . . . 129,375 178,079
Property and equipment, net . . . . . . . . . . . . . . . 9,146 8,065
Intangible assets, net. . . . . . . . . . . . . . . . . . 788 10,609
Net deferred taxes and other. . . . . . . . . . . . . . . 1,692 565
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . $141,001 $197,318
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks. . . . . . . . . . . . . . . . . 15,828 $ 56,496
Accounts payable. . . . . . . . . . . . . . . . . . . . 68,707 64,060
Accrued liabilities . . . . . . . . . . . . . . . . . . 10,241 11,926
-------- --------
Total current liabilities. . . . . . . . . . . . . . 94,776 132,482
Other liabilities . . . . . . . . . . . . . . . . . . . . 1,377 2,359
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . . 96,153 134,841
-------- --------
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 6,724,919
outstanding at December 31, 1996 and 6,806,084
shares issued and 6,676,461 outstanding at
December 31, 1995. . . . . . . . . . . . . . . . . . 34 34
Capital in excess of par value. . . . . . . . . . . . . 33,295 33,611
Retained earnings . . . . . . . . . . . . . . . . . . . 12,399 30,237
Treasury stock, 81,165 shares at December 31, 1996
and 129,623 shares at December 31, 1995, at cost . . (880) (1,405)
-------- --------
Total stockholders' equity . . . . . . . . . . . . . 44,848 62,477
-------- --------
Total liabilities and stockholders' equity . . . . . $141,001 $197,318
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
- 36 -
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
December 31,
------------------------------
(In thousands) 1996 1995 1994
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income . . . . . . . . . . . . . . . . . . . . $(17,838) $ (7,177) $ 2,586
-------- -------- --------
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 12,618 3,090 2,358
Loss on disposal of property and equipment. . . . . . . 839 - -
Stock compensation expense. . . . . . . . . . . . . . . (13) 47 180
Restructuring charges . . . . . . . . . . . . . . . . . - 2,953 -
(Decrease) increase in cash due to changes in
assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . 13,049 (178) 72,798
Merchandise inventories. . . . . . . . . . . . . . 32,671 14,261 9,236
Deferred income taxes. . . . . . . . . . . . . . . 3,158 (3,211) (1,466)
Accounts payable . . . . . . . . . . . . . . . . . 4,647 7,651 (80,511)
Accrued liabilities. . . . . . . . . . . . . . . . (1,685) (687) 3,658
Income taxes . . . . . . . . . . . . . . . . . . . - - (931)
Other liabilities. . . . . . . . . . . . . . . . . (465) (559) (598)
Other. . . . . . . . . . . . . . . . . . . . . . . (1,788) (52) (418)
-------- -------- --------
Net cash provided by operating activities. . . . . 45,193 16,138 6,892
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Falcon Microsystems, Inc.
(net of cash acquired of $1,045) . . . . . . . . . . - - (16,155)
Cost of property and equipment. . . . . . . . . . . . . (4,770) (2,674) (2,539)
Proceeds from sales of property and equipment. . . . . 53 - -
-------- -------- --------
Net cash used in investing activities. . . . . . . (4,717) (2,674) (18,694)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments of) proceeds from bank notes, net . . . . . . (40,668) (13,624) 13,313
Proceeds from exercises of stock options and
warrants . . . . . . . . . . . . . . . . . . . . . . 222 447 933
Purchase of treasury stock. . . . . . . . . . . . . . . - - (2,107)
Payments under capital lease obligations and other. . . - (299) (379)
-------- -------- --------
Net cash (used in) provided by financing
activities . . . . . . . . . . . . . . . . . . (40,446) (13,476) 11,760
-------- -------- --------
Net increase (decrease) in cash . . . . . . . . . . . . . 30 (12) (42)
Cash at beginning of year . . . . . . . . . . . . . . . . 18 30 72
-------- -------- --------
Cash at end of year . . . . . . . . . . . . . . . . . . . $ 48 $ 18 $ 30
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . $ 4,756 $ 3,276 $ 2,494
Income taxes . . . . . . . . . . . . . . . . . . . . $ 20 $ 5 $ 5,074
The accompanying notes are an integral part
of these consolidated financial statements.
- 37 -
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
--------------------------------------------------------------
Common Stock Capital Total
------------------- in Stock-
Shares Excess Retained Treasury holders'
(In thousands) Issued Amount of Par Earnings Stock Equity
-------- -------- -------- -------- -------- --------
Balance, December 31, 1993. . . . . . . . . . . . . . . . 6,669 $ 33 $ 32,707 $ 34,828 $ - $ 67,568
Stock awards and options exercised. . . . . . . . . . . . 120 1 1,112 - - 1,113
Treasury stock purchases. . . . . . . . . . . . . . . . . - - - - (2,107) (2,107)
Net income. . . . . . . . . . . . . . . . . . . . . . . . - - - 2,586 - 2,586
-------- -------- -------- -------- -------- --------
Balance, December 31, 1994. . . . . . . . . . . . . . . . 6,789 34 33,819 37,414 (2,107) 69,160
Stock awards and options exercised. . . . . . . . . . . . 17 - (208) - 702 494
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . - - - (7,177) - (7,177)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1995. . . . . . . . . . . . . . . . 6,806 34 33,611 30,237 (1,405) 62,477
Stock awards and options exercised. . . . . . . . . . . . - - (316) - 525 209
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . - - - (17,838) - (17,838)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996. . . . . . . . . . . . . . . . 6,806 $ 34 $ 33,295 $ 12,399 $ (880) $ 44,848
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
- 38 -
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Government Technology Services, Inc. ("GTSI") operates in a single
business segment and resells microcomputer and workstation hardware,
software and peripherals to agencies of federal, state and local
governments as well as systems integrators, prime contractors and other
companies reselling to government agencies. Aggregate sales to the Federal
Government were approximately $446.8 million, $513.0 million and $607.0
million for the years ended December 31, 1996, 1995 and 1994, respectively.
In August 1994, GTSI acquired all of the outstanding shares of common stock
of Falcon Microsystems, Inc. ("Falcon"). See Note 2. GTSI and Falcon are
hereinafter referred to as the "Company."
As of March 17, 1997, the Company was engaged in discussions with its
Principal Lender regarding obtaining a waiver for a fourth quarter covenant
violation. The Company believes that this waiver will be obtained on or
about May 1, 1997. The Company is currently holding discussions with its
Principal Lender to structure a new credit agreement that reflects market
pricing common to credit agreements with companies of similar size,
complexity and risk as the Company. The Company anticipates that these
discussions will be finalized on or about May 1, 1997, and management
presently estimates that the final terms of the new credit facility will
neither adversely impact nor materially benefit the Company's total
borrowing costs in 1997. See Note 5.
1. ACCOUNTING POLICIES
Significant accounting policies of the Company are summarized below:
BASIS OF CONSOLIDATION. The consolidated financial statements include
the accounts of GTSI and its wholly-owned subsidiary, Falcon. All
significant inter-company accounts and transactions are eliminated in
consolidation.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements, and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates and the Company periodically re-
evaluates the recorded values of all assets and liabilities.
REVENUE RECOGNITION. The Company recognizes revenue upon shipment of
products and acceptance of services rendered.
FINANCIAL INSTRUMENTS. In accordance with Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," the Company is required to disclose the fair value of
- 39 -
financial instruments, both assets and liabilities recognized and not
recognized in the statement of financial position, for which it is
practicable to estimate fair value. At December 31, 1996 and 1995, the
recorded values of financial instruments such as accounts receivable and
payable and notes payable to banks approximated their fair values, based on
the short-term maturities of these instruments.
ACCOUNTS RECEIVABLE. Accounts receivable principally represents
amounts collectible from the Federal Government. Other accounts receivable
result from items billed to prime contractors to the Federal Government or
suppliers under incentive agreements involving the sale of their products.
The Company performs ongoing credit evaluations of its non-governmental
customers but generally does not require collateral. Allowances for
potential uncollectible amounts are estimated and deducted from total
accounts receivable.
INVENTORIES. Inventories are valued at the lower of cost or market.
Cost is determined through a weighted average method, which approximates
the first-in, first-out (FIFO) method. Certain buying and occupancy costs
amounting to approximately $3.6 million, $3.7 million and $4.3 million
relating to the purchase of inventoriable products were included in
operating expenses for the years ended December 31, 1996, 1995 and 1994,
respectively.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost
less accumulated depreciation. Property and equipment under capital leases
are recorded at the lower of the present value of minimum lease payments or
their fair value at the inception of the lease, less accumulated
amortization.
Depreciation and amortization are calculated using the straight-line
method over estimated useful lives ranging from three to ten years.
Property and equipment held under capital leases are amortized using
straight-line methods over the terms of the leases or their estimated
useful lives, whichever is shorter.
INTANGIBLE ASSETS. Intangible assets are recorded at cost and
amortized using the straight-line method over the following estimated
useful lives:
Covenants not-to-compete . . . . 5 years
Customer lists . . . . . . . . .25 years
Goodwill . . . . . . . . . . . .25 years
IMPAIRMENT OF LONG-LIVED ASSETS. Effective January 1, 1996, the
Company adopted FAS 121. The effect of adopting FAS 121 was immaterial to
the Company. The Company reviews its long-lived assets (including
property, plant and equipment; identifiable intangibles; and goodwill) for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, the Company evaluates the
- 40 -
probability that future undiscounted net cash flows, without interest
charges, will be less than the carrying amount of the assets. It is
reasonably possible that future undiscounted net cash flows, without
interest charges, will be less than the carrying amount of the assets.
Impairment is measured at fair value.
INCOME TAXES. Effective January 1, 1993, the Company adopted FAS 109.
The cumulative effect of adopting FAS 109 was immaterial to the Company.
The adoption of FAS 109 changed the Company's method of accounting for
income taxes from the deferred method under Accounting Principles Board
Opinion No. 11 to an asset and liability approach. Under the new method,
deferred income taxes are recognized based on the estimated future tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes. Valuation allowances are established when necessary
to reduce deferred tax assets to amounts expected to be realized. Income
tax expense represents the current tax provision for the period and the
change during the period in deferred tax assets and liabilities.
EARNINGS PER SHARE. Earnings per share is based on the weighted
average number of shares of common stock and common equivalent shares
outstanding during each period. Common stock equivalents include dilutive
stock options and warrants using the treasury stock method. Stock rights,
associated with the Company's Rights Agreement (see Note 7), which may have
a potentially dilutive effect have been excluded from the weighted average
shares calculation as preconditions to the exercisability of such rights
were not satisfied. Fully diluted earnings per share have not been
presented as part of the consolidated statements of income because the
effects are anti-dilutive or insignificant.
MARKETING DEVELOPMENT AND COOPERATIVE ADVERTISING FUNDS. In general,
vendors provide the Company with various sales incentive programs.
Generally, the funds received under these programs are determined based on
the Company's purchases and/or sales of the vendor's product. The funds
are earned upon performance of specific promotional programs or upon
completion of predetermined objectives dictated by the vendor. Once
earned, the funds reduce operating expenses. The Company expenses
advertising costs as incurred.
BOOK OVERDRAFTS. Included in accounts payable at December 31, 1996
and 1995, are approximately $20.6 million and $1.1 million, respectively,
which represent book overdrafts.
RECLASSIFICATIONS. Certain amounts from prior years have been
reclassified to conform to the current year financial statement
presentation.
NEW ACCOUNTING PRONOUNCEMENTS. Effective January 1, 1996, the Company
adopted FAS 121. This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by the Company be
reviewed for impairment whenever events or changes in circumstances
- 41 -
indicate that the carrying amount of an asset may not be fully recoverable.
During the fourth quarter of 1996, the Company recorded a charge of
approximately $9.1 million related to the impairment of intangible assets
acquired as part of the acquisition of Falcon in 1994.
In October 1995, the FASB issued FAS 123. This statement requires
that companies determine the fair value for all stock-based compensation
using one of several option-pricing models and is effective for fiscal
years beginning after December 15, 1995. The Company adopted the
disclosure requirements of FAS 123 effective for the Company's December 31,
1996 financial statements. The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its plans, as
allowed under FAS 123.
2. ACQUISITION
On August 16, 1994, GTSI acquired all of the outstanding shares of
common stock of Falcon from its sole stockholder for approximately $19.2
million, including fees and expenses. The purchase price included
approximately $17.2 million in cash, an option to purchase 100,000 shares
of GTSI common stock (valued at approximately $400,000), plus approximately
$1.7 million related to covenants not-to-compete. Options to purchase
20,000 shares vested on August 16, 1995 and 1996, respectively, while
options to purchase the remaining 60,000 shares shall vest in annual
installments of 20,000 shares on August 16, 1997, 1998 and 1999,
respectively. The financial statements include the results of operations
of Falcon since the date of acquisition.
The acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets and liabilities acquired at
their estimated fair value as of the date of acquisition. Of the purchase
price, $7.6 million was allocated to Falcon's net assets, and the remainder
was allocated to intangible assets, as follows (in thousands):
Covenants not-to-compete . . . $ 1,683
Customer lists . . . . . . . . 9,820
Goodwill . . . . . . . . . . . 158
--------
$ 11,661
========
During the fourth quarter of 1996, management determined the
intangible assets acquired in the Falcon acquisition had been impaired and
recorded a charge of approximately $9.1 million to write these intangibles
down to their current fair market value. The impairment was the result of
decreased cash flows due to a significant decline in the sales and
projected sales of vendor products that comprised the majority of Falcon's
pre-acquisition sales, in conjunction with increased competition from non-
traditional sources. As of December 31, 1996, intangible assets consisted
of a covenant not-to-compete of $787,500. Accumulated amortization is
approximately $10.9 million and $1.1 million at December 31, 1996 and 1995,
respectively.
- 42 -
The Company's unaudited pro forma consolidated condensed statement of
income for 1994, assuming the acquisition of Falcon was effected at the
beginning of the year, is summarized as follows (in thousands, except net
income per share amounts):
1994
--------
Total revenues . . . . . . . . . . . . . . . . . $711,694
Income before taxes. . . . . . . . . . . . . . . 1,664
Net income . . . . . . . . . . . . . . . . . . . 716
Net income per share . . . . . . . . . . . . . . $ 0.10
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.
3. ACCOUNTS RECEIVABLE
The composition of accounts receivable as of December 31, 1996 and
1995 is as follows (in thousands):
1996 1995
-------- --------
Trade accounts receivable. . . . . . . . . . . . $ 80,795 $ 97,686
Vendor and other receivables . . . . . . . . . . 13,856 9,747
-------- --------
94,651 107,433
Less allowance for uncollectible accounts. . . (4,535) (4,268)
-------- --------
Accounts receivable, net . . . . . . . . . . . . $ 90,116 $103,165
======== ========
- 43 -
4. PROPERTY AND EQUIPMENT
The composition of property and equipment as of December 31, 1996 and
1995 is as follows (in thousands):
1996 1995
-------- --------
Owned assets:
Office furniture and equipment . . . . . . . . $ 13,964 $ 14,941
Computer software. . . . . . . . . . . . . . . 1,825 1,565
Other. . . . . . . . . . . . . . . . . . . . . 976 1,026
-------- --------
16,765 17,532
Less accumulated depreciation and amortization . (7,853) (9,766)
-------- --------
8,912 7,766
-------- --------
Assets under capital leases:
Office furniture and equipment . . . . . . . . 2,334 2,334
Computer software. . . . . . . . . . . . . . . 199 199
-------- --------
2,533 2,533
Less accumulated amortization. . . . . . . . . . (2,299) (2,234)
-------- --------
234 299
-------- --------
Property and equipment, net. . . . . . . . . . . $ 9,146 $ 8,065
======== ========
5. NOTES PAYABLE TO BANKS
During the fourth quarter of 1995, the Company began negotiations with
a bank ("Principal Lender") and other lenders ("Other Lenders")
(collectively, "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 March 26, 1996, the Company and the Principal Lender
executed Amendment No. 1 to the Interim Agreement which modified certain
financial covenants.
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 facility with the
Principal Lender for inventory financing of vendor products. Interest
- 44 -
under the inventory financing facility is accrued at a rate equal to prime
plus 3.00% (11.25% at December 31, 1996). At June 30, 1996, the Company
was not in compliance with two covenants contained in the Credit Facility.
On August 12, 1996, the Company's Lenders agreed to waive compliance with
the June 30, 1996 application of these covenants. 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
unused portion of the Credit Facility was $34.8 million.
Interest under the Credit Facility is payable quarterly and is accrued
at a rate equal to the London Interbank Offered Rate ("LIBOR") plus 2.24%
(7.48% at December 31, 1996). Borrowing is limited to 85% 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. 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. Although the Principal Lender
has the right to discontinue making any new loans and to call the
outstanding loan, such Principal Lender has continued to provide financing
to the Company under the existing Credit Facility. All amounts due to the
Lenders as of December 31, 1996 are classified as current liabilities.
As of March 17, 1997, the Company was engaged in discussions with its
Principal Lender regarding obtaining a waiver for a fourth quarter covenant
violation. The Company believes that this waiver will be obtained on or
about May 1, 1997. The Company is currently holding discussions with its
Principal Lender to structure a new credit agreement that reflects market
pricing common to credit agreements with companies of similar size,
complexity and risk as the Company. The Company anticipates that these
discussions will be finalized on or about May 1, 1997, and management
presently estimates that the final terms of the new credit facility will
neither adversely impact nor materially benefit the Company's total
borrowing costs in 1997.
Prior to the execution of the Credit Facility on December 29, 1995,
the Company had similar credit agreements with different banks. Maximum
lending limits during 1995 were $110.0 million through November 15, $80.0
million from November 16 to December 15, and $72.0 million from December 16
to December 28. Interest from January 1, 1995 through December 28, 1995
was payable quarterly at rates ranging from the respective bank's base rate
to the respective bank's base rate plus 2.0%. During 1995, the Company was
not in compliance with certain financial covenants on a quarterly basis at
March 31, June 30 and September 30. The Company's prior lenders issued
amendments to its credit agreement in order to bring the Company into
compliance at the respective dates. Maximum lending limits during 1994
were $75.0 million through January 31, $45 million from February 1 through
April 29, $50 million between April 30 and August 31, $100 million from
- 45 -
September 1 to November 16, and $110 million from November 17 to December
31. Under the prior agreements, borrowings were limited to 85-90% of
eligible accounts receivable plus, in some cases, a specified percentage of
eligible inventory, as defined. Interest under the previous agreements was
payable quarterly and accrued at LIBOR plus 1.25% for the period from
January 1, 1994 to April 29, 1994; at the lessor of LIBOR plus 0.75% or a
money-market rate from April 30 to November 17, 1994; and at a blended rate
ranging from 6.3% to 8.9% thereafter until December 31, 1994.
The following information pertains to the notes payable for the years
ended December 31 (dollars in thousands):
1996 1995 1994
-------- -------- --------
Weighted average interest rate . . . . 7.6% 8.8% 5.9%
Weighted average borrowings. . . . . . $ 29,625 $ 43,626 $ 35,181
6. INCOME TAXES
The components of the (benefit) provision for income taxes for the
years ended December 31, 1996, 1995 and 1994 are as follows (in thousands):
1996 1995 1994
-------- -------- --------
Current taxes:
Federal. . . . . . . . . . . . . . . $ (4,579) $ (1,059) $ 2,619
State. . . . . . . . . . . . . . . . (610) (165) 423
-------- -------- --------
(5,189) (1,224) 3,042
-------- -------- --------
Deferred taxes:
Federal. . . . . . . . . . . . . . . 2,848 (2,883) (1,277)
State. . . . . . . . . . . . . . . . 310 (328) (189)
-------- -------- --------
3,158 (3,211) (1,466)
-------- -------- --------
Total (benefit) provision for
income taxes . . . . . . . . . . . . (2,031) (4,435) 1,576
======== ======== ========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
In 1996, the Company determined that $5.1 million of net deferred tax
assets did not satisfy the recognition criteria set forth in FAS 109.
Accordingly, a valuation allowance was recorded against the applicable net
deferred tax assets.
- 46 -
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1995 were as follows (in
thousands):
Dec. 31, Dec. 31,
1996 1995
-------- --------
Deferred tax assets:
Accounts receivable and inventory
allowances . . . . . . . . . . . . . . . . . $ 2,507 $ 4,838
Intangible assets. . . . . . . . . . . . . . . 2,484 -
Accrued warranty and other contract costs. . . 1,554 135
Restructuring accrual. . . . . . . . . . . . . 553 549
Bid and proposal costs . . . . . . . . . . . . 300 607
Vacation accrual . . . . . . . . . . . . . . . 172 134
Deferred compensation. . . . . . . . . . . . . 131 820
Rent abatement . . . . . . . . . . . . . . . . 81 -
Other. . . . . . . . . . . . . . . . . . . . . 9 15
-------- --------
Total deferred tax assets. . . . . . . . . . 7,791 7,098
-------- --------
Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . 157 142
Rent abatement . . . . . . . . . . . . . . . . 21 302
Intangible assets. . . . . . . . . . . . . . . - 981
Other. . . . . . . . . . . . . . . . . . . . . - 49
-------- --------
Total deferred tax liabilities . . . . . . . 178 1,474
-------- --------
Net deferred tax assets. . . . . . . . . . . . . 7,613 5,624
Valuation allowance. . . . . . . . . . . . . . . 5,147 -
-------- --------
Net deferred tax assets reported . . . . . . . . $ 2,466 $ 5,624
======== ========
The Company's tax (benefit) provision for the years ended December 31,
1996, 1995 and 1994, respectively, differs from the statutory rate for
Federal income taxes as a result of the following factors:
1996 1995 1994
-------- -------- --------
Statutory rate . . . . . . . . . . . . (34.0)% (34.0)% 34.0%
State income taxes, net of
Federal tax benefit. . . . . . . . . (3.7) (4.2) 3.9
Valuation allowance. . . . . . . . . . 25.9 - -
Other. . . . . . . . . . . . . . . . . 1.6 - -
-------- -------- --------
(10.2)% (38.2)% 37.9%
======== ======== ========
- 47 -
7. STOCKHOLDERS' EQUITY
STOCK OPTIONS AND WARRANTS. The Company has two combination incentive
and non-statutory stock option plans, the "1996 Plan" and the "1994 Plan,"
that provide for the granting of options to employees (both plans) and non-
employee directors (only under the 1996 Plan) to purchase up to 600,000 and
300,000 shares, respectively, of the Company's common stock. Until its
expiration on March 15, 1996, the Company had another combination incentive
and non-statutory stock option plan, the "1986 Plan," that provided for the
granting of options to employees to purchase up to 1,100,000 shares of the
Company's common stock. Under the 1996, 1994 and 1986 Plans, options have
a term of up to ten years, generally vest over five years and option prices
are required to be at not less than 100% of the fair market value of the
Company's common stock at the date of grant and, except in the case of non-
employee directors, must be approved by the Board of Directors or its
Compensation Committee. Options under the 1996, 1994 and 1986 plans were
as follows:
Number Weighted Weighted
of Exercise Average Average
Option Price Price Remaining
shares per share per share Life
- - ------------------------------------------------------------------------------------------------------------
1996 Plan:
Outstanding at December 31, 1995. . . . . . . . . . . - - -
Granted. . . . . . . . . . . . . . . . . . . . . . 237,000 $ 5.13- 7.31 $ 5.34
Forfeited or canceled. . . . . . . . . . . . . . . - - -
Exercised. . . . . . . . . . . . . . . . . . . . . - - -
Outstanding at December 31, 1996. . . . . . . . . . . 237,000 $ 5.13- 7.31 $ 5.34 8.1
- - ------------------------------------------------------------------------------------------------------------
1994 Plan:
Outstanding at December 31, 1993. . . . . . . . . . . - - -
Granted. . . . . . . . . . . . . . . . . . . . . . 147,000 $10.25-13.44 $ 11.71
Forfeited or canceled. . . . . . . . . . . . . . . (9,000) 12.50 12.50
Exercised. . . . . . . . . . . . . . . . . . . . . - - -
Outstanding at December 31, 1994. . . . . . . . . . . 138,000 10.25-13.44 12.21
Granted. . . . . . . . . . . . . . . . . . . . . . 93,000 3.50- 7.13 4.20
Forfeited or canceled. . . . . . . . . . . . . . . (58,000) 7.13-12.88 11.42
Exercised. . . . . . . . . . . . . . . . . . . . . - - -
Outstanding at December 31, 1995. . . . . . . . . . . 173,000 3.50-12.88 8.28
Granted. . . . . . . . . . . . . . . . . . . . . . 162,500 3.25-12.88 5.46
Forfeited or canceled. . . . . . . . . . . . . . . (44,000) 3.50-12.88 8.11
Exercised. . . . . . . . . . . . . . . . . . . . . - - -
Outstanding at December 31, 1996. . . . . . . . . . . 291,500 $ 3.25-13.44 $ 6.68 6.6
- - ------------------------------------------------------------------------------------------------------------
1986 Plan:
Outstanding at December 31, 1993. . . . . . . . . . . 630,650 $ 4.22-14.25 $ 9.78
Granted. . . . . . . . . . . . . . . . . . . . . . 55,000 10.25 10.25
Forfeited or canceled. . . . . . . . . . . . . . . (45,450) 8.75-10.00 9.42
Exercised. . . . . . . . . . . . . . . . . . . . . (78,812) 4.18-10.00 7.24
Outstanding at December 31, 1994. . . . . . . . . . . 561,388 4.22-14.25 10.16
Granted. . . . . . . . . . . . . . . . . . . . . . 77,750 3.50 3.50
Forfeited or canceled. . . . . . . . . . . . . . . (56,100) 10.00 10.00
Exercised. . . . . . . . . . . . . . . . . . . . . (3,150) 7.00 7.00
Outstanding at December 31, 1995. . . . . . . . . . . 579,888 3.50-14.25 9.30
Granted. . . . . . . . . . . . . . . . . . . . . . 20,000 3.25 3.25
Forfeited or canceled. . . . . . . . . . . . . . . (470,038) 3.50-12.50 9.95
Exercised. . . . . . . . . . . . . . . . . . . . . (17,550) 3.50- 5.50 5.05
Outstanding at December 31, 1996. . . . . . . . . . . 112,300 $ 3.50-14.25 $ 6.12 6.6
- - ------------------------------------------------------------------------------------------------------------
- 48 -
Number Weighted Weighted
of Exercise Average Average
Option Price Price Remaining
shares per share per share Life
- - ------------------------------------------------------------------------------------------------------------
Nonstatutory Stock Options:
Outstanding at December 31, 1993. . . . . . . . . . . 110,000 $ 5.13-10.00 $ 5.57
Granted. . . . . . . . . . . . . . . . . . . . . . 100,000 10.50 10.50
Forfeited or canceled. . . . . . . . . . . . . . . - - -
Exercised. . . . . . . . . . . . . . . . . . . . . - - -
Outstanding at December 31, 1994. . . . . . . . . . . 210,000 5.13-10.00 7.92
Granted. . . . . . . . . . . . . . . . . . . . . . 895,000 3.75 3.75
Forfeited or canceled. . . . . . . . . . . . . . . (60,000) 5.13-10.00 5.94
Exercised. . . . . . . . . . . . . . . . . . . . . (50,000) 5.13 5.13
Outstanding at December 31, 1995. . . . . . . . . . . 995,000 3.75-10.50 4.10
Granted. . . . . . . . . . . . . . . . . . . . . . 110,000 6.13 6.13
Forfeited or canceled. . . . . . . . . . . . . . . - - -
Exercised. . . . . . . . . . . . . . . . . . . . . - - -
Outstanding at December 31, 1996. . . . . . . . . . . 1,105,000 $ 3.75-10.00 $ 4.35 8.8
- - ------------------------------------------------------------------------------------------------------------
FOR ALL PLANS:
Outstanding at December 31, 1996. . . . . . . . . . . 1,745,800 $ 3.25-14.25 $ 4.99 8.2
- - ------------------------------------------------------------------------------------------------------------
OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1996
Options Outstanding Options Exercisable
- - --------------------------------------------------------------------------- -----------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/96 Life-Years Price at 12/31/96 Price
- - --------------- --------------- --------------- --------------- --------------- ---------------
$ 3.25- $ 4.78 1,028,000 8.8 $ 3.71 793,400 $ 3.73
4.79- 7.13 548,000 7.7 5.47 92,150 5.50
7.14- 10.25 59,300 5.6 9.62 23,150 9.69
10.26- 14.25 110,500 6.7 11.98 78,325 11.75
- - --------------- --------------- --------------- --------------- --------------- ---------------
$ 3.25- $ 14.25 1,745,800 8.2 $ 4.99 987,025 $ 4.67
=============== =============== =============== =============== =============== ===============
- 49 -
The Company adopted the disclosure requirements of FAS 123 effective
for the Company's December 31, 1996 financial statements. The Company
applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its plans, as allowed under FAS 123.
Accordingly, no compensation cost has been recognized for stock option and
stock purchase plans. If compensation cost for the Company's stock-based
compensation plans had been determined on the fair value at the grant dates
for 1996 and 1995 awards under those plans consistent with the method in
FAS 123, the Company's net loss and net loss per share would have increased
to the pro forma amounts (in thousands, except net loss per share amounts)
indicated below. Because the FAS 123 method of accounting has not been
applied to options granted prior to January 1, 1995, the resulting pro
forma compensation cost may not be representative of that to be expected in
future years.
1996 1995
-------- --------
Net loss - pro forma . . . . . . . . . . . . . . $(18,818) $ (8,003)
Net loss per share - pro forma . . . . . . . . . $ (2.81) $ (1.21)
The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used
for grants in both 1996 and 1995: no dividend yield, 70% volatility,
risk-free interest rates ranging from 5.65% to 6.90%, and expected lives of
four to five years.
At December 31, 1996, in the 1996 Plan options for 71,350 shares were
exercisable and 313,000 options were available for grant; in the 1994 Plan
options for 61,375 shares were exercisable and 8,500 options were available
for grant; and in the 1986 Plan options for 84,300 shares were exercisable.
In December 1996, an officer was granted 20,000 non-statutory options
to purchase the Company's common stock at an exercise price of $6.125 per
share. As long as the officer remains an employee of the Company, the
options vest cumulatively in 20 equal quarterly installments, commencing on
April 1, 1997. The options expire at the earlier of one month after
termination of the officer's employment with the Company, or April 1, 2004.
In December 1996, an officer was granted 90,000 non-statutory options
to purchase the Company's common stock at an exercise price of $6.125 per
share. As long as the officer remains an employee of the Company, the
options vest cumulatively in 20 equal quarterly installments, commencing on
April 1, 1997. The options expire at the earlier of one month after
termination of the officer's employment with the Company, or April 1, 2004.
In December 1995, an officer was granted 700,000 non-statutory options
to purchase the Company's common stock at an exercise price of $3.75 per
share. Options to purchase 350,000 shares were fully vested and
exercisable as of the grant date, options to purchase 250,000 shares were
- 50 -
vested on December 18, 1996, and options to purchase 100,000 shares vest on
December 18, 1997. All of the options remain exercisable until their
expiration on December 18, 2005.
In December 1995, an officer was granted 195,000 non-statutory options
to purchase the Company's common stock at an exercise price of $3.75 per
share. Options to purchase 65,000 shares were fully vested and exercisable
as of the grant date, options to purchase 65,000 vested on December 18,
1996, and options to purchase 65,000 shares vest on April 19, 1997. All of
the options remain exercisable until their expiration on December 18, 2005.
In November 1994, three officers were granted stock bonus awards
totaling 22,000 shares with 7,333 shares issued in November 1994 and 5,333
shares issued in November 1995. Upon separation from the Company in April
1995, November 1995 and January 1996, the officers' awards for 4,000
shares, 3,334 shares and 2,000 shares, respectively, were canceled in
accordance with the terms of the award.
In August 1993, two officers were granted stock bonus awards totaling
20,000 shares, with 6,666 shares issued in both August 1993 and August 1994
and 2,668 shares issued in August 1995. The remaining 4,000 shares were
canceled upon the officer's separation from the Company in April 1995 in
accordance with the terms of the award.
In September 1992, an officer was granted 100,000 non-statutory
options to purchase the Company's Common Stock at an exercise price of
$5.125 per share. The options vested quarterly over 20 equal installments
commencing January 1, 1993, as long as the officer remained an employee of
the Company. On April 10, 1995, this officer separated from the Company
and 50,000 unvested options were subsequently canceled on May 25, 1995 in
accordance with the terms of the Officer Severance Plan. The remaining
50,000 vested options were subsequently exercised by the officer upon
various dates from August through October 1995.
In December 1990, the Company issued warrants to two members of the
Board of Directors to purchase, in the aggregate, 20,000 shares of common
stock at $10.00 per share. The warrants were immediately exercisable. The
Company also issued these directors certificates which may be used to pay
$2.50 per share of the exercise price of these warrants. In October 1991,
warrants to purchase 10,000 shares at $7.50 per share (after giving effect
to such certificates) were exercised. The remaining 10,000 warrants
expired on December 5, 1995.
STOCK PURCHASE PLAN. The Company has established an Employee Stock
Purchase Plan ("ESPP"). Eligible employees may elect to set aside, through
payroll deduction, up to 15% of their compensation to purchase common stock
of the Company. The maximum number of shares that an eligible employee may
purchase during any offering period is equal to 5% of such employee's
compensation for the 12 calendar-month period prior to the commencement of
an offering period divided by 85% of the fair market value of a share of
common stock on the first day of the offering period. The ESPP is
- 51 -
implemented through one offering during each six-month period beginning
January and July 1. The ESPP purchase price is 85% of the lower of the
fair market value of a share of common stock on the first day or the last
day of the offering period. In the offering periods ended June 30 and
December 31, 1996, employees purchased 22,786 and 10,122 shares,
respectively, at prices of $3.72 and $4.78, respectively. In the offering
periods ended June 30 and December 31, 1995, employees purchased 14,172 and
25,845 shares, respectively, at prices of $5.10 and $3.72, respectively.
In the offering periods ended June 30 and December 31, 1994, employees
purchased 8,151 and 9,078 shares, respectively, at prices of $8.93 and
$8.82, respectively. The weighted average fair market value of shares
under the ESPP was $4.76, $4.53 and $10.44 in 1996, 1995 and 1994,
respectively. The Company has reserved 250,000 shares of common stock for
the ESPP, of which 122,422 were available for future issuance as of
December 31, 1996.
STOCK REPURCHASE PROGRAM. In 1994, the Board of Directors authorized
the open market repurchase of up to 450,000 shares of the Company's common
stock. As of December 31, 1994, the Company had repurchased 194,800 shares
at a cost of $2.1 million. These shares are currently being used by the
Company to satisfy its obligations under the Company's various employee
stock option and purchase plans. In accordance with the terms of the
Credit Facility executed by the Company in May 1996, the Company is
currently precluded from repurchasing its common stock. See Note 5.
RIGHTS PLAN. On December 19, 1994, the Board of Directors of the
Company authorized and declared a dividend of one preferred stock purchase
right (a "Right") for each outstanding share of the Company's common stock
payable to stockholders of record at the close of business on January 3,
1995. Each Right entitles the common stockholder to purchase, in certain
circumstances generally relating to a change in control of the Company, one
one-thousandth of a share of the Company's Series B Junior Participating
Cumulative Preferred Stock, par value $0.25 per share (the "Preferred
Shares") at an exercise price of $40, subject to adjustment.
Alternatively, the Right holder may purchase common stock of the Company
having a market value equal to two times the exercise price, or may
purchase shares of common stock of the acquiring corporation having a
market value equal to two times the exercise price. The Preferred Shares
confer to holders certain rights as to dividends, voting and liquidation
which are in preference to common stockholders. The Rights are non-voting,
are not presently exercisable and currently trade in tandem with the common
stock. The Rights may be redeemed, in whole but not in part, by the
Company at $0.01 per Right in accordance with the Rights Plan. The Rights
were scheduled to expire on January 3, 1997, unless earlier redeemed or
exchanged. On November 14, 1996, the Board of Directors of the Company
extended the Rights Plan until the stockholders' vote, at the annual
meeting of stockholders on May 6, 1997, on a proposed three-year extension
of such Rights Plan.
- 52 -
8. CHANGES IN ACCOUNTING ESTIMATES
During the fourth quarter of 1995, the Company recorded a pretax
charge of approximately $7.9 million ($4.9 million after tax, or $0.74 per
share), with $3.0 million related to restructuring charges as discussed in
Note 10. $1.8 million was necessary to increase the allowance for
uncollectible accounts receivable and $2.2 million was related to
merchandise inventory purchased for the Company's Desktop IV Contract. The
remaining $900,000 was necessary to increase reserves for software licenses
under the terms of the Company's Desktop IV Contract.
During the fourth quarter of 1994, the Company recorded a pretax
charge of approximately $9.9 million ($6.1 million after tax, or $0.89 per
share) related to its Desktop IV and Companion contracts and its general
merchandise inventories. Approximately $4.7 million of the charge is
related to the Desktop IV and Companion contracts, including $2.7 million
for higher-than-estimated product warranty labor costs and software
licenses and $2.0 million for excess inventories as these contracts wind
down. The remaining $5.2 million of the fourth quarter charge related to
excess quantities of general merchandise inventories.
9. COMMITMENTS AND CONTINGENCIES
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.
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 requires the Company to provide,
without charge, certain software licenses to users who register before
February 28, 1997.
At December 31, 1996, the Company recorded a liability of
approximately $3.0 million, which represents management's estimate of the
costs necessary to provide the "upgrades" noted above plus estimated
professional services costs to be paid in 1997 related to the ongoing GSA
audit.
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.
- 53 -
The Company leases office and warehouse space and various equipment
under non-cancelable operating leases. In August 1995, the Company entered
into a ten-year agreement to lease approximately 205,000 square feet of
warehouse space beginning in December 1996 to accommodate the distribution
and storage of merchandise inventories. Minimum annual rental payments are
$700,000 in the first year of the lease term, and increase approximately
3.00% in each subsequent year of the lease term.
In November 1988, the Company executed a ten-year lease for its
corporate headquarters which comprises approximately 120,000 square feet of
office space and 14,000 square feet of warehouse space. Future minimum
annual rental payments are approximately $2.0 million per year. See
additional discussion in Note 10.
The Company also entered into a nine-year lease for 55,170 square feet
of office space in two buildings beginning December 1, 1989. Future
minimum annual rental payments are approximately $800,000.
The Company maintains sales offices in various strategic locations
throughout the country and in Germany and has, in each of these locations,
entered into a lease for office space.
Collective future minimum lease payments as of December 31, 1996 are
as follows (in thousands):
Operating
Year ending December 31, Leases
------------------------ --------
1997. . . . . . . . . . . . . . . $ 3,614
1998. . . . . . . . . . . . . . . 3,367
1999. . . . . . . . . . . . . . . 749
2000. . . . . . . . . . . . . . . 771
2001. . . . . . . . . . . . . . . 793
Thereafter. . . . . . . . . . . . 4,172
--------
Total minimum lease payments . . . . . $ 13,466
========
The Company is obligated under its office and warehouse leases for its
pro rata portion of all insurance, taxes and utilities on the facilities.
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $3.4 million, $3.5 million and $3.8 million, respectively.
10. RESTRUCTURING CHARGES
For the year ended December 31, 1995, the Company recorded a $3.0
million restructuring charge ($1.8 million after tax, or $0.28 per share).
This amount includes $1.6 million for headcount reductions and $1.4 million
for the consolidation of certain office and warehouse facilities.
- 54 -
11. 401(K) PLAN
Effective April 1991, the Company adopted the Employees' 401(k)
Investment Plan (the "Plan"), a savings and investment plan intended to be
qualified under Section 401 of the Internal Revenue Code (the "Code"). All
employees of the Company who are at least 21 years of age and have
completed at least six months of employment with the Company are eligible
to participate. The Plan is voluntary and allows participating employees
to make pretax contributions, subject to limitations under the Code, of a
percentage (not to exceed 15%) of their total compensation. Employee
contributions are fully vested at all times. The Company, in its sole
discretion, may make contributions in amounts, if any, as may be determined
by the Board of Directors for the benefit of all participants. No
contributions to the 401(k) Plan have been made by the Company to date.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth selected unaudited quarterly financial
data and the percentages such items represent of sales. The quarterly
financial data reflect, in the opinion of the Company, all normal and
recurring adjustments necessary to present fairly the results of operations
for such periods. Results of any one or more quarters are not necessarily
indicative of annual results or continuing trends.
- 55 -
1996 Quarters Ended
----------------------------------------------------------------------------
(In thousands, except per share data) March 31, June 30, September 30, December 31,(1)
---------------- ---------------- ---------------- ----------------
Sales . . . . . . . . . . . . . . . . . . . . . . . $ 82,792 100.0% $100,809 100.0% $ 163,221 100.0% $144,820 100.0%
Gross margin. . . . . . . . . . . . . . . . . . . . 7,223 8.7 6,853 6.8 11,165 6.8 8,325 5.7
Operating expenses. . . . . . . . . . . . . . . . . 9,314 11.2 8,406 8.3 9,489 5.8 23,088 15.9
(Loss) income from operations . . . . . . . . . . . (2,091) (2.5) (1,553) (1.5) 1,676 1.0 (14,763) (10.2)
Interest expense, net . . . . . . . . . . . . . . . 848 1.0 710 0.7 495 0.3 1,085 0.7
(Loss) income before income taxes . . . . . . . . . (2,939) (3.5) (2,263) (2.2) 1,181 0.7 (15,848) (10.9)
Net (loss) income . . . . . . . . . . . . . . . . . (1,818) (2.2) (1,410) (1.4) 703 0.4 (15,313) (10.6)
Net (loss) income per share . . . . . . . . . . . . ($0.27) ($0.21) $0.10 ($2.28)
Weighted average number of
common and common
equivalent shares outstanding . . . . . . . . . . 6,675 6,677 7,060 6,703
1995 Quarters Ended
----------------------------------------------------------------------------
(In thousands, except per share data) March 31, June 30, September 30, December 31,*
---------------- ---------------- ---------------- ----------------
Sales . . . . . . . . . . . . . . . . . . . . . . . $ 91,742 100.0% $ 98,644 100.0% $ 175,705 100.0% $160,871 100.0%
Gross margin. . . . . . . . . . . . . . . . . . . . 7,270 7.9 7,136 7.2 14,286 8.1 9,922 6.2
Operating expenses. . . . . . . . . . . . . . . . . 9,914 10.8 10,188 10.3 10,424 5.9 11,966 7.4
Restructuring charges . . . . . . . . . . . . . . . - - - - - - 2,953 1.8
(Loss) income from operations . . . . . . . . . . . (2,644) (2.9) (3,052) (3.1) 3,862 2.2 (4,997) (3.1)
Interest expense, net . . . . . . . . . . . . . . . 1,068 1.2 833 0.8 1,069 0.6 1,811 1.1
(Loss) income before income taxes . . . . . . . . . (3,712) (4.1) (3,885) (3.9) 2,793 1.6 (6,808) (4.2)
Net (loss) income . . . . . . . . . . . . . . . . . (2,296) (2.5) (2,401) (2.4) 1,726 1.0 (4,206) (2.6)
Net (loss) income per share . . . . . . . . . . . . ($0.35) ($0.36) $0.26 ($0.63)
Weighted average number of
common and common
equivalent shares outstanding. . . . . . . . . . 6,597 6,591 6,626 6,650
(1) The quarter ended December 31, 1996 includes a pretax charge of $9,100 ($8,200 after tax, or $1.22 per share) related to the
impairment of intangible assets acquired as part of the acquisition of Falcon in 1994.
(2) The quarter ended December 31, 1995 includes a pretax charge of $7,900 ($4,900 after tax, or $0.74 per share) associated with
the valuation of inventory and receivables, software licenses, headcount reductions and the consolidation of certain office
and warehouse facilities.
- 56 -
GOVERNMENT TECHNOLOGY SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
Balance Charged Balance
at to at
Beginning Costs and End of
Description of Period Expenses Other(1) Deductions(2) Period
- - ------------------------------------------------------- --------- --------- -------- ------------- --------
Year ended December 31, 1996:
Allowance for bad debts . . . . . . . . . . . . . . . . $ 4,268 $ 2,761 $ - $(2,494) $ 4,535
Allowance for slow-moving and
obsolete inventory. . . . . . . . . . . . . . . . . . 8,250 1,591 - (5,275) 4,566
Allowance for income taxes. . . . . . . . . . . . . . . - 5,147 - - 5,147
Year ended December 31, 1995:
Allowance for bad debts . . . . . . . . . . . . . . . . $ 2,269 $ 3,225 $ - $(1,226) $ 4,268
Allowance for slow-moving and
obsolete inventory. . . . . . . . . . . . . . . . . . 8,827 5,403 - (5,980) 8,250
Year ended December 31, 1994:
Allowance for bad debts . . . . . . . . . . . . . . . . $ 1,446 $ 1,830 $ 540 $(1,547) $ 2,269
Allowance for slow-moving and
obsolete inventory. . . . . . . . . . . . . . . . . . 2,777 9,332 459 (3,741) 8,827
(1) Acquired in purchase of subsidiary.
(2) Amounts written off during the period.
- 57 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on June 17, 1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
the sections of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 6, 1997, entitled "Election of
Directors -- Nominees," "Executive Officers" and "Common Stock Ownership of
Principal Stockholders and Management -- Section 16(a) Beneficial Ownership
Reporting Compliance," to be filed with the Commission.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
the sections of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 6, 1997, entitled "Election of
Directors -- Compensation of Directors" and "Executive Compensation and
Other Information," to be filed with the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item is incorporated by reference to
the section of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 6, 1997, entitled "Common Stock
Ownership of Principal Stockholders and Management," to be filed with the
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
the sections of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 6, 1997, entitled "Election of
Directors -- Nominees" and "Executive Compensation and Other Information --
Compensation Committee Interlocks and Insider Participation," to be filed
with the Commission.
- 58 -
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(A) (1) FINANCIAL STATEMENTS
See the Index included in Item 8 on Page 32 of this Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
See the Index included in Item 8 on Page 32 of this Form 10-K.
(3) EXHIBITS
2.1 Stock Purchase Agreement by and among the Registrant, Falcon
Microsystems, Inc. and M. Dendy Young dated August 16, 1994
(2)(11)
3.1 Certificate of Incorporation, as amended(3)(6)(13)
3.2 Bylaws, as amended(13)
4.1 Rights Agreement dated as of January 3, 1995 by and between the
Registrant and First Union National Bank of North Carolina, as
Rights Agent, which includes as Exhibit B thereto the form of
Rights Certificate(13)
10.1 Amended and Restated 1986 Stock Option Plan,(4) including forms
of Stock Option Agreements and Stock Purchase Agreement(1)(3)
10.2 Employee Stock Purchase Plan, as amended to date(1)(6)
10.3 GSA Schedule B/C Award/Contract No. GS00K95AGS6407 dated April
1, 1996, issued by the General Services Administration to the
Registrant for the three-year period ending March 31,
1999(2)(16)
10.4 GSA Schedule A Award/Contract No. GS00K94AGS5681 dated October
1, 1993, issued by the General Services Administration to the
Registrant, and Modifications during 1993(2)(9); and
Modifications during the quarter ended December 31, 1994(12)
10.5 Deed of Lease Agreement I dated as of November 17, 1987 between
the Registrant and Enterprise Center Limited Partnership Number
Two covering part of the Registrant's facilities in Chantilly,
Virginia, as amended by Amendment No. One dated December 14,
1988(3)
- 59 -
10.6 Deed of Lease Agreement II dated as of November 17, 1987
between the Registrant and Enterprise Center Limited
Partnership Number Two covering part of the Registrant's
facilities in Chantilly, Virginia, as amended by Amendment No.
One dated December 14, 1988(3)
10.7 Lease dated March 31, 1993 between the Registrant and West 50
Associates covering office and warehouse facilities(9); and
Amendment thereto dated September 21, 1995(15)
10.8 Letter Agreement dated September 17, 1990, as amended, between
the Registrant and R. M. Rickenbach(1)(3)
10.9 Warrant of the Registrant dated December 6, 1990 issued to
Lawrence J. Schoenberg(1)(6)
10.10 Nonstatutory Stock Option Agreement dated October 9, 1992
between the Registrant and Frank H. Slovenec(1)(6)
10.11 Officer Severance Plan, as amended to date(15)
10.12 GTSI Employees' 401(k) Investment Plan(3); and Amendment No.
1(5); Amendment No. 2 and Amendment No. 3 thereto(15)
10.13 IBM Business Partner Agreement (Dealer Profile, Dealer Exhibit,
Dealer/Retailer Attachment and Remarketer General Terms)
between IBM and the Registrant, effective January 1994(9)
10.14 U.S. Navy Standard Desktop Computer Companion Contract No.
N66032-91-D-0002 dated February 8, 1991; Modification thereof
dated June 28, 1991(4); Modifications during 1992(6); and
Modifications during 1993(2)(9)
10.15 Credit Agreement, dated as of November 17, 1994, by and among
the Registrant and Falcon Microsystems, Inc., as Borrowers; The
Lenders Parties Thereto From Time To Time; and Mellon Bank,
N.A., as Agent(12); and Amendment thereto dated December 29,
1995(15) (see also Exhibit 10.24)
10.16 Stock Bonus Agreement dated August 25, 1993 between the
Registrant and R. M. Rickenbach(1)(8)
10.17 Stock Bonus Agreement dated August 25, 1993 between the
Registrant and Frank H. Slovenec(1)(8)
10.18 Authorized Apple Dealer Sales Agreement between Apple Computer,
Inc. and the Registrant, effective April 1993(7)
10.19 U.S. Air Force Desktop IV Microsystems Contract No.
F01620-93-D-0001 dated February 2, 1993; Modifications during
1993(2)(9); and Modifications during the quarter ended March
31, 1994(10); and Modifications during the quarter ended June
30, 1995(14)
- 60 -
10.20 National Aeronautics and Space Administration Scientific &
Engineering Workstation Procurement Contract No. NAS5-37008
dated February 19, 1993; Modifications during 1993(2)(9); and
Modifications during the quarter ended March 31, 1994(10)
10.21 Stock Bonus Agreement dated November 16, 1994 between the
Registrant and R. M. Rickenbach(1)
10.22 Stock Bonus Agreement dated November 16, 1994 between the
Registrant and Frank H. Slovenec(1)
10.23 Stock Bonus Agreement dated November 16, 1994 between the
Registrant and Thomas L. Smudz(1)
10.24 Business Credit and Security Agreement dated as of December 29,
1995 among the Registrant, certain Lenders named therein, and
Deutsche Financial Services Corporation, as a Lender and as
Agent; and Amendment thereto dated March 29, 1996(15)
10.25 Lease dated August 11, 1995 between the Registrant and Security
Capital Industrial Trust covering new distribution center
facility(15)
10.26 Letter agreement dated January 16, 1996 between the Registrant
and Microsoft Corporation(15)
10.27 Employment Agreement dated December 18, 1995 between the
Registrant and M. Dendy Young(1)(15)
10.28 Employment Agreement dated December 18, 1995 between the
Registrant and Peter E. Janke(1)(15)
10.29 Settlement Agreement between the Registrant and the U.S. Air
Force with respect to the Desktop IV Microsystems Contract No.
F01620-93-D-0001(17)
11.1 Computation of Earnings Per Share
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Coopers & Lybrand, L.L.P.
________________________
(1) Constitutes a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form
10-K.
(2) Confidential treatment has been granted for portions of this
exhibit, and such confidential portions have been removed from
this exhibit, pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934, as amended.
- 61 -
(3) Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-41351) filed with
the Commission on June 21, 1991.
(4) Incorporated by reference to Pre-effective Amendment No. 3 to
the Registrant's Registration Statement on Form S-1
(Registration No. 33-41351) filed with the Commission on
September 20, 1991.
(5) Incorporated by reference to the Registrant's Registration
Statement on Form S-8 (Registration No. 33-55090) filed with
the Commission on November 25, 1992.
(6) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
1992.
(7) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended March 31,
1993.
(8) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended September
30, 1993.
(9) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
1993.
(10) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended March 31,
1994.
(11) Incorporated by reference to the Registrant's Form 8-K filed
with the Commission on August 31, 1994, as amended by Form
8-K/A No. 1 filed with the Commission on October 31, 1994.
(12) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
1994.
(13) Incorporated by reference to the Registrant's Form 8-K filed
with the Commission on January 17, 1995.
(14) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended June 30,
1995.
(15) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
1995.
- 62 -
(16) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended March 31,
1996.
(17) Confidential treatment has been requested for portions of this
exhibit, and such confidential portions have been removed from
this exhibit, pursuant to Rule 24b-2 of the Securities Exchange
Act of 1934, as amended.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
See the list of Exhibits in Item 14(a)(3) beginning on Page 59
of this Form 10-K.
(D) FINANCIAL STATEMENT SCHEDULES
See the Index included in Item 8 on Page 32 of this Form 10-K.
- 63 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the
City of Chantilly, Commonwealth of Virginia.
GOVERNMENT TECHNOLOGY SERVICES, INC.
Dated: March 31, 1997 By: /s/ M. Dendy Young
--------------------------------
M. Dendy Young,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Lawrence J. Schoenberg Chairman of the Board March 31, 1997
- - ---------------------------
Lawrence J. Schoenberg
/s/ M. Dendy Young President and March 31, 1997
- - --------------------------- Chief Executive Officer
M. Dendy Young (Principal Executive Officer)
and a Director
/s/ Charles A. Hasper Vice President, Controller March 31, 1997
- - --------------------------- and Acting Chief Financial
Charles A. Hasper Officer
(Principal Financial and
Accounting Officer)
/s/ Tania Amochaev Director March 31, 1997
- - ---------------------------
Tania Amochaev
/s/ Gerald W. Ebker Director March 31, 1997
- - ---------------------------
Gerald W. Ebker
- 64 -
Signature Title Date
--------- ----- ----
/s/ Thomas L. Hewitt Director March 31, 1997
- - ---------------------------
Thomas L. Hewitt
/s/ Lee Johnson Director March 31, 1997
- - ---------------------------
Lee Johnson
/s/ James J. Leto Director March 31, 1997
- - ---------------------------
James J. Leto
- 65 -