Back to GetFilings.com
1
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, 1997 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, 1998, as reported on The Nasdaq Stock Market, was $32,885,731.
The number of shares outstanding of the registrant's Common Stock on
February 28, 1998, was 6,756,180.
2
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 12, 1998 are incorporated by reference into
Part III of this Form 10-K.
3
PART I
ITEM 1. BUSINESS.
THE COMPANY
Government Technology Services, Inc. is a 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 a 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.)
On February 12, 1998, the Company entered into and closed on an Asset
Purchase Agreement with BTG, Inc. and two of its subsidiaries
(collectively, "BTG") under which the Company acquired substantially all of
the assets of the BTG division that resells computer hardware, software and
integrated systems to the Government (the "BTG Division"). The acquired
assets consisted primarily of inventory and rights under certain contracts
and intangible personal property, along with furniture, fixtures, supplies
and equipment. In addition, the Company assumed certain liabilities under
specified contracts of BTG as well as certain liabilities arising from the
ownership or operation of the acquired assets after the closing. The
Company paid at closing $7,325,265 in cash (after a $174,735 adjustment for
accrued vacation liability and satisfaction of an outstanding invoice owed
by BTG) and issued 15,375 shares, having a liquidation preference of
$15,375,000, of a new series of preferred stock designated Series C 8%
Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"). The
Company paid an additional $500,000 in cash upon the release of liens
on certain items of equipment which are part of the acquired assets. A
portion of the consideration, $800,000 in cash and 1,538 shares of Series C
Preferred Stock, is being held under an escrow agreement to secure BTG's
indemnification obligations under the Asset Purchase Agreement. Under the
Asset Purchase Agreement, BTG is obligated to repay to the Company up to
$4.5 million to the extent that there is a shortfall in the amounts that
the Company receives from dispositions of certain inventory acquired.
Pursuant to the Asset Purchase Agreement, the Company agreed to
convene a meeting of stockholders no later than January 1, 1999 (the "First
Meeting") to approve a proposal to convert the Series C Preferred Stock
into 3,000,000 shares of Common Stock (the "Conversion Proposal") and a
proposal to amend the certificate of incorporation to increase the number
4
of authorized shares of Common Stock from 10,000,000 to 20,000,000 (the
"Charter Amendment Proposal"). If the Conversion Proposal and the Charter
Amendment Proposal are approved, the Series C Preferred Stock will be
converted automatically into that number of shares of Common Stock equal to
the liquidation preference of the Series C Preferred Stock ($15,375,000 or
$1,000 per share) plus all accrued and unpaid dividends thereon divided by
the conversion price of $5.125. If the Conversion Proposal and the Charter
Amendment Proposal are approved at the Annual Meeting of Stockholders
scheduled for May 12, 1998, which will be the First Meeting, the Series C
Preferred Stock will be converted into 3,000,000 shares of Common Stock.
If the Conversion Proposal and the Charter Amendment Proposal are not
approved at the Annual Meeting, (a) the Company has agreed to convene a
second meeting of stockholders no later than January 1, 2000 to approve the
Conversion Proposal and the Charter Amendment Proposal, and (b) the Series
C Preferred Stock will begin to accrue dividends.
GTSI (r) offers its customers a convenient and cost-effective
centralized source for microcomputer and workstation solutions through its
broad selection of popular products and services 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, state
governments and systems integrators and prime contractors selling to the
government market. In 1997, GTSI's sales directly to Government agencies,
to prime contractors for resale to Government agencies and to state and
local government agencies accounted for 86%, 10% and 4% 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 approximately 150,000 information
technology products from approximately 2,100 manufacturers, including
Hewlett-Packard Company ("Hewlett-Packard"), Compaq Computer Corporation
("Compaq"), Panasonic (a division of Matsushita Electric Corporation of
America), Microsoft Corporation ("Microsoft"), CISCO Systems Incorporated
("CISCO"), 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 many end users
comprising the government market, while virtually insulating these vendors
from most of the complex government procurement rules and regulations.
5
GTSI fulfills customer orders from its state-of-the-art 200,000-square
foot distribution center located in Chantilly, Virginia. In addition to
the normal distribution functions, activities at the center include
stocking of popular items for fast delivery, customizing equipment through
the integration of various hardware and software components, and
specialized services such as providing source acceptance inspections and
documentation. The distribution center has the capability of supporting
approximately $1.5 billion in shipments per year. This includes the
capacity to integrate hardware at an estimated rate of 900 to 1,100 per day
including functional and diagnostic testing of all integrated components.
The Company currently plans to increase integration capacity to an
estimated 1,600 to 1,800 units per day. In addition to being able to ship
to any of the 48 contiguous states overnight, the center's location in the
Washington, D.C. metropolitan area allows for expedited deliveries to
anywhere in the world.
"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 a 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 procurement and
contracting officers, information resource managers, systems integrators,
value-added resellers ("VARs"), prime contractors and a wide array of end
users. In addition, by focusing on the Government market, the Company has
avoided the significant costs of commercial retail outlets and the
potentially higher credit risk associated with selling solely 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. Air Force Desktop IV Microsystems Contract ("Desktop IV
6
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"), and the U.S. Army Standard Management
Information Systems Contract ("STAMIS Contract"), as well as other
Government contracts of 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").
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 and entered into an agreement with HP to
add their Unix-Based server products. 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
microcomputer and workstation products is an important factor in its
success in the government market.
7
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
vendors from most of the procurement regulatory complexities, costs,
extensive paperwork and complicated billing requirements associated with
the government market.
THE GOVERNMENT PROCUREMENT PROCESS
The Company's 1997 revenues were derived primarily 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, indefinite-delivery/indefinite-quantity
("IDIQ") contracts, including government-wide acquisition contracts,
subcontracts, BPAs, and open market.
GSA SCHEDULE CONTRACTS
In 1996, GTSI held four GSA Schedule contracts: Schedule A, Schedule
B/C, Schedule 58 Parts VI and VII, and Schedule E. Schedule A included
general purpose commercial automatic data processing equipment and software
including workstations and connected peripherals equipment. Schedule B/C
included general-purpose automatic data processing equipment (end-user
computers, normally microcomputers and related software) for office use
environment. Schedule 59 Part VI and VII was for telecommunications
products, and Schedule E was for electronic commerce and services. On
November 26, 1997 GSA combined the four schedules under the terms of the
B/C Schedule Contract and the B/C Schedule Contract became the Information
Technology ("IT") Schedule. Products offered under the IT Schedule
Contract include workstations, desktops, laptops, notebooks, servers, laser
printer, color printers, scanners, monitors, modems, hard drives, memory,
networking products, facsimile products, internet and intranet products,
video teleconferencing, maintenance, training and services. GTSI's IT
schedule will expire on March 31, 1999.
The GSA, which is the central procurement agency of the Executive
Branch of the Government, negotiates schedule contracts. 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. Gov-
ernment 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
8
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. This threshold is $25,000
per order for classroom training, $50,000 per order for shrink-wrap
software and $500,000 per order for other software and hardware.
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 although manufacturers may enter into exclusive
relationships. 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 GSA
administrative fee calculated on the product price. This 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
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 for
a period of one year. 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. The
Schedule includes an economic price adjustment clause that permits the
Company to adjust contract prices upward if certain conditions have been
satisfied after a period of one year.
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 expertise, 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
9
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 IDIQ (i.e.,
the contract provides no pre-set delivery schedules or minimum purchase
levels). In some cases, various agencies levy a fee on those on purchases
made by departments outside of the agency, which awarded the contract.
These fees are collected by the Company, and as under the GSA contract,
remitted to the respective agency on a contract specified payment schedule.
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.
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 1997,
1996, and 1995 were approximately $1.1 million, $29.8 million, and $93.4
million, respectively.
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
10
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 exercised its third one-year option, which
expired on February 18, 1997. The Government did not exercise the fourth
one-year option. Sales under GTSI's SEWP I Contract in 1997, 1996, and
1995 were approximately $19.6 million, $23.8 million, and $8.9 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 1997,
1996 and 1995 were approximately $3.6 million, $24.0 million and $25.2
million, respectively.
NIH ECS I CONTRACT. In September 1995, GTSI and 16 other contractors
were jointly awarded the Electronic Computer Store I ("ECS I") 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 exercised one option to extend the contract to
September 30, 1997. The Government's maximum evaluated dollar value for
the ECS I Contract over its two-year maximum life is approximately $96.8
million. Sales under the ECS Contract in 1997 and 1996 were approximately
$52 million and $33.6 million, respectively.
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 September 4, 1998. The Government's maximum evaluated dollar
11
value for the contract over its two-year maximum life is approximately
$38.0 million. Shipments under the TDA-1 Contract began in August 1996.
Sales under the TDA-1 Contract in 1997 and in 1996 were approximately $17.6
million and $2.1 million, respectively.
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 equipment, 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 original
contract expiration date was November 15, 1997. The contract includes
three one-year extension options. The Government has exercised its first
one-year option to extend the contract to November 14, 1998. Sales under
the SEWP II contract in 1997 were approximately $20.7 million.
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. In April 1997, the award
to GTSI was affirmed. In May 1997, GTSI began shipments under this
contract. 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 in 1997 were approximately $19.9 million.
NIH ECS II CONTRACT. In September 1997, GTSI and 45 other contractors
were jointly awarded the Electronic Computer Store II ("ECS II") 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
Government. The vehicle is a non-mandatory, fixed price, IDIQ contract
with an original expiration date of September 16, 1998. The contract
includes four one-year options. The Government's maximum evaluated dollar
value for the ECS II for the 5-year term of the contract is $1.8 billion.
Sales under the ECS II contract in 1997 were approximately $5.9 million.
STAMIS CONTRACT. In October 1997, GTSI was awarded the U.S. Army's
Standard Management Information System ("STAMIS") Computer Contract II.
The IDIQ contract is a one-year contract with four one-year options to
renew for the purchase of products, and three additional one-year options
for the purchase of service. The Government's maximum evaluated dollar
value for the STAMIS Contract for the entire term of the contract is $469
million. Sales under the STAMIS contract in 1997 were approximately $0.6
million.
12
SUBCONTRACTS
In 1997, the Company's business included 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 IC4I Contract is non-mandatory, fixed-price, IDIQ contract which
expires in June 1998 and includes three one-year extension options.
Shipments under the IC4I Contract began in October 1996. Sales under the
subcontract in 1997 and in 1996 were approximately $6.2 million and $0.3
million, respectively.
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 1997 and in 1996 were
approximately $1.2 million and $3.9 million, respectively.
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 major 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; the Air Force Standard Systems Group BPA for printers and
associated products and the GSA Federal Telecommunications Service BPA for
computer equipment.
13
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 simplified
acquisition 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, 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 between $2,500 and $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. As a result of recent legislative changes, the
Government is encouraged to make purchases under $2,500 by credit card and
often without competition. In 1996, GTSI initiated a catalog offering for
sales of microcomputer products. Many of these products offered for sale
are for less than $2,500 and are available via credit card purchases.
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 that 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 qualified as a "small
business" during 1997 by virtue of it being a non-manufacturing entity with
a rolling average over the prior 12 months of 500 or fewer employees. As a
small business, GTSI enjoyed 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;
14
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.
As a result of the acquisition of the BTG Division in February 1998,
GTSI no longer qualifies as a small business for future contract awards.
Although most government contracts entered into before the BTG Division
acquisition will not be affected by this change, the Company cannot predict
the effect, if any, of this change on its operations. GTSI has a number of
possible actions available to it to seek to mitigate an adverse impact to
GTSI of the future loss of its small business status, including the
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 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.
15
PRODUCTS
The Company currently offers access to approximately 150,000
information technology products from approximately 2,100 hardware and
software vendors. The Company continuously monitors sales of existing and
newly introduced products to ensure that it carries state-of-the-art
technology products.
HARDWARE. The Company currently resells microcomputers from major
brand name manufacturers, including Hewlett-Packard, Compaq, Panasonic,
Nexar Technologies, Inc. ("Nexar"), Everex, Sun and Apple; and peripherals
from major brand name manufacturers, including Hewlett-Packard, Tektronix,
Sony, Iomega, Panasonic 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 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 and Hewlett-Packard Unix work-
stations. The Company's microcomputer software vendors include Microsoft,
Symantec IBM/Lotus, Informix, Corel, and Visio. GTSI also sells networking
software, including Novell products.
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
16
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. GTSI designs these
seminars and shows to provide training and information about microcomputers
and workstations and related services that 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 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)
(http:\\www.gtsi.com), on the world wide web 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.
In 1998, the Company plans to expand GTSI Express (sm), a tightly
integrated print and online catalog designed to target the rapidly
expanding base of Government credit card holders. The GTSI Express print
catalog will be revised and re-printed several times a year and distributed
to GTSI and various trade publication customers. GTSI intends to update
the online catalog daily and to provide access to the catalog from GTSI's
web site. All products featured in GTSI Express will be competitively
priced. For popular products, GTSI will offer same day shipping. In
addition, GTSI Express will provide customers with value-added information
such as an online listing of top-selling GTSI products, information
technology industry data and government-related information.
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.
17
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.
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.
18
CUSTOMERS
The Company's customers are primarily federal, state and local
government agencies and prime contractors to the Government, including
systems integrators. In 1997, 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 1997 sales, aggregate 1997 sales to the Government's
Departments of the Army, Navy and Air Force were 18%, 12% and 11%,
respectively, of GTSI's 1997 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.
BACKLOG
At March 19, 1998, and December 31, 1997, the Company's backlog of
orders was approximately $76.3 million and $38.4 million, respectively, as
compared with approximately $38.8 million and $48.1 million at March 19,
1997 and December 31, 1996, respectively. Backlog consists of written
purchase orders received and accepted by GTSI but not shipped due to either
the unavailability of inventory to fill the order and/or 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 because of the seasonality of Government ordering patterns and the
periodic inventory shortages resulting from constrained products.
SERVICE AND WARRANTY
GTSI provides post-sale field service for certain products that it
sells primarily through subcontractors and to a limited extent through the
Company's in-house technical staff. The Company typically warrants prod-
ucts sold to the Government and certain other customers for the same term
as the manufacturer's warranty period although many IDIQ contracts include
provisions for warranties that extend beyond those offered by the
manufacturer. The Company also sells extended warranties on many of the
government contracts. Product repaired while under the manufacturer's
warranty is at the manufacturer's expense; product repaired after
expiration of the manufacturer's and GTSI's warranty, if longer, is at the
customer's expense.
19
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. In 1997, certain
manufacturers selling directly to the Government have gained market share
in the GSA schedule market. A number 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
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, 1998, the Company had 519 employees, including 302 in
sales, marketing and contract management; 107 in operations; and 110 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.
20
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 200,000-
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 throughout 1998.
The Company's two branch sales offices are located in Chicago, Illinois and
Heidelberg, Germany. In 1997 the Company entered into an agreement to build
and lease new executive offices comprising approximately 100,500 square
feet. The lease agreement has a 10 year term with one 5 year option.
ITEM 3. LEGAL PROCEEDINGS.
On October 5 1997, the Company entered into a settlement agreement
with the Department of Justice under which the Company will pay the
Government a total of $400,000 plus $22,000 in legal fees that are to be
paid in three equal installments. Interest will accrue from the date of
settlement and will be paid over the installment period. The agreement
resolves and releases the Company from claims relating to a GSA audit of
the Company's GSA schedule sales for the years 1988 to 1997, and settles
and dismisses with prejudice a qui tam lawsuit filed on behalf of the
Government regarding such GSA schedule sales. The qui tam lawsuit naming
the Company was filed under seal in 1995 and was subject to a court order
prohibiting disclosure of the suit. The qui tam action was filed by the
same individual who filed a similar suit against Novell, Inc. in 1992,
which Novell settled by paying the Government $1.7 million.
In December 1996, the Company settled litigation pending before the
Armed Services Board of Contract Appeals related to the Company's
obligation to provide "upgrades" of certain computer software under the
Desktop IV Contract. The settlement required the Company to provide,
without charge, certain software licenses to users who registered before
February 28, 1997.
At December 31, 1996, the Company recorded a liability of
approximately $3.0 million, which represented management's estimate of the
costs necessary to provide the "upgrades" noted above plus estimated
professional services costs paid in 1997 related to the GSA audit. The
balance of this reserve was approximately $800,000 as of February 28, 1998.
The Company is occasionally a defendant in litigation incidental to
its business. The Company believes that none of such litigation currently
pending against it, individually or in the aggregate, will have a material
adverse effect on the Company's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
21
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 Stock
Market (sm) under the symbol "GTSI." As of December 31, 1997, there were
210 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.
1997 1996
------------------- -----------------
Quarter High Low High Low
------- -------- --------- ------- -------
First $ 5 7/8 $ 4 1/2 $ 5 1/4 $ 3 1/4
Second $ 5 7/16 $ 4 3/4 $ 6 7/8 $ 5
Third $ 5 7/8 $ 4 13/16 $ 6 1/4 $ 5 1/8
Fourth $ 5 7/8 $ 4 1/2 $ 7 3/8 $ 5 3/8
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, Shareholder Services Group, 1525 West W.T. Harris Blvd., 3C3,
Charlotte, NC 28288-1153; telephone 1-800-829-8432.
ANNUAL MEETING. The Annual Meeting of Stockholders is scheduled to be
held at 9:00 a.m. on Tuesday, May 12, 1998, at the Company's headquarters
located at 4100 Lafayette Center Drive in Chantilly, Virginia.
22
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data for the three years ended December 31,
1997, 1996, and 1995 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, 1997 and
1996 Financial Statements of the Company have been audited by Arthur
Andersen LLP, independent accountants, as indicated in their report, which
is also included elsewhere in this Form 10-K. The December 31, 1995
Financial Statements of the Company were audited by Coopers & Lybrand
L.L.P., independent accountants, whose report is 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,
-------------------------------------------------------------
1997 1996(1) 1995(2) 1994(3) 1993(4) 1992
INCOME STATEMENT DATA: -------- -------- -------- -------- -------- --------
Sales . . . . . . . . . . . . . . . . . . . . $486,377 $491,642 $526,962 $617,220 $523,612 $396,555
Cost of sales . . . . . . . . . . . . . . . . 449,454 458,076 488,348 569,827 472,909 350,791
-------- -------- -------- -------- -------- --------
Gross margin. . . . . . . . . . . . . . . . . 36,923 33,566 38,614 47,393 50,703 45,764
-------- -------- -------- -------- -------- --------
Operating expenses:
Selling, general and administrative. . . . 35,388 36,841 39,645 38,701 33,119 32,080
Depreciation and amortization. . . . . . . 3,539 13,456 3,090 2,358 1,608 1,622
Restructuring charges. . . . . . . . . . . - - 2,953 - - -
-------- -------- -------- -------- -------- --------
Total operating expenses. . . . . . . . . . . 38,927 50,297 45,688 41,059 34,727 33,702
-------- -------- -------- -------- -------- --------
(Loss) income from operations . . . . . . . . (2,004) (16,731) (7,074) 6,334 15,976 12,062
Interest expense, net . . . . . . . . . . . . 3,100 3,138 4,538 2,172 2,010 2,642
-------- -------- -------- -------- -------- --------
(Loss) income before taxes. . . . . . . . . . (5,104) (19,869) (11,612) 4,162 13,966 9,420
Income tax (benefit) provision. . . . . . . . - (2,031) (4,435) 1,576 5,330 3,649
-------- -------- -------- -------- -------- --------
Net (loss) income . . . . . . . . . . . . . . $ (5,104) $(17,838) $ (7,177) $ 2,586 $ 8,636 $ 5,771
======== ======== ======== ======== ======== ========
(Loss) earnings per share (basic and diluted) $ (0.76) $ (2.67) $ (1.09) $ 0.37 $ 1.30 $ 0.91
======== ======== ======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding . . . 6,733 6,690 6,604 6,898 6,654 6,355
======== ======== ======== ======== ======== ========
(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.
(4) The quarter ended December 31, 1993 includes a pretax charge of $1.2 million ($0.7 million after tax, or $0.11 per share)
associated with the valuation of inventory and receivables.
(In thousands) DECEMBER 31,
1997 1996(1) 1995(2) 1994(3) 1993(4) 1992
BALANCE SHEET DATA: -------- -------- -------- -------- -------- --------
Working capital . . . . . . . . . . . . . . . $ 30,860 $ 34,599 $ 45,597 $ 49,355 $ 63,467 $ 54,181
Total assets. . . . . . . . . . . . . . . . . 137,464 141,001 197,318 209,573 237,342 138,129
Notes payable to banks. . . . . . . . . . . . 21,569 15,828 56,496 70,120 45,007 50,724
Total liabilities . . . . . . . . . . . . . . 97,590 96,153 134,841 140,413 169,774 81,862
Stockholders' equity. . . . . . . . . . . . . 39,874 44,848 62,477 69,160 67,568 56,267
/TABLE
23
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 one of the largest dedicated resellers of microcomputer and
Unix workstation hardware, software and networking products to the
Government. The Company currently offers access to over 150,000
information technology products from more than 2,100 manufacturers. GTSI
also performs network integration services, including configuring,
installing and maintaining microcomputers in local area networks. The
Company sells to virtually all departments and agencies of the Government,
many state governments and several hundred systems integrators and prime
contractors that sell to the government market. GTSI offers its customers
a convenient and cost-effective centralized source 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 these 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.
24
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, ------------------
------------------------------ 1996 1995
1997 1996(1) 1995(2) to 1997 to 1996
-------- -------- -------- -------- --------
Sales . . . . . . . . . . . . . . . . . . . . 100.0% 100.0 % 100.0 % (1.1)% (6.7)%
Cost of sales . . . . . . . . . . . . . . . . 92.4 93.2 92.7 (1.9) (6.2)
-------- -------- --------
Gross margin. . . . . . . . . . . . . . . . . 7.6 6.8 7.3 10.0 (13.1)
======== ======== ========
Operating expenses:
Selling, general and administrative. . . . 7.3 7.5 7.5 (3.9) (7.0)
Depreciation and amortization. . . . . . . 0.7 2.7 0.6 (73.7) 335.5
Restructuring charges. . . . . . . . . . . - - 0.6 - (100.0)
-------- -------- --------
Total operating expenses. . . . . . . . . . . 8.0 10.2 8.7 (22.6) 10.1
-------- -------- --------
(Loss) income from operations . . . . . . . . (0.4) (3.4) (1.4) (88.0) 136.5
Interest expense, net . . . . . . . . . . . . 0.6 0.6 0.8 (1.2) (30.8)
-------- -------- --------
(Loss) income before taxes. . . . . . . . . . (1.0) (4.0) (2.2) (74.3) 71.1
Income tax (benefit) provision. . . . . . . . - (0.4) (0.8) (100.0) (54.2)
-------- -------- --------
Net (loss) income . . . . . . . . . . . . . . (1.0)% (3.6)% (1.4)% (71.4) 148.5
======== ======== ========
(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.
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,
--------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Hardware. . . . . . . . . . . . . . . . . . . $ 430.1 88.5% $ 429.7 87.4% $ 456.6 86.6%
Software. . . . . . . . . . . . . . . . . . . 55.1 11.3 50.2 10.2 55.8 10.6
Services. . . . . . . . . . . . . . . . . . . 1.2 0.2 11.7 2.4 14.6 2.8
-------- -------- -------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . . $ 486.4 100.0% $ 491.6 100.0% $ 527.0 100.0%
======== ======== ======== ======== ======== ========
CONTRACT VEHICLES
(Dollars in millions) Years Ended December 31,
--------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
GSA Schedules . . . . . . . . . . . . . . . . $ 208.8 31.0% $ 236.6 48.1% $ 234.9 44.6%
IDIQ Contracts. . . . . . . . . . . . . . . . 148.6 43.0 117.8 24.0 148.6 28.2
Open Market . . . . . . . . . . . . . . . . . 107.3 22.0 120.1 24.4 116.0 22.0
Other Contracts . . . . . . . . . . . . . . . 21.7 4.0 17.1 3.5 27.5 5.2
-------- -------- -------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . . $ 486.4 100.0% $ 491.6 100.0% $ 527.0 100.0%
======== ======== ======== ======== ======== ========
25
VENDOR CATEGORY
(Dollars in millions) Years Ended December 31,
--------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Hewlett-Packard . . . . . . . . . . . . . . . $ 105.6 21.7% $ 95.6 19.4% $ 99.2 18.8%
Compaq. . . . . . . . . . . . . . . . . . . . 54.2 11.1 50.5 10.3 49.5 9.4
Panasonic . . . . . . . . . . . . . . . . . . 53.8 11.1 31.9 6.5 24.7 4.7
Microsoft . . . . . . . . . . . . . . . . . . 46.8 9.6 31.6 6.4 16.8 3.2
Sun . . . . . . . . . . . . . . . . . . . . . 21.4 4.4 28.4 5.8 32.1 6.1
Nexar . . . . . . . . . . . . . . . . . . . . 21.0 4.3 11.7 2.4 - -
Apple . . . . . . . . . . . . . . . . . . . . 13.4 2.8 22.7 4.6 43.2 8.2
IBM label . . . . . . . . . . . . . . . . . . 9.2 1.9 43.7 8.9 25.2 4.8
Private Label . . . . . . . . . . . . . . . . - - 0.0 0.0 64.3 12.2
Other . . . . . . . . . . . . . . . . . . . . 161.0 33.1 175.5 35.7 172.0 32.6
-------- -------- -------- -------- -------- --------
Total. . . . . . . . . . . . . . . . . . . $ 486.4 100.0% $ 491.6 100.0% $ 527.0 100.0%
======== ======== ======== ======== ======== ========
1996 COMPARED WITH 1995
SALES. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. During 1997,
net sales decreased $5.2 million or 1.1% and were negatively impacted by
$1.2 million in higher Industrial Funding Fees associated with the GSA and
NIH contracts. These fees are collected by the Company and remitted to the
respective agency on a payment schedule determined by the respective
agency. Decreased sales under GSA Schedule and under Open Market Contracts
of $27.8 million and $12.8 million, respectively, were offset by increased
sales under GTSI's various IDIQ Contracts. It is management'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. IDIQ
contract sales rose during 1997 primarily as a result of higher revenue on
the Company's NIH, TDA-1 and SEWP contracts. Revenue from these contracts
rose $19 million, $15 million and $16 million, respectively, from 1996.
However, higher sales from the NIH, TDA-1 and SEWP vehicles were offset by
weaker sales activity on the GSA Schedule B/C contract.
Sales of Hewlett-Packard, Compaq, Panasonic, Microsoft and Nexar
products increased $60.0 million from the prior year and accounted for 58%
of GTSI's total sales activity by Vendor. This increase was offset by
lower sales of IBM Label products which decreased by $34.5 million from the
prior year.
Backlog at December 31, 1997, was approximately $38.4 million, down
20.1% from approximately $48.1 million at December 31, 1996. Backlog was
$76.3 million at March 19, 1998 compared to $38.8 million in the prior
period. The increase is primarily related to orders that were recorded as
part of the BTG Division acquisition, which closed on February 12, 1998.
Backlog represents orders received but for which product has yet to ship.
Generally, the Company fulfills all orders within 30 days from the time the
order is received.
26
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 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 increased in 1997 by approximately $3.4 million or 10.0%,
and increased as a percentage of sales from 6.7% to 7.6%. In the fourth
quarter of 1996, the Company recorded $2.2 million in adjustments that were
deemed necessary to provide for contractual obligations, and to reduce
certain trade credits to the amounts ultimately expected to be realized.
Other product cost factors that contributed to the improvement in the gross
margin percentage during 1997 were the recognition of greater price
protection credits and purchase discounts offered by vendors.
OPERATING EXPENSES. Operating expenses in 1997 decreased
approximately $11.4 million, or 22.6%, and improved as a percentage of
sales from 10.2% to 8.0%. The change is primarily attributable to a $9.1
million decrease in amortization expense associated with the accelerated
write-down of intangible assets which was recognized during the fourth
quarter of 1996.
INTEREST EXPENSE. Total interest charges between 1997 and 1996 were
relatively flat, although bank administrative and credit card fees were
higher in 1997 by approximately $0.4 million from the prior period. These
costs were offset by lower interest expenses due to reduced bank borrowings
during certain times throughout 1997.
INCOME TAXES. In 1996, a tax benefit of $2.0 million was recorded as
a result of the Company's operating loss for that period, that was realized
by carrying back the loss to prior years in which the Company recognized
taxable income.
1995 COMPARED WITH 1994
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
27
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 management'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
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.
28
Backlog at December 31, 1996, was approximately $48.1 million, up by
32.1% from backlog of $36.4 million reported for December 31, 1995.
Backlog represents orders received but for which product has yet to ship.
Generally, the Company fulfills all orders within 30 days from the time the
order is received.
GROSS MARGIN. 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 $4.6 million, or 10.1%, and increased as a percentage of
sales from 8.7% 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).
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 was
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 ("FAS") 109,
"Accounting for Income Taxes," and a valuation allowance was recorded
against the applicable net deferred tax assets. In 1995, the Company
recorded a tax benefit of $4.4 million.
29
NEW ACCOUNTING PRONOUNCEMENTS
The Company will adopt FAS 130, "Reporting Comprehensive Income," and
FAS 131, "Disclosures about Segments of an Enterprise and Related
Information," during 1998. The Company is evaluating the impact of these
statements on its consolidated financial statement presentation.
FAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," was adopted by the Company during the
first quarter of 1996. 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.
FAS 123, "Accounting for Stock-Based Compensation," was adopted by the
Company during 1996. This statement requires disclosure of the fair value
of all stock-based compensation using one of several option-pricing models.
FAS 128, "Earnings Per Share," and FAS 129, "Disclosure of Information
about Capital Structure," were adopted by the Company in the fourth quarter
of 1997, with no material effect on the Company's consolidated financial
statement presentation.
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
30
more complex requirements contracts with more complex service costs, and
vendor delays in the processing of incentives and credits due GTSI, have
occurred (all of which are also likely to occur in the future) and have
adversely affected the Company's operating performance in particular
periods. The seasonality and the unpredictability of the factors affecting
such seasonality make GTSI's quarterly and yearly financial results
difficult to predict and subject to significant fluctuation. The Company's
stock price could be adversely affected if any such financial results fail
to meet the financial community's expectations.
Additionally, legislation is periodically introduced in Congress that
may change the Government's procurement practices. GTSI cannot predict
whether any legislative or any regulatory proposals will be adopted or, if
adopted, the impact upon its operating results. Changes in the structure,
composition and/or buying patterns of the Government, either alone or in
combination with competitive conditions or other factors, could adversely
affect future results.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company incurred a cash flow loss from operations of
$3.0 million, as compared to generating $45.2 million for the year ended
December 31, 1996. The decrease between the two years relates to a
significant reduction during 1996 in net operating assets (accounts
receivable plus merchandise inventories less accounts payable). The Company
acquired $2.4 million in capital equipment, of which $0.7 million related
to the purchase of a new financial reporting system. Additional
expenditures relate to internal equipment purchases and leasehold
improvements of $0.4 million to the Company's warehouse facility.
On July 28, 1997, the Company and its banks executed the Second
Amended and Restated Business Credit and Security Agreement. The amendment
modified certain terms and conditions contained in the Credit Facility and
effectively eliminated the Company's default condition with respect to
compliance with certain 1996 year-end financial covenants contained in the
Credit Facility. More specifically, the total amount available under the
Credit Facility was reduced from a total of $95 million to $60 million,
with an additional $30 million reduction from February 1 - July 31 of each
year. Further, the Wholesale Financing Facility was increased from $10
million to $20 million, with a $10 million reduction from March 1 - July 31
of each year. Other modifications included the revision of the Credit
Facility's term to one year with a one-year automatic renewal, the addition
of an unused line fee, an increase in the interest rate accrued against
outstanding borrowings, and the modification of certain financial
covenants.
At December 31, 1997, the Company was not in compliance with the
annual covenant covering Net Income and the fourth quarter covenant related
to Tangible Net Worth. On February 3, 1998, the Company obtained waivers
from the Agent for all covenant violations at December 31, 1997. All
amounts due to the Lenders as of December 31, 1997 are classified as
current liabilities, and the available portion of the modified Credit
Facility was $18.7 million at December 31, 1997.
31
On February 11, 1998, the Second Amended and Restated Business Credit
and Security Agreement was amended to extend the credit limit for two
months, during which time the total amount available equaled $60.0 million.
For the "Seasonal Reduction Period" commencing March 31, 1998 and ending on
July 31, 1998, the credit available will equal $30 million. Additionally,
the reduction period for the Wholesale Financing facility was amended to
extend from March 31, 1998 to July 31, 1998 during which the available
credit under the facility will equal $10 million.
Interest under the Credit Facility is payable quarterly and is accrued
at a rate equal to the London Interbank Offered Rate ("LIBOR") plus 2.95%
(8.89% at December 31, 1997). Borrowing is limited to 80% of eligible
accounts receivable. The Credit Facility is secured by all of the
operating assets of the Company. Current obligations are first funded and
then all cash receipts are automatically applied to reduce outstanding
borrowings. The Credit Facility also contains certain covenants, including
restrictions on the payment of dividends and repurchase of stock, and
provisions specifying compliance with certain financial ratios.
The Company anticipates that it will continue to rely primarily on
operating cash flow, bank loans and vendor credit to finance its operating
cash needs. The Company believes that such funds should be sufficient to
satisfy the Company's near term anticipated cash requirements for
operations. Nonetheless, the Company may seek additional sources of
capital, including permanent financing over a longer term at fixed rates,
to finance its working capital requirements. The Company believes that
such capital sources will be available to it on acceptable terms, if
needed.
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 6 to
Financial Statements.
YEAR 2000
The Company is aware of the issues associated with the programming
code in existing computer systems as the millennium ("Year 2000")
approaches. The Year 2000 problem is complex as certain computer
operations will be affected in some way by the rollover of the two-digit
year value to 00. The issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail.
Management is performing a preliminary assessment of the Year 2000
compliance expense and related potential effect on the Company's earnings.
Since such assessment is yet to be completed, there can be no assurance
that any potential Year 2000 problem, if material, can be resolved by the
32
Company in a timely or cost effective fashion, or that any difficulty or
inability in resolving such problem will not have a material adverse effect
upon the Company.
"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, changes in government procurement
regulations, and other risks described in this Annual Report on Form 10-K
and in the Company's other Securities and Exchange Commission filings.
33
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 9
of Notes to Consolidated Financial Statements.
Index to Financial Statements and Schedule Page
FINANCIAL STATEMENTS:
Reports of Independent Public Accountants. . . . . . . . . . . . . .34
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . .36
Consolidated Balance Sheets as of December 31,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . .37
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . .38
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995. . . . . .39
Notes to Consolidated Financial Statements . . . . . . . . . . . . .40
SCHEDULE:
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . .56
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.
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Government Technology Services, Inc.
We have audited the accompanying consolidated balance sheets of
Government Technology Services, Inc. and subsidiary as of December 31, 1997
and 1996, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows, and financial statement schedule, for
the years 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 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 financial position of Government
Technology Services, Inc. and subsidiary as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Our audits were 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 audits 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.
February 27, 1998
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Government Technology Services, Inc.
We have audited the consolidated statements of operations, cash flows,
and changes in stockholders' equity and related financial statement
schedule of Government Technology Services, Inc. and Subsidiary listed in
Item 14(a) of this Form 10-K for the year 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 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 consolidated results of operations
and cash flows of Government Technology Services, Inc. and Subsidiary for
the year 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
36
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended
December 31,
------------------------------
(In thousands, except per share amounts) 1997 1996 1995
-------- -------- --------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $486,377 $491,642 $526,962
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 449,454 458,076 488,348
-------- -------- --------
Gross margin. . . . . . . . . . . . . . . . . . . . . . . 36,923 33,566 38,614
Operating expenses. . . . . . . . . . . . . . . . . . . . 38,927 50,297 42,735
Restructuring charges . . . . . . . . . . . . . . . . . . - - 2,953
-------- -------- --------
Loss from operations. . . . . . . . . . . . . . . . . . . (2,004) (16,731) (7,074)
Interest expense, net of interest income of
$325, $265 and $243, respectively . . . . . . . . . . 3,100 3,138 4,538
-------- -------- --------
Loss before taxes . . . . . . . . . . . . . . . . . . . . (5,104) (19,869) (11,612)
Income tax benefit. . . . . . . . . . . . . . . . . . . . - (2,031) (4,435)
-------- -------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (5,104) $(17,838) $ (7,177)
======== ======== ========
Net loss per share (basic and diluted). . . . . . . . . . $ (0.76) $ (2.67) $ (1.09)
======== ======== ========
Weighted average number of shares outstanding . . . . . . 6,733 6,690 6,604
======== ======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
37
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------
(In thousands, except share data) 1997 1996
-------- --------
ASSETS
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 856 $ 48
Accounts receivable, net. . . . . . . . . . . . . . . . 90,905 90,116
Merchandise inventories . . . . . . . . . . . . . . . . 33,000 31,844
Net deferred taxes and other. . . . . . . . . . . . . . 3,423 7,367
-------- --------
Total current assets . . . . . . . . . . . . . . . . 128,184 129,375
Property and equipment, net . . . . . . . . . . . . . . . 8,217 9,146
Intangible assets, net. . . . . . . . . . . . . . . . . . 534 788
Net deferred taxes and other. . . . . . . . . . . . . . . 529 1,692
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . $137,464 $141,001
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks. . . . . . . . . . . . . . . . . 21,569 15,828
Accounts payable. . . . . . . . . . . . . . . . . . . . 67,720 68,707
Accrued liabilities . . . . . . . . . . . . . . . . . . 8,035 10,241
-------- --------
Total current liabilities. . . . . . . . . . . . . . 97,324 94,776
Other liabilities . . . . . . . . . . . . . . . . . . . . 266 1,377
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . . 97,590 96,153
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock - $0.25 par value, 680,850 shares
authorized; none issued or outstanding . . . . . . . - -
Common Stock - $0.005 par value, 10,000,000 shares
authorized; 6,806,084 shares issued and 6,756,180
outstanding at December 31, 1997 and 6,806,084
shares issued and 6,724,919 outstanding at
December 31, 1996. . . . . . . . . . . . . . . . . . 34 34
Capital in excess of par value. . . . . . . . . . . . . 33,086 33,295
Retained earnings . . . . . . . . . . . . . . . . . . . 7,295 12,399
Treasury stock, 49,904 shares at December 31, 1997
and 81,165 shares at December 31, 1996, at cost. . . (541) (880)
-------- --------
Total stockholders' equity . . . . . . . . . . . . . 39,874 44,848
-------- --------
Total liabilities and stockholders' equity . . . . . $137,464 $141,001
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
br
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
December 31,
------------------------------
(In thousands) 1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (5,104) $(17,838) $ (7,177)
-------- -------- --------
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 3,539 12,618 3,090
(Gain)/loss on disposal of property and equipment . . . (340) 839 -
Stock compensation. . . . . . . . . . . . . . . . . . . - (13) 47
Restructuring charges . . . . . . . . . . . . . . . . . - - 2,953
(Decrease) increase in cash due to changes in
assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . (789) 13,049 (178)
Merchandise inventories. . . . . . . . . . . . . . . (1,156) 32,671 14,261
Deferred income taxes. . . . . . . . . . . . . . . . 2,466 3,158 (3,211)
Accounts payable . . . . . . . . . . . . . . . . . . (987) 4,647 7,651
Accrued liabilities. . . . . . . . . . . . . . . . . (2,206) (1,685) (687)
Other liabilities. . . . . . . . . . . . . . . . . . (1,111) (465) (559)
Other. . . . . . . . . . . . . . . . . . . . . . . . 2,641 (1,788) (52)
-------- -------- --------
Net cash (used in) provided by operating
activities. . . . . . . . . . . . . . . . . . (3,047) 45,193 16,138
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of property and equipment. . . . . . . . . . . . . (2,377) (4,770) (2,674)
Proceeds from sales of property and equipment. . . . . 361 53 -
-------- -------- --------
Net cash used in investing activities. . . . . . . (2,016) (4,717) (2,674)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) bank notes, net . . . . . . 5,741 (40,668) (13,624)
Proceeds from exercises of stock options and warrants . 130 222 447
Payments under capital lease obligations and other. . . - - (299)
-------- -------- --------
Net cash provided by (used in) financing
activities. . . . . . . . . . . . . . . . . . . 5,871 (40,446) (13,476)
-------- -------- --------
Net increase (decrease) in cash . . . . . . . . . . . . . 808 30 (12)
Cash at beginning of year . . . . . . . . . . . . . . . . 48 18 30
-------- -------- --------
Cash at end of year . . . . . . . . . . . . . . . . . . . $ 856 $ 48 $ 18
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . $ 2,744 $ 4,756 $ 3,276
Income taxes . . . . . . . . . . . . . . . . . . . . $ 7 $ 20 $ 5
The accompanying notes are an integral part
of these consolidated financial statements.
39
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
--------------------------------------------------------------
Common Stock Capital Total
------------------- in Stock-
Shares Excess Retained Treasury holders'
(In thousands) Issued Amount of Par Earnings Stock Equity
-------- -------- -------- -------- -------- --------
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
Stock awards and options exercised. . . . . . . . . . . . - - (209) - 339 130
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . - - - (5,104) - (5,104)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997. . . . . . . . . . . . . . . . 6,806 $ 34 $ 33,086 $ 7,295 $ (541) $ 39,874
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
40
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. Business activities also include sales to systems
integrators, prime contractors and other companies reselling information
technology to various government agencies. In August 1994, GTSI acquired
all of the outstanding shares of common stock of Falcon Microsystems, Inc.
("Falcon"). GTSI and Falcon are hereinafter referred to as the "Company."
On February 12, 1998, the Company entered into and closed on an Asset
Purchase Agreement with BTG, Inc. and two of its subsidiaries
(collectively, "BTG") under which the Company acquired substantially all of
the assets of the BTG division that resells computer hardware, software and
integrated systems to the Government (the "BTG Division"). The acquired
assets consisted primarily of inventory and rights under certain contracts
and intangible personal property, along with furniture, fixtures, supplies
and equipment. In addition, the Company assumed certain liabilities under
specified contracts of BTG as well as certain liabilities arising from the
ownership or operation of the acquired assets after the closing. The
Company paid at closing $7,325,265 in cash (after a $174,735 adjustment for
accrued vacation liability and satisfaction of an outstanding invoice owed
by BTG) and issued 15,375 shares, having a liquidation preference of
$15,375,000, of a new series of preferred stock designated Series C 8%
Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"). The
Company paid an additional $500,000 in cash upon the release of liens
on certain items of equipment which are part of the acquired assets. A
portion of the consideration, $800,000 in cash and 1,538 shares of Series C
Preferred Stock, is being held under an escrow agreement to secure BTG's
indemnification obligations under the Asset Purchase Agreement. Under the
Asset Purchase Agreement, BTG is obligated to repay to the Company up to
$4.5 million to the extent that there is a shortfall in the amounts that
the Company receives from dispositions of certain inventory acquired.
Pursuant to the Asset Purchase Agreement, the Company agreed to
convene a meeting of stockholders no later than January 1, 1999 (the "First
Meeting") to approve a proposal to convert the Series C Preferred Stock
into 3,000,000 shares of Common Stock (the "Conversion Proposal") and a
proposal to amend the certificate of incorporation to increase the number
of authorized shares of Common Stock from 10,000,000 to 20,000,000 (the
"Charter Amendment Proposal"). If the Conversion Proposal and the Charter
Amendment Proposal are approved, the Series C Preferred Stock will be
converted automatically into that number of shares of Common Stock equal to
the liquidation preference of the Series C Preferred Stock ($15,375,000 or
$1,000 per share) plus all accrued and unpaid dividends thereon divided by
the conversion price of $5.125. If the Conversion Proposal and the Charter
Amendment Proposal are approved at the Annual Meeting of Stockholders
scheduled for May 12, 1998, which will be the First Meeting, the Series C
Preferred Stock will be converted into 3,000,000 shares of Common Stock.
41
If the Conversion Proposal and the Charter Amendment Proposal are not
approved at the Annual Meeting, (a) the Company has agreed to convene a
second meeting of stockholders no later than January 1, 2000 to approve the
Conversion Proposal and the Charter Amendment Proposal, and (b) the Series
C Preferred Stock will begin to accrue dividends.
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/or acceptance of services rendered.
FINANCIAL INSTRUMENTS. At December 31, 1997 and 1996, 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 and prime contractors to
the Federal Government. Other accounts receivable result from items billed
to suppliers under various agreements involving the sale of their products.
The Company performs ongoing credit evaluations of its non-governmental
customers but generally does not require collateral to support any
outstanding obligation owed to GTSI. 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 using a weighted average method.
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.
42
INTANGIBLE ASSETS. Intangible assets are recorded at cost and
amortized using the straight-line method over the following estimated
useful lives.
IMPAIRMENT OF LONG-LIVED ASSETS. To determine recoverability of its
long-lived assets, the Company evaluates the 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.
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.
INCOME TAXES. 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. Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards ("FAS") 128, "Earnings Per
Share," which requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all periods presented. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity. Diluted earnings per share is computed similarly to fully
diluted earnings per share pursuant to Accounting Principles Bulletin No.
15. Options to purchase approximately 284,000, 368,000 and 35,000 weighted
average shares of Common Stock at December 31, 1997, 1996 and 1995,
respectively, were not included in the computation of earnings per share
due to their anti-dilutive effect. Earnings per share for all other
periods presented have been restated to conform to FAS 128.
MARKETING DEVELOPMENT AND COOPERATIVE ADVERTISING FUNDS. Certain
vendors provide the Company with 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.
43
CHECK OVERDRAFTS. Included in accounts payable at December 31, 1997
and 1996, are approximately $2.0 million and $20.6 million, respectively,
which represent checks that have been issued but have yet to clear the
bank.
RECLASSIFICATIONS. Certain amounts from prior years have been
reclassified to conform to the current year financial statement
presentation.
NEW ACCOUNTING PRONOUNCEMENTS. The Company will adopt FAS 130,
"Reporting Comprehensive Income," and FAS 131, "Disclosures about Segments
of an Enterprise and Related Information," during 1998. The Company is
evaluating the impact of these statements on its consolidated financial
statement presentation.
2. ACCOUNTS RECEIVABLE
The composition of accounts receivable as of December 31, 1997 and
1996 is as follows (in thousands):
1997 1996
-------- --------
Trade accounts receivable. . . . . . . . . . . . $ 79,879 $ 80,795
Vendor and other receivables . . . . . . . . . . 15,119 13,856
-------- --------
94,998 94,651
Less allowance for uncollectible accounts . . (4,093) (4,535)
-------- --------
Accounts receivable, net . . . . . . . . . . . . $ 90,905 $ 90,116
======== ========
44
3. PROPERTY AND EQUIPMENT
The composition of property and equipment as of December 31, 1997 and
1996 is as follows (in thousands):
1997 1996
-------- --------
Office furniture and equipment . . . . . . . . . $ 11,819 $ 16,298
Computer software. . . . . . . . . . . . . . . . 2,954 2,024
Other. . . . . . . . . . . . . . . . . . . . . . 2,509 976
-------- --------
17,282 19,298
Less accumulated depreciation and
amortization. . . . . . . . . . . . . . . . . (9,065) (10,152)
-------- --------
Property and equipment, net. . . . . . . . . . . $ 8,217 $ 9,146
======== ========
4. NOTES PAYABLE TO BANKS
On May 2, 1996, the Company executed a three-year credit facility with
a bank (the "Principal Lender") for $40.0 million and a one-year credit
facility with the Other Lenders for an additional $55.0 million (collect-
ively, the "Credit Facility"). Additionally, on June 27, 1996, the Company
executed a separate $10.0 million facility with the Principal Lender for
inventory financing of vendor products (the "Wholesale Financing
Facility"). Interest under the inventory financing facility is accrued at
a rate equal to prime plus 3.00% (11.25% at December 31, 1996). On August
23, 1996, the Company and its banks executed Amendment No. 1 to the Credit
Facility, which modified certain quarterly financial covenants.
On June 30, 1997, the Company and its banks executed the Second
Amended and Restated Business Credit and Security Agreement The agreement
modified some of the terms and conditions contained in the Credit Facility
and effectively eliminated the Company's default condition with certain
1996 year-end financial covenants. The total amount available under the
Credit Facility was reduced from a total of $95 million to $60 million,
with an additional $30 million reduction during the period February 1 -
July 31 of each year. Further, the Wholesale Financing Facility was
increased from $10 million to $20 million, with a $10 million reduction
during the period March 1 - July 31 of each year. Other modifications
included the revision of the Credit Facility's term to one year with a one-
year automatic renewal, the addition of an unused line fee, an increase in
the interest rate accrued against outstanding borrowings, and the
modification of all financial covenants.
45
At December 31, 1997, the Company was not in compliance with the
annual covenant covering Net Income and the fourth quarter covenant related
to Tangible Net Worth. On February 3, 1998, the Company obtained waivers
from the Agent for all covenant violations at December 31, 1997. Amounts
due to the Lenders as of December 31, 1997 are classified as current
liabilities and the available portion of the Credit Facility at December
31, 1997 was approximately $18.7 million.
On February 11, 1998, the Second Amended and restated Business Credit
and Security Agreement was revised to limit the total amount available
under the facility to $60 million for an additional two months. The total
available under the facility is reduced to $30 million only during the
period April 1, 1998 to July 31, 1998. As for the Wholesale Financing
facility, the amount available under the agreement remains at $20 million
and is used solely for inventory purchases. The amount available is
reduced to $10 million only during the period April 1, 1998 to July 31,
1998. All other terms of both facilities remain the same. Interest under
the Credit Facility is payable quarterly and is accrued at a rate equal to
the London Interbank Offered Rate ("LIBOR") plus 2.95% (8.89% at December
31, 1997). Borrowing is limited to 80% of eligible accounts receivable.
The Credit Facility is substantially secured by all of the operating assets
of the Company. Current obligations are first funded and then all cash
receipts are automatically applied to reduce outstanding borrowings. The
Credit Facility also contains certain covenants that include restrictions
on the payment of dividends, the repurchase of stock, and provisions
specifying compliance with certain quarterly and annual financial
statistical ratios.
The following information pertains to the notes payable for the years
ended December 31, 1997, 1996 and 1995 (dollars in thousands):
1997 1996 1995
-------- -------- --------
Weighted average interest rate . . . . 8.0% 7.6% 8.8%
Weighted average borrowings. . . . . . $ 18,547 $ 29,625 $ 43,626
46
5. INCOME TAXES
The components of the (benefit) provision for income taxes for the
years ended December 31, 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995
-------- -------- --------
Current taxes:
Federal. . . . . . . . . . . . . . . $ (2,191) $ (4,579) $ (1,059)
State. . . . . . . . . . . . . . . . (275) (610) (165)
-------- -------- --------
(2,466) (5,189) (1,224)
-------- -------- --------
Deferred taxes:
Federal. . . . . . . . . . . . . . . 2,191 2,848 (2,883)
State. . . . . . . . . . . . . . . . 275 310 (328)
-------- -------- --------
2,466 3,158 (3,211)
-------- -------- --------
Income tax benefit . . . . . . . . . . - (2,031) (4,435)
======== ======== ========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities and the
amounts used for income tax purposes. In 1997 and 1996, the Company deter-
mined that $7.0 million and $5.1 million, respectively, of net deferred tax
assets were not recoverable. Accordingly, valuation allowances were
recorded against the applicable net deferred tax assets.
47
Significant components of the Company's deferred taxes as of December
31, 1997 and 1996 were as follows (in thousands):
Dec. 31, Dec. 31,
1997 1996
-------- --------
Deferred tax assets:
Accounts receivable and inventory
allowances . . . . . . . . . . . . . . . . . $ 2,195 $ 2,507
Intangible assets . . . . . . . . . . . . . 2,029 2,484
Accrued warranty and other contract
costs . . . . . . . . . . . . . . . . . . 564 1,554
Restructuring accrual . . . . . . . . . . . 170 553
Bid and proposal costs. . . . . . . . . . . 356 300
Vacation accrual. . . . . . . . . . . . . . 163 172
Deferred compensation . . . . . . . . . . . 82 131
Rent abatement. . . . . . . . . . . . . . . 73 81
NOL carryforwards . . . . . . . . . . . . . 1,717 -
Other . . . . . . . . . . . . . . . . . . . 10 9
-------- --------
Total deferred tax assets. . . . . . . 7,359 7,791
-------- --------
Deferred tax liabilities:
Depreciation. . . . . . . . . . . . . . . . 381 157
Rent abatement. . . . . . . . . . . . . . . 9 21
-------- --------
Total deferred tax liabilities . . . . 390 178
-------- --------
Net deferred tax assets. . . . . . . . . . . . . 6,969 7,613
Valuation allowance. . . . . . . . . . . . . . . 6,969 5,147
-------- --------
Net deferred tax assets reported . . . . . . . . $ - $ 2,466
======== ========
48
The Company's tax benefit for the years ended December 31, 1997, 1996
and 1995 differs from the statutory rate for Federal income taxes as a
result of the following factors:
1997 1996 1995
-------- -------- --------
Statutory rate . . . . . . . . . . . . (34.0)% (34.0)% (34.0)%
State income taxes, net of
Federal tax benefit . . . . . . . (3.7) (3.7) (4.2)
Valuation allowance. . . . . . . . . . 35.7 25.9 -
Other. . . . . . . . . . . . . . . . . 2.0 1.6 -
-------- -------- --------
- (10.2)% (38.2)%
======== ======== ========
49
6. 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. In addition,
in May 1997 the Company's Board of Directors adopted the 1997 Non-Officer
Stock Option Plan (the "1997 Plan") under Section (i)(1)(A) of The Nasdaq
Stock Market's National Market Rules. The 1997 Plan provides for the
granting of non-statutory stock options only to employees other than
officers and directors to purchase up to 300,000 shares 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
1997, 1996, 1994 and 1986 Plans, options have a term of up to ten years,
generally vest over three 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 1997, 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
- ------------------------------------------------------------------------------------------------------------
1997 Plan:
Outstanding at December 31, 1996. . . . . . . . . . . - - -
Granted. . . . . . . . . . . . . . . . . . . . . . 131,675 $ 4.88- 5.50 $ 4.98
Forfeited or canceled. . . . . . . . . . . . . . . (12,333) 4.88 4.88
Exercised. . . . . . . . . . . . . . . . . . . . . - - -
Outstanding at December 31, 1997. . . . . . . . . . . 119,342 $ 4.88- 5.50 $ 5.00 6.4
- ------------------------------------------------------------------------------------------------------------
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
Granted. . . . . . . . . . . . . . . . . . . . . . 358,000 4.88- 5.44 5.13
Forfeited or canceled. . . . . . . . . . . . . . . (195,500) 4.88- 6.13 5.21
Exercised. . . . . . . . . . . . . . . . . . . . . - - -
Outstanding at December 31, 1997. . . . . . . . . . . 399,500 $ 4.88- 7.31 $ 5.21 7.9
- ------------------------------------------------------------------------------------------------------------
1994 Plan:
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
Granted. . . . . . . . . . . . . . . . . . . . . . 116,000 5.19- 5.31 5.23
Forfeited or canceled. . . . . . . . . . . . . . . (172,300) 3.50- 6.13 5.30
Exercised. . . . . . . . . . . . . . . . . . . . . (2,700) 3.50- 3.50 3.50
Outstanding at December 31, 1997. . . . . . . . . . . 232,500 $ 3.25-13.44 $ 7.02 5.7
- ------------------------------------------------------------------------------------------------------------
50
Number Weighted Weighted
of Exercise Average Average
Option Price Price Remaining
shares per share per share Life
- ------------------------------------------------------------------------------------------------------------
1986 Plan:
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
Granted. . . . . . . . . . . . . . . . . . . . . . - - -
Forfeited or canceled. . . . . . . . . . . . . . . (27,800) 6.50-10.25 9.65
Exercised. . . . . . . . . . . . . . . . . . . . . - - -
Outstanding at December 31, 1997. . . . . . . . . . . 84,500 $ 3.50-14.25 $ 4.95 6.4
- ------------------------------------------------------------------------------------------------------------
Nonstatutory Stock Options:
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
Granted. . . . . . . . . . . . . . . . . . . . . . 150,000 5.13- 5.25 5.17
Forfeited or canceled. . . . . . . . . . . . . . . - - -
Exercised. . . . . . . . . . . . . . . . . . . . . - - -
Outstanding at December 31, 1997. . . . . . . . . . . 1,255,000 $ 3.75-10.00 $ 4.67 7.6
- ------------------------------------------------------------------------------------------------------------
FOR ALL PLANS:
Outstanding at December 31, 1997. . . . . . . . . . . 2,090,842 $ 3.25-14.25 $ 5.06 7.3
- ------------------------------------------------------------------------------------------------------------
OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1997
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- -----------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life-Years Price at 12/31/96 Price
- --------------- --------------- --------------- --------------- --------------- ---------------
$ 3.25- $ 4.78 1,019,000 7.8 $ 3.71 973,200 $ 3.73
4.79- 7.13 876,342 7.2 5.81 396,883 5.23
7.14- 10.25 25,000 5.4 8.14 8,150 8.95
10.26- 14.25 170,500 5.6 11.46 111,300 11.62
- --------------- --------------- --------------- --------------- --------------- ---------------
$ 3.25- $14.25 2,090,842 7.3 $ 5.27 1,489,533 $ 4.75
=============== =============== =============== =============== =============== ===============
51
The Company adopted the disclosure requirements of FAS 123,
"Accounting for Stock-Based Compensation," 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 1997, 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.
1997 1996 1995
-------- -------- --------
Net loss - pro forma . . . . . . . . . $ (5,411) $(18,818) $ (8,003)
Net loss per share - pro forma
(basic and diluted) . . . . . . . $ (0.80) $ (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 for 1997, 1996 and 1995: no dividend yield, 70% volatility,
risk-free interest rates ranging from 5.74% to 6.90%, and expected lives of
three to five years.
At December 31, 1997, in the 1997 Plan options for 40,225 shares were
exercisable and 180,658 options were available for grant; in the 1996 Plan
options for 264,467 shares were exercisable and 80,500 options were
available for grant; in the 1994 Plan options for 106,958 shares were
exercisable and 64,800 options were available for grant; and in the 1986
Plan options for 68,050 shares were exercisable.
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
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, 1997, employees purchased 13,126 and 15,435 shares,
respectively, at prices of $4.25 and $4.20, respectively. In the offering
periods ended June 30 and December 31, 1996, employees purchased 22,786 and
52
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. The weighted average fair market value of shares
under the ESPP was $4.22, $4.76 and $4.53 in 1997, 1996 and 1995,
respectively. The Company has reserved 250,000 shares of common stock for
the ESPP, of which 93,861 were available for future issuance as of December
31, 1997.
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 and, as amended, the
Company is currently precluded from repurchasing its common stock.
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 entitled 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 entitled the holder to purchase common stock of
the Company having a market value equal to two times the exercise price, or
to purchase shares of common stock of the acquiring corporation having a
market value equal to two times the exercise price. The Preferred Shares
conferred to holders certain rights as to dividends, voting and liquidation
in preference to common stockholders. The Rights were non-voting, were not
presently exercisable and traded in tandem with the common stock. The
Rights were redeemable, 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. At the annual meeting held on May 6, 1997,
the proposal for such three-year extension of the Rights Plan was defeated.
7. COMMITMENTS AND CONTINGENCIES
During the fourth quarter of 1997, the Company recorded an additional
accrual of $1.1 million to account for estimated obligations associated
with state sales tax activity occurring during the years 1992 though 1995.
State sales tax laws generally require collection from customers of sales
tax unless such customers provide valid sales tax exemption certificates.
Sales tax exemption certificates are customarily issued to those companies
that resell products to the federal government.
53
In October 1997, the Company entered into a settlement agreement with
the Department of Justice under which the Company will pay the Government a
total of $400,000 plus $22,000 in legal fees that are to be paid in three
equal installments. The agreement resolves and releases the Company from
claims under the previously disclosed GSA audit of the Company's GSA
Schedule sales for the years 1988 to the present, and settles and dismisses
with prejudice a qui tam lawsuit filed on behalf of the Government
regarding such GSA Schedule sales. The qui tam lawsuit naming the Company
was filed under seal in 1995 and has been subject to a court order
prohibiting disclosure of the suit. The qui tam action was filed by the
same individual who filed a similar action against Novell, Inc. in 1992,
which Novell settled by paying the government $1.7 million. The Company
believes it has settled the Government's claims on favorable terms. Prior
to settling with the DOJ, the Company had incurred approximately $1.5
million in attorney and accounting costs in responding to GSA charges and
asserting the Company's defenses to the Government's allegations.
In December 1996, the Company settled litigation pending before the
Armed Services Board of Contract Appeals related to the Company's
obligation to provide "upgrades" of certain computer software under the
Desktop IV Contract. The settlement required the Company to provide,
without charge, certain software licenses to users who registered before
February 28, 1997. At December 31, 1996, the Company recorded a liability
of approximately $3.0 million, which represented management's estimate of
the costs necessary to provide the "upgrades" noted above plus estimated
professional services costs paid in 1997 related to the 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.
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 200,000 square feet of
warehouse space beginning in December 1996 to accommodate the distribution
and storage of merchandise inventories.
In November 1988, the Company executed a ten-year lease for its
corporate headquarters that comprises approximately 120,000 square feet of
office space and 14,000 square feet of warehouse space. The Company also
entered into a nine-year lease for 55,170 square feet of office space in
two buildings beginning December 1, 1989. The lease for the entire
facility expires on November 30, 1998. In October 1997, the Company
entered into an agreement to lease a new administrative facility consisting
of 100,000 square feet of new office space in Chantilly, Virginia. The
agreement has a 10 year term with one five year option period and will
commence on December 1, 1998. The Company is obligated under the lease
agreement to provide to the Landlord a Letter of Credit ("LOC") in the
amount of $2.0 million as a security deposit for all tenant requested
54
improvements associated with the lease. This deposit will be reduced by
10%, per year, over the life of the lease. Rent expense for the years
ended December 31, 1997, 1996 and 1995 was approximately $3.6 million, $3.4
million, and $3.5 million, respectively. The Company also maintains sales
offices in Chicago and in Germany and has, in each of these locations,
entered into lease agreements. Collective future minimum lease payments as
of December 31, 1997 are as follows (in thousands):
Operating
Year ending December 31, Leases
------------------------ --------
1998. . . . . . . . . . . . . . . $ 3,510
1999. . . . . . . . . . . . . . . 1,764
2000. . . . . . . . . . . . . . . 1,817
2001. . . . . . . . . . . . . . . 1,869
2002. . . . . . . . . . . . . . . 1,925
Thereafter. . . . . . . . . . . . 11,561
--------
Total minimum lease payments . . . . . $ 22,446
========
8. 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.
9. 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
1997 Quarters Ended
----------------------------------------------------------------------------
(In thousands, except per share data) March 31, June 30, September 30, December 31,(1)
---------------- ---------------- ---------------- ----------------
Sales . . . . . . . . . . . . . . . . . . . . . . . $ 88,407 100.0% $ 94,464 100.0% $ 161,759 100.0% $141,747 100.0%
Gross margin. . . . . . . . . . . . . . . . . . . . 7,130 8.1 6,832 7.2 11,715 7.2 11,246 7.9
Operating expenses. . . . . . . . . . . . . . . . . 9,883 11.2 9,443 10.0 9,312 5.7 10,289 7.3
(Loss) income from operations . . . . . . . . . . . (2,753) (3.1) (2,611) (2.8) 2,403 1.5 957 0.6
Interest expense, net . . . . . . . . . . . . . . . 651 0.8 376 0.4 512 0.3 1,561 1.0
(Loss) income before income taxes . . . . . . . . . (3,404) (3.9) (2,987) (3.2) 1,891 1.2 (604) (0.4)
Net (loss) income . . . . . . . . . . . . . . . . . (3,404) (3.9) (2,987) (3.2) 1,891 1.2 (604) (0.4)
Net (loss) income per share . . . . . . . . . . . . $(0.51) $(0.44) $0.28 $(0.09)
Weighted average number of
common and common
equivalent shares outstanding. . . . . . . . . . 6,725 6,725 6,740 6,741
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
(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.
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 Deductions(2) Period
- ------------------------------------------------------------------ --------- --------- ------------- --------
Year ended December 31, 1997:
Allowance for bad debts . . . . . . . . . . . . . . . . . . . . $ 4,535 $ 2,800 $(3,242) $ 4,093
Allowance for slow-moving and obsolete inventory. . . . . . . . 4,566 6,766 (8,483) 2,849
Allowance for income taxes. . . . . . . . . . . . . . . . . . . 5,147 1,822 - 6,969
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
(1) Adjustments and 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 12, 1998, 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 12, 1998, 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 12, 1998, 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 12, 1998, 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 33 of this Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
See the Index included in Item 8 on Page 33 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)(17)
3.2 Bylaws, as amended
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), and amendment thereto dated November 26, 1997
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)
60
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)
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(2)
10.30 Asset Purchase Agreement dated as of February 12, 1998 among
the Registrant, BTG, Inc., BTG Technology Systems, Inc. and
Concept Automation, Inc. of America (excluding attachments and
exhibits)(17)
10.31 Standstill Agreement between the Registrant and BTG, Inc. dated
as of February 12, 1998(17)
61
10.32 Certificate of Designations, Preferences and Rights of Series C
8% Cumulative Redeemable Convertible Preferred Stock of the
Registrant filed February 12, 1998 with the Secretary of State
of Delaware(17)
10.33 1994 Stock Option Plan, as amended to date(1)
10.34 1996 Stock Option Plan(1)
10.35 Employment Agreement dated January 1, 1998 between the
Registrant and M. Dendy Young(1)
10.36 Lease dated December 10, 1997 between the Registrant and Petula
Associates, Ltd. covering new headquarters facility (excluding
attachments and exhibits)
10.37 Second Amended and Restated Business Credit and Security
Agreement, dated as of July 28, 1997, among the Registrant,
Certain Lenders Named [in such agreement], and Deutsche
Financial Services Corporation, as a Lender and as Agent
(excluding attachments and exhibits)
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.
(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.
62
(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 Current Report on
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 Current Report on
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.
(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) Incorporated by reference to the Registrant's Current Report on
Form 8-K filed with the Commission on February 12, 1998.
63
(B) REPORTS ON FORM 8-K
(1) On October 9, 1997, the Registrant filed a Current Report on
Form 8-K reporting that the Registrant had reached an agreement
of certain legal matters.
(2) On December 19, 1997, the Registrant filed a Current Report on
Form 8-K reporting that the Registrant had signed a letter of
intent for the purchase by the Registrant of the product sales
division of BTG, Inc.
(3) On January 13, 1998, the Registrant filed a Current Report on
Form 8-K reporting that the Registrant had amended the above-
referenced letter of intent.
(4) On January 26, 1998, the Registrant filed a Current Report on
Form 8-K reporting that the Registrant had extended the above-
referenced letter of intent.
(5) On February 12, 1998, the Registrant filed a Current Report on
Form 8-K reporting that the Registrant had completed the
transaction contemplated by the above-referenced letter of
intent.
(C) EXHIBITS
See the list of Exhibits in Item 14(a)(3) beginning on Page 58
of this Form 10-K.
(D) FINANCIAL STATEMENT SCHEDULES
See the Index included in Item 8 on Page 33 of this Form 10-K.
64
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 30, 1998 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 30, 1998
- ---------------------------
Lawrence J. Schoenberg
/s/ M. Dendy Young President and March 30, 1998
- --------------------------- Chief Executive Officer
M. Dendy Young (Principal Executive Officer)
and a Director
/s/ Stephen L. Waechter Senior Vice President and March 30, 1998
- --------------------------- Chief Financial Officer
Stephen L. Waechter (Principal Financial and
Accounting Officer)
/s/ Tania Amochaev Director March 30, 1998
- ---------------------------
Tania Amochaev
Director March 30, 1998
- ---------------------------
Dr. Edward H. Bersoff
65
Signature Title Date
--------- ----- ----
/s/ Gerald W. Ebker Director March 30, 1998
- ---------------------------
Gerald W. Ebker
/s/ Lee Johnson Director March 30, 1998
- ---------------------------
Lee Johnson
/s/ Steven Kelman Director March 30, 1998
- ---------------------------
Steven Kelman, Ph. D.
/s/ James J. Leto Director March 30, 1998
- ---------------------------
James J. Leto
/s/ John M. Toups Director March 30, 1998
- ---------------------------
John M. Toups
66
INDEX TO EXHIBITS
===========================================================================
EXHIBIT |
NUMBER | DESCRIPTION
- ---------------------------------------------------------------------------
3.2 | Bylaws, as amended
- ---------------------------------------------------------------------------
10.3 | Amendment dated November 26, 1997 to 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
- ---------------------------------------------------------------------------
10.33 | 1994 Stock Option Plan, as amended to date
- ---------------------------------------------------------------------------
10.34 | 1996 Stock Option Plan
- ---------------------------------------------------------------------------
10.35 | Employment Agreement dated January 1, 1998 between the
Registrant and M. Dendy Young
- ---------------------------------------------------------------------------
10.36 | Lease dated December 10, 1997 between the Registrant and
Petula Associates, Ltd. covering new headquarters facility
(excluding attachments and exhibits)
- ---------------------------------------------------------------------------
10.37 | Second Amended and Restated Business Credit and Security
Agreement, dated as of July 28, 1997, among the Registrant,
Certain Lenders Named [in such agreement], and Deutsche
Financial Services Corporation, as a Lender and as Agent
(excluding attachments and exhibits)
- ---------------------------------------------------------------------------
11.1 | Computation of Earnings Per Share
- ---------------------------------------------------------------------------
23.1 | Consent of Arthur Andersen LLP
- ---------------------------------------------------------------------------
23.2 | Consent of Coopers & Lybrand, L.L.P.
===========================================================================