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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 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)
3901 STONECROFT BOULEVARD, CHANTILLY, VIRGINIA 20151-0808
(Address of principal executive offices) (Zip Code)
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.
YES [X] 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 March 1,
2000, as reported on The Nasdaq Stock Market, was $41,557.694.
The number of shares outstanding of the registrant's Common Stock on March
1, 2000, was 9,235,043.
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 16, 2000 are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
THE COMPANY
Government Technology Services, Inc. ("GTSI)" or the "Company") is a
leading business to Government marketer (B2G) 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 as 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,
was held under an escrow agreement to secure BTG's indemnification obligations
under the Asset Purchase Agreement. Under the Asset Purchase Agreement, BTG was
obligated to repay to the Company up to $4.5 million to the extent that there
was a shortfall in the amounts that the Company received from dispositions of
certain inventory acquired.
Subsequent to the closing, BTG delivered to the Company certain other
inventory ("Surplus Inventory"). By letter dated May 15, 1998, the Company and
BTG agreed that BTG would invoice GTSI an aggregate of $3,912,419 for Surplus
Inventory. In addition, BTG agreed to pay to the Company $1 million on June 30,
1998, which constituted full and complete payment for any inventory shortfall as
described in the Asset Purchase Agreement, as well as $250,000 for costs
associated with processing the Surplus Inventory.
Pursuant to the Asset Purchase Agreement, the Company agreed to convene a
meeting of stockholders no later than January 1, 1999 to approve a proposal to
convert the Series C Preferred Stock into 3,000,000 shares of Common Stock (the
"Conversion Proposal"), and a proposal to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock from
10,000,000 to 20,000,000 (the "Charter Amendment Proposal"). At the Company's
annual meeting of stockholders held on May 12, 1998, the Company's stockholders
approved the Conversion Proposal and the Charter Amendment Proposal. The Series
C Preferred Stock was converted automatically into
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3,000,000 shares of Common Stock valued at $5.125 per share and which, pursuant
to the exemption provided under Section 4(2) of the Securities Act of 1933, as
amended ("Securities Act"), were not registered under the Securities Act.
On February 10, 1999, the Company entered into subsequent agreements with
BTG. The agreements relate to the reacquisition of stock by GTSI from BTG, the
terms of certain contracts and the relationship of the parties going forward.
Pursuant to the agreements, GTSI reacquired 600,000 shares of its stock from
BTG. Of the 600,000 shares, 200,000 were tendered to GTSI at no cost and 400,000
were purchased by GTSI for $5.00 per share, in exchange for a three-year, 8%
interest bearing note from BTG with the principal due in three annual
installments of $500,000, $500,000 and $1,000,000, respectively. As part of the
agreements, GTSI has an exclusive five-year option to purchase the remaining 1.3
million shares of GTSI stock held by BTG for $5.25 per share. Under the February
12, 1998 Asset Purchase Agreement, BTG is precluded from selling any of its
holdings, with certain limited exceptions, to a third party for six years
without GTSI's prior consent. Under the February 10, 1999 agreement, GTSI must
consent to a sale by BTG of their stock to any third party. If GTSI consents to
such a sale, BTG is obligated to pay GTSI $0.50 per share on any shares sold by
BTG.
As a result of the agreement, BTG transferred to GTSI all of the cash
portion of the February 12, 1998 escrow, totaling $827,219, and BTG's ownership
interest in GTSI was reduced to 13.3%. Consequently, BTG forfeited its right to
representation on the GTSI Board and Dr. Edward H. Bersoff, Chief Executive
Officer of BTG, resigned from the GTSI Board. The agreements also provide that
BTG will novate certain contracts that GTSI had been performing in the capacity
of a subcontractor, and halts all royalty payments by GTSI to BTG after December
31, 1998.
GTSI 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 most departments
and agencies of the Government, state governments and systems integrators and
prime contractors selling to the government market. In 1999, GTSI's sales
directly to Government agencies, to prime contractors for resale to Government
agencies and to state and local government agencies accounted for 90%, 8% and 2%
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 related
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"), Microsoft Corporation
("Microsoft"), Compaq Computer Corporation ("Compaq"), Panasonic Personal
Computer Company (a division of Matsushita Electric Corporation of America),
CISCO Systems Incorporated ("CISCO"), Sun Microsystems, Inc. ("Sun"), Apple
Computer, Inc., Toshiba America Information Systems, Inc. ("Toshiba") and
International Business Machines Corp.("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.
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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 1,600 to 1,800 units per day including functional and diagnostic testing of
all integrated components. In 1998, the Company's distribution and integration
operations achieved ISO 9002 certification. The Company also subleases a 20,000
square foot distribution center in Chattanooga, Tennessee. 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 ("BPA's") 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.
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 Hewlett-Packard to add their Unix-Based server
products. In 1998, GTSI began offering a full range of seat management services
to Government agencies. These services include project management, help desk
support, local area network management support, basic hardware support,
continuous training support, asset management, information technology planning
as well as technical assessment and evaluation. In future years, the
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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.
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 1999 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 achieves these sales primarily through
contracts with the government and through open market sales. Company contracts
with the government include GSA schedule contracts and indefinite
dealing/indefinite quantity contracts.
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 is set to expire on March 31, 2002. In August 1998, GTSI was
awarded GSA Schedule 36.
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Schedule 36 is for the supply of Hewlett-Packard printer toner cartridges.
Schedule 36 is set to expire on September 30, 2003.
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. Government agencies and other authorized purchasers
(collectively, "GSA Schedule Purchasers") may purchase goods under GSA Schedule
contracts at predetermined ceiling prices, terms and conditions. GSA Schedule
Purchasers may place unlimited orders for products under GSA Schedule contracts.
However, agencies are instructed to seek lower prices for orders exceeding a
"maximum order" threshold. 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 usually 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. 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.
BLANKET PURCHASE AGREEMENTS
Historically, the Company has held hundreds of BPA's 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 BPA's for similar products with
several companies. BPA's generally include a list of products at established
prices, individual purchase limits for authorized purchasers, and other
pre-negotiated terms and conditions. Purchases under BPA's are often paid for
with a Government-issued credit card.
In 1996, the GSA authorized agencies to enter into BPA's with Schedule
holders. The GSA-authorized BPA's 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
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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 BPA's.
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 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.
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 with a value in excess of $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. GTSI discontinued its
catalog at the end of 1998, and replaced it with an expanded website.
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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" under several of the contracts it held during 1999 by virtue of it
being a non-manufacturing entity with a rolling average over the prior 12 months
of 500 or fewer employees at the time of contract award. 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; 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 contract awards after February,
1998. 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
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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.
The industry in which the Company conducts its business, as well as the
geographic location of the Company's headquarters near the nation's capitol and
the concomitant density of high technology companies headquartered nearby,
results in a limited pool of qualified employees. Although the Company believes
that its compensation and benefits are competitive, such competition and
geography may from time to time impact the Company's ability to attract and
retain a competent and productive workforce.
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, Panasonic, Compaq, Sun, Apple,
and IBM 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.
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 therefore, 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 workstations, also
specializes in complex software and service solutions such as customer
relationship management, call center automation. Linux, and information
assurance. The Company's software vendors include Microsoft, Adobe, Siebel
Systems, Microstrategy.com, Avesta Technologies, Red Hat, Symantec IBM/Lotus,
Informix, Corel, and Visio. GTSI also sells networking software, including
Citrex and 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
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access to, GTSI's computerized system for maintaining price, product
availability, bid, ordering and order-status information.
From inception, GTSI recognized that the size and diversity of the
government market made it imperative to identify and understand the needs of
customers. Through years of intensive effort, GTSI has compiled and continuously
updates one of the most comprehensive databases of federal, state and local
government microcomputer users and their buying patterns. This proprietary,
on-line computerized database currently contains over 235,000 entries, including
an extensive list of agency procurement and contracting officers, information
resource managers, end users, systems integrators, VARs and prime contractors.
GTSI uses this database, among other things, for targeting telemarketing and
direct mail campaigns. The Company conducts direct mail campaigns consisting of
brochures, fliers, questionnaires, reply cards and other promotional items.
In addition to being an active participant in major federal and state
government trade shows, GTSI sponsors and produces its own federal and state
government seminars and agency-specific shows. 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
(http:\\www.gtsi.com), on the world wide web in early 1995. In 1997 and 1998,
the website provided access to certain product, contract and Company
information. In the first quarter of 1999, the Company introduced its third
generation website which consists of two sections. First, there is the
electronic shopping section of the website that includes a smart shopping cart
feature allowing the buyer to save and manage multiple shopping carts, a smart
check-out feature which stores products from multiple contracts into a single
shopping cart that are automatically split (with appropriate surcharges) upon
check-out, and a smart quote feature which allows buyers to save, manage and
e-mail multiple price quotes. Second, the site includes an information portal
section that is designed to meet the information needs of the Government
customer.
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:
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- Access to the government market through a significant number
of diverse contract vehicles;
- Substantial relief from the cost of compliance with
procurement regulations involved in selling directly to the
government market;
- 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; and
- 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 and may contain limitations
on vendor liability. 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. The Company must
continue to obtain products at competitive prices from leading vendors in order
to provide a centralized source of price-competitive products for its customers
and to be awarded government contracts. Although almost all of GTSI's vendors
currently do not have all of their own computer products on a GSA Schedule
contract, one or more may elect to apply for its own GSA Schedule contract and
may do so at lower end-user selling prices than those GTSI currently offers or
could profitably offer. Although GTSI believes its relationships with its key
vendors to be good, a decision by one or more to sell directly to the Government
(especially if at significantly lower prices than GTSI), to sell their products
to GTSI's competitors on more favorable terms than to GTSI, to allow additional
resellers to represent their products on a GSA Schedule contract, to restrict or
terminate GTSI's rights to sell their products or restrict their products from
being carried on a GSA Schedule contract, could materially adversely affect the
Company.
CUSTOMERS
The Company's customers are primarily federal, state and local government
agencies and prime contractors to the Government, including systems integrators.
In 1999, the Company sold products or services to thousands of different
customers, including to most agencies and major departments of the
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Government, to many state governments and to hundreds of prime contractors.
Although no single customer accounted for greater than 5% of the Company's 1999
sales, aggregate 1999 sales to the Government's Departments of the Army, Navy
and Air Force were 25.6.%, 12.4% and 10.4%, respectively, of GTSI's 1999 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 February 29, 2000, and December 31, 1999, the Company's total backlog of
orders was approximately $55.0 million and $54.9 million, respectively, as
compared with approximately $53.4 million and $59.7 million at February 28,
1999, and December 31, 1998, respectively. Total backlog consists of written
purchase orders received and accepted by GTSI but not yet shipped. 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 products 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. GTSI outsources to third parties a significant
portion of its extended warranty obligations.
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 1999, 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,
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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 March 3, 2000, the Company had 521 employees, including 264 in sales,
marketing and contract management; 153 in operations; and 104 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.
ITEM 2. PROPERTIES.
The Company's executive offices are located in an approximately
100,500-square foot facility in Chantilly, Virginia under a lease expiring in
November 2009, with one five-year option. 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 a
branch sales office occupying 139 square meters in Mannheim, Germany. The
Company also subleases a 20,000 square foot distribution center in Chattanooga,
Tennessee under a sublease, which expires on March 31, 2001.
ITEM 3. LEGAL PROCEEDINGS.
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.
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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
under the symbol "GTSI." As of December 31, 1999, there were 178 record holders
of the Company's common stock. As of March 20, 2000, there were 179 record
holders and approximately 1,500 beneficial holders of the Company's common
stock. The following table sets forth, for the periods indicated, the high and
low closing prices for the Company's common stock.
-----------------------------------------------
1999 1998
-----------------------------------------------
Quarter High Low High Low
-------------------------------------------------------------
First $ 5 1/4 $ 3 3/16 $ 5 7/8 $ 4 3/4
-------------------------------------------------------------
Second $ 4 1/4 $ 3 1/8 $ 5 7/16 $ 4 3/8
-------------------------------------------------------------
Third $ 4 1/4 $ 3 1/8 $ 5 3/16 $ 3 3/4
-------------------------------------------------------------
Fourth $ 3 3/4 $ 2 7/16 $ 5 1/2 $ 2 1/2
-------------------------------------------------------------
The Company has never paid cash dividends. It is the present policy of the
Company to retain earnings to finance the growth and development of its
business, and therefore the Company does not anticipate paying cash dividends on
its common stock in the foreseeable future. Furthermore, certain financial
covenants in the Company's bank credit agreement restrict the Company's ability
to pay cash dividends.
Additional Investor Relations Information. All of the Company's current
required filings with the Securities and Exchange Commission, as well as press
releases and other investor relations information, may be found at
HTTP://WWW.GTSI.COM on the internet's world wide web. For those without internet
access, such information may be obtained without charge by request to the
Company addressed to: Investor Relations, Government Technology Services, Inc.,
3901 Stonecroft Boulevard, Chantilly, Virginia 20151-0808.
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 16, 2000, at the Company's headquarters located at
3901 Stonecroft Boulevard in Chantilly, Virginia.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data for the three years ended December 31, 1999,
1998 and 1997 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, 1999, 1998 and 1997 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
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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,
1999 1998 1997 1996 (1) 1995 (2)
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
Sales $668,488 $605,884 $486,377 $491,642 $526,962
Cost of sales 618,381 554,247 450,454 458,510 488,348
--------- --------- --------- --------- ---------
Gross margin 50,107 51,637 35,923 33,132 38,614
--------- --------- --------- --------- ---------
Operating expense:
Selling, general and administrative 44,931 44,660 36,940 38,008 39,645
Depreciation and amortization 3,584 3,661 3,539 13,456 3,090
Restructuring charges - - - - 2,953
--------- --------- --------- --------- ---------
Total operating expenses 48,515 48,321 40,479 51,464 45,688
--------- --------- --------- --------- ---------
Income (loss) from operations 1,592 3,316 (4,556) (18,332) (7,074)
Interest (income) expense, net (1,090) 977 548 1,537 4,538
--------- --------- --------- --------- ---------
Income (loss) before taxes 2,682 2,339 (5,104) (19,869) (11,612)
Income tax provision (benefit) - - - (2,031) (4,435)
--------- --------- --------- --------- ---------
Net income (loss) $ 2,682 $ 2,339 $ (5,104) $(17,838) $ (7,177)
========= ========= ========= ========= =========
Earnings (loss) per share (basic) $ 0.29 $ 0.27 $ (0.76) $ (2.67) $ (1.09)
========= ========= ========= ========= =========
Earnings (loss) per share (diluted) $ 0.29 $ 0.26 $ (0.76) $ (2.67) $ (1.09)
========= ========= ========= ========= =========
Weighted average number of common and
Common equivalent shares outstanding (basic) 9,271 8,700 6,733 6,690 6,604
========= ========= ========= ========= =========
Weighted average number of common and
Common equivalent shares outstanding (diluted) 9,314 8,909 6,733 6,690 6,604
========= ========= ========= ========= =========
(1) The year 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 year 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.
(In thousands) December 31,
1999 1998 1997 1996 1995
---------- ----------- ---------- ----------- ----------
BALANCE SHEET DATA:
Working capital $ 44,350 $ 42,206 $ 30,860 $ 34,599 $ 45,597
Total assets 186,333 161,090 137,464 141,001 197,318
Notes payable to banks 9,479 14,889 21,569 15,828 56,496
Total liabilities 133,137 105,766 97,590 96,153 134,841
Stockholders' equity 53,196 55,324 39,874 44,848 62,477
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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
Government Technology Services, Inc. ("GTSI" or the "Company") is a leading
business to Government marketer (B2G) of microcomputer and Unix workstation
hardware, software and networking products to the Federal government market. 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 Cisco in 1998); and
to the addition or expiration of sales contract vehicles (e.g., the addition of
the SEWP II Contract, the NIH ECS-II Contract, the TDA-1 Contract and STAMIS
Contract, 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 and
IDIQ 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 meet customers' requirements.
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.
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Percentage of Sales Percentage Change
--------------------------------- --------------------------
Years Ended December 31, Years Ended December 31,
--------------------------------- --------------------------
1999 1998 1997 1998 to 1999 1997 to 1998
-------- --------- -------- ------------ ------------
INCOME STATEMENT DATA:
Sales 100.0% 100.0% 100.0% 10.3% 24.6%
Cost of sales 92.5% 91.5% 92.6% 11.6% 23.0%
-------- --------- --------
Gross margin 7.5% 8.5% 7.4% (3.0)% 43.7%
Operating expense:
Selling, general and administrative 6.8% 7.4% 7.6% 0.6% 20.9%
Depreciation and amortization 0.5% 0.6% 0.7% (2.1)% 3.4%
-------- --------- --------
Total operating expenses 7.3% 8.0% 8.3% 0.4% 19.4%
-------- --------- --------
Income (loss) from operations 0.2% 0.6% (0.9)% (52.0)% (172.8)%
Interest (income) expense, net (0.2)% 0.1% 0.1% (211.6)% 78.3%
-------- --------- --------
Income (loss) before taxes 0.4% 0.5% (1.0)% 14.7% (145.8)%
Income tax provision - - - - -
-------- --------- --------
Net income (loss) 0.4% 0.5% (1.0)% 14.7% (145.8)%
======== ========= ========
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 Years Ended December 31,
(Dollars in millions) -------------------------------------------------------------------------
1999 1998 1997
---------------------- ----------------------- ------------------------
Hardware $514.4 76.9% $ 474.7 78.3% $ 430.1 88.5%
Software 131.6 19.7% 94.6 15.6% 55.1 11.3%
Services 22.5 3.4% 36.6 6.1% 1.2 0.2%
------ ------------- --------- ----------- ---------- -----------
Total $668.5 100.0% $ 605.9 100.0% $ 486.4 100.0%
====== ============= ========= =========== ========== ===========
CONTRACT VEHICLES Years Ended December 31,
(Dollars in millions) -------------------------------------------------------------------------
1999 1998 1997
---------------------- ----------------------- ------------------------
GSA Schedules $268.3 40.1% $ 199.8 33.0% $ 208.8 42.9%
IDIQ Contracts 308.5 46.2% 319.3 52.7% 148.6 30.6%
Open Market 76.8 11.5% 68.6 11.3% 107.3 22.1%
Other Contracts 14.9 2.2% 18.2 3.0% 21.7 4.4%
------ ------------- --------- ----------- ---------- -----------
Total $668.5 100.0% $ 605.9 100.0% $ 486.4 100.0%
====== ============= ========= =========== ========== ===========
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VENDOR CATEGORY Years Ended December 31,
(Dollars in millions) --------------------------------------------------------------------------
1999 1998 1997
---------------------- ----------------------- -------------------------
Hewlett-Packard $ 166.4 24.9% $ 138.1 22.8% $ 105.6 21.7%
Microsoft 83.7 12.5% 68.3 11.3% 46.8 9.6%
Panasonic 68.5 10.2% 53.4 8.8% 53.8 11.1%
Compaq 51.6 7.7% 62.9 10.4% 54.2 11.1%
SUN 47.5 7.1% 20.3 3.3% 21.4 4.4%
Cisco 34.0 5.1% 30.0 5.0% 3.9 0.8%
Everex 15.0 2.3% 27.2 4.5% 14.6 3.0%
Dell 11.3 1.7% 16.5 2.7% 8.0 1.6%
Toshiba 11.1 1.7% 14.1 2.3% 14.4 3.0%
Other 179.4 26.8% 175.1 28.9% 163.7 33.7%
------- ------------- ---------- ----------- ----------- ------------
Total $ 668.5 100.0% $ 605.9 100.0% $ 486.4 100.0%
------- ------------- ---------- ----------- ----------- ------------
1999 COMPARED WITH 1998
Sales. Sales consist of revenues from product shipments and services
rendered, net of allowances for customer returns and credits. Net sales in 1999
increased $62.6 million, or 10.3% over 1998. The primary reason for the increase
was higher sales under the Company's GSA schedules and Open Market sales of
approximately $68.5 million, or 34.3%, and $8.2 million, or 12.0%, respectively.
The increase is partially offset by lower sales under
indefinite-delivery/indefinite-quantity ("IDIQ") contracts of approximately
$10.8 million, or 3.4%, and lower sales on other contracts of $3.3 million, or
18.1%. The decline in IDIQ sales is primarily attributable to the replacement of
the TDA-1 IDIQ contract sales of $27.6 million in 1998 with the TDA BPA
agreement sales of $25.4 million in 1999. In 1996, GSA expressly authorized
agencies to procure from GSA schedule holders under BPA's which incorporate many
terms and conditions of the GSA schedule contracts. Additionally, BPA's offer
many of the same products as GSA schedules, often at lower prices than available
on GSA schedules. In response to GSA's authorization, the Company has increased
its emphasis on BPA's.
Sales under GSA contracts increased primarily as a result of TDA Bridge BPA
sales of $25.4 million, which replaced the expired 1998 TDA-1 IDIQ contract.
Additional increases result from increased sales under the Army Microsoft
Upgrade BPA contract of $20.2 million; and increased sales under the Enhanced
Technology contract of $9.4 million resulting from a full year effect of this
contract which was awarded in April, 1998; and increased overall emphasis on
BPA's.
Total booked backlog at December 31, 1999 was approximately $54.9 million
compared to $59.7 million at December 31, 1998. Total booked backlog was $55.0
million at February 29, 2000, up 1.6 million or 3.0% compared to February 28,
1999. Booked backlog represents orders received but product has yet to ship.
Gross Margin. In 1999, gross margin decreased in absolute dollars by $1.5
million, or 3.0%, and decreased as a percentage of sales to 7.5% from 8.5%, when
compared to 1998. Margins in 1999 were affected by a combination of the
replacement of several existing contracts by competitive wins and continued
downward pressure on personal computer margins. Although the gross margin in
1999 is below the gross margin in 1998, the gross margin in 1998 included the
beneficial effect of a one-time $2.2 million inventory valuation adjustment.
Removal of this inventory adjustment results in a pro-forma gross margin of 8.2%
for 1998.
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Operating Expenses. Total operating expenses for 1999 increased $194,000,
or 0.4%, compared to 1998, but as a percentage of sales, operating expenses
decreased to 7.3% from 8.0%. Operating expenses, at $48.5 million in 1999, were
relatively equal with operating expenses of $48.3 in 1998. Although total
operating expenses were relatively flat compared to 1998, personnel costs
increased by $3.5 million, or 12.5% due to expanded sales and program management
and support coverage due to the acquisition of new contract vehicles as well as
an emphasis on revenue growth. This increase was substantially offset by
reductions in advertising, consulting, and rent. Advertising expense was reduced
by $2.1 million, or 33.4%, compared to 1998 primarily related to the Company's
discontinued catalog business along with the better management of show related
costs. Consultant expense was reduced by $907,000, or 40.8%, in transitioning
functions internally to Company personnel. Rent expense was reduced $650,000, or
54.2% due to better negotiated lease terms related to the Company's move to its
new headquarters in November of 1998.
Interest Expense. Net interest expense is the amount of interest expense on
borrowings offset by interest income and prompt payment discounts. Net interest
expense decreased by $2.1 million, or 211.6 % in 1999 compared to 1998. The
Company utilized more prompt payment discounts and reduced average borrowings as
compared to the same period in 1998. The reduced average borrowing was primarily
due to improved cash flow from the increased collections emphasis on aged
accounts receivables. Average days sales outstanding ("DSO") decreased 5 days to
47 in 1999 from 52 in 1998. Average borrowing was also reduced by the increase
of credit card sales which allows for the immediate collection of invoices.
Income Taxes. No provision for income tax has been recognized with respect
to the Company's income from operations for 1999 due to the reversal of tax
valuation allowance that fully offset the Company's current tax expenses for
1999.
1998 COMPARED WITH 1997
Sales. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. During 1998, net
sales increased $119.5 million, or 24.6% over 1997. The primary reason for the
increase was higher sales under the Company's IDIQ contracts of approximately
$170.7 million, or 115%. The increase in IDIQ contracts was partially offset by
decreased GSA schedule sales and Open Market sales of approximately $9.0
million, or 4.3% and $38.7 million, or 36.1%, respectively. Management believes
that the decline in Open Market sales is primarily attributable to recent
changes in the procurement regulations that allow the Government to purchase
products by other means (e.g. GSA schedule contracts, Government-wide Agency
Contract ("GWAC"), Blanket Purchase Agreements ("BPA's")) in a quicker and
easier manner than was the case before such changes. In addition, the decrease
in sales under GSA schedule contracts can be attributed primarily to decreased
sales relating to GSA Schedule B/C contract of $33.3 million offset by an
increase in BPA sales of $28.1 million from the same period last year. In 1996,
GSA schedule contracts expressly authorized agencies to procure from schedule
holders under BPA's which incorporate many terms and conditions of the GSA
schedule contracts. Additionally, BPA's offer many of the same products as GSA
schedules, often at lower prices than available on GSA schedules. In response to
GSA's authorization, the Company has increased its emphasis on BPA's.
Sales under IDIQ contracts increased primarily as result of increased sales
under contracts with the State Department, the Army's PC-2 and the Tennessee
Valley Authority, totaling $91.4 million. The Company performs, as a
subcontractor, under these contracts as a result of the acquisition of the BTG
Division. In addition, the Company's contract with the U.S. Army's Standard Army
Management Information Systems ("STAMIS") Computer Contract II, which was
awarded in November 1997, produced sales of $35.6 million during 1998.
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Total booked backlog at December 31, 1998 was approximately $59.7 million
compared to $38.4 million at December 31, 1997. Total booked backlog was $53.4
million at February 28, 1999, up $6.5 million or 13.9% compared to February 28,
1998. Booked backlog represents orders received but product has yet to ship.
Gross Margin. In 1998, gross margin increased in absolute dollars $15.7
million, or 43.7%, and increased as a percentage of sales from 7.4% to 8.5%,
when compared to 1997. The increase in gross margin was impacted by an inventory
adjustment of approximately $2.2 million resulting from a June 1998 physical
inventory valuation. Gross margin for 1998 was 8.2%, excluding the impact of the
inventory adjustment. In addition, gross margins were favorably impacted by
change in the Company's mix of contract vehicles. Gross margins for 1998, were
also impacted by the realization of greater contract price protection credits
offset by increased warranty maintenance expense. The change in gross margin
percentage can be impacted by a variety of factors and is not necessarily
indicative of gross margin percentages to be earned in the future periods.
Operating Expenses. Total operating expenses for 1998 increased $7.8
million, or 19.4% compared to 1997. This increase was due primarily to increased
personnel cost as a result of the BTG Division acquisition, as well as increases
in the overall volume of the business. In addition, the Company incurred
approximately $1.0 million of operating costs associated with the acquisition of
the BTG Division. Total operating expenses, as a percentage of total sales
decreased from 8.3% to 8.0%, reflecting the Company's growth in sales requiring
less additional infrastructure expenses as existing facilities and personnel are
utilized more effectively.
Interest Expense. Net interest expense is the amount of interest expense on
borrowings offset by interest income and prompt payment discounts. The net
interest expense increased approximately $429,000, or 78.3% for the year ended
December 31, 1998 compared to the same period in 1997. This increase was due
primarily to increased average borrowings as a result of increased sales
volumes, as well as additional borrowings required for the BTG Division
acquisition. In addition, during 1998 the Company utilized more prompt payment
discounts as compared to the same period in 1997.
Income Taxes. No provision for income tax has been recognized with respect
to the Company's income from operations for 1998 due to the reversal of the
deferred tax valuation allowance that fully offset the Company's current tax
expenses for 1998.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS 128, "Earnings Per Share," and SFAS 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.
SFAS 130, "Reporting Comprehensive Income," was adopted by the Company in
1998 and in accordance therewith, the Company's Comprehensive Income equals
reported Net Income (Loss).
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information," was adopted by the Company in the fourth quarter of 1998.
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
temporarily adversely affect the profitability of GTSI's sales under its
Government fixed-price contracts, which generally preclude the Company from
passing on
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inflation-related or other increases in product costs to Government customers
during the term of a pre-existing contract. The Company mitigates this risk in
part by often obtaining agreements from certain of its suppliers prohibiting
them from increasing their prices to GTSI during fixed-price, term contracts.
SEASONAL FLUCTUATIONS AND OTHER FACTORS
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its operations as a result of
Government buying and funding patterns, which also impact the buying patterns of
GTSI's prime contractor customers. These buying and funding patterns
historically have had a significant positive effect on GTSI's bookings in the
third quarter ending September 30 each year (the Government's fiscal year end),
and consequently on sales and net income in the third and fourth quarters of
each year. Quarterly financial results are also affected by the timing of the
award of and shipments of products under government contracts, price competition
in the microcomputer and workstation industries, the addition of personnel or
other expenses in anticipation of sales growth, product line changes and
expansions, and the timing and costs of changes in customer and product mix. In
addition, customer order deferrals in anticipation of new product releases by
leading microcomputer and workstation hardware and software manufacturers,
delays in vendor shipments of new or existing products, a shift in sales mix to
more complex requirements contracts with more complex service costs, and vendor
delays in the processing of incentives and credits due GTSI, have occurred (all
of which are also likely to occur in the future) and have adversely affected the
Company's operating performance in particular periods. The seasonality and the
unpredictability of the factors affecting such seasonality make GTSI's quarterly
and yearly financial results difficult to predict and subject to significant
fluctuation. The Company's stock price could be adversely affected if any such
financial results fail to meet the financial community's expectations.
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 1999, the Company's operating activities generated approximately
$10.3 million of cash flow, compared to $10.5 million for 1998. The decrease was
primarily due to the Company's increase in accounts receivables relating to
increased revenues from 1998 to 1999 and better collection efforts leading to a
lower allowance for uncollectible balances. The decreased operating cash flow
from the increase in accounts receivables was partially offset by a
corresponding increase in accounts payable. Investing activities used cash of
approximately $4.9 million during 1999. The Company's financing activities used
approximately $5.3 million of cash flow during 1999 due to a reduction in the
Company's outstanding borrowing under its line-of-credit.
On May 2, 1996, the Company executed a three-year credit facility with a
bank (the "Principal Lender") for $40.0 million and a one-year credit facility
with the other lenders for an additional $55.0 million (collectively, the
"Credit Facility"). Additionally, on June 27, 1996, the Company executed a
separate $10.0 million facility with the Principal Lender for inventory
financing of vendor products (the "Wholesale Financing Facility").
On July 28, 1997, the Company and its banks executed the Second Amended and
Restated Business Credit and Security Agreement (the "Credit Agreement") to
modify some of the terms and conditions, as well as the amounts available
under the Credit Facility and the Wholesale Financing
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Facility. These modifications included the revision of the Credit Facility's
term to one year with a one year automatic renewal.
On March 31, 1999, the Second Amended and Restated Business Credit
Agreement of July 28, 1997 was amended to make the Tangible Net Worth
requirement for the Company an amount no less than $40 million at all times
beginning the calendar quarter ending March 31, 1999 and each calendar quarter
thereafter. All other material terms of the Credit Agreement remained the same.
On November 24, 1999, the Company and its banks executed separate
amendments, effective December 1, 1999, for the continuation of the Credit
Agreement through November 30, 2000 with an automatic one year renewal, and
adjusting, among other things, the seasonality of the amount available under the
Credit Facility. The limit of the Credit Facility is $50 million during the
period July 1 through January 31. During the period February 1 through April 30,
the total amount available under the Credit Facility is limited to $30 million.
During the period May 1 though June 30, the total amount available under the
Credit Facility is $20 million. In addition, the interest rate under the Credit
Facility is a rate of the London Interbank Offered Rate (LIBOR) plus 1.75%. The
Wholesale Financing Facility was also amended effective December 1, 1999 to
$50.0 Million throughout the fiscal year.
As of December 31, 1999, 1998, and 1997, respectively, the Company's
interest rate on the Credit Facility was 8.24%, 7.83% and 8.89%, respectively.
Amounts due to the Lenders of $9.5 million as of December 31, 1999 down from
$14.9 million as of December 31, 1998 are classified as current liabilities and
the available portion of the Credit Facility was approximately $35.3 million at
December 31, 1999 up from $24.4 million at December 31, 1998.
Borrowing is limited to 85% of eligible accounts receivable. The Credit
Facility is secured by substantially all of the operating assets of the Company.
Current obligations are first funded and then all cash receipts are
automatically applied to reduce outstanding borrowings. The Credit Facility also
contains certain covenants that include restrictions on the payment of dividends
and the repurchase of the Company's Common Stock, as well as provisions
specifying compliance with certain quarterly and annual financial statistical
ratios. At December 31, 1999, the company was in compliance with all financial
covenants set forth in the credit facility.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Inapplicable.
"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,
impact of the Year 2000 issue on the Company's business, and other risks
described in this Annual Report on Form 10-K and in the Company's other
Securities and Exchange Commission filings.
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23
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 10 of Notes to Consolidated
Financial Statements.
Index to Financial Statements and Schedule Page
- ------------------------------------------ ----
Financial Statements:
Report of Independent Public Accountants 24
Consolidated Balance Sheets as of December 31, 1999 and 1998 25
Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997 26
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997 27
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997 28
Notes to Consolidated Financial Statements 29-41
Schedule:
Schedule II - Valuation and Qualifying Accounts 42
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.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Government Technology Services, Inc:
We have audited the accompanying consolidated balance sheets of Government
Technology Services, Inc. and subsidiary (a Delaware Corporation) as of December
31, 1999 and 1998, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
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 our 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
Vienna, Virginia
February 23, 2000
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25
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands, except share amounts) 1999 1998
------------------- ------------------
ASSETS
Current assets:
Cash $ 149 $ 39
Accounts receivable, net 125,179 106,334
Merchandise inventories 41,483 36,544
Other current assets 6,057 3,099
------------------- ------------------
Total current assets 172,868 146,016
Property and equipment, net 12,627 11,381
Intangible assets, net - 114
Other assets 838 3,579
------------------- ------------------
Total assets $ 186,333 $ 161,090
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to banks $ 9,479 $ 14,889
Note payable, current 500 -
Accounts payable 103,871 75,806
Accrued warranty liabilities 9,135 6,409
Other accrued expenses 5,533 6,706
------------------- ------------------
Total current liabilities 128,518 103,810
Notes payable, net of current portion 1,500 -
Other liabilities 3,119 1,956
------------------- ------------------
Total liabilities 133,137 105,766
------------------- ------------------
Stockholders' equity
Preferred Stock - $0.25 par value, 680,850 shares authorized;
none issued or outstanding - -
Common stock - $0.005 par value 20,000,000 shares authorized,
9,806,084 issued and 9,235,043 outstanding at December 31, 1999; and
20,000,000 shares authorized, 9,806,084 issued and 9,799,490 outstanding
at December 31, 1998 49 49
Capital in excess of par value 43,687 45,712
Retained earnings 12,316 9,634
Treasury stock, 571,041 shares at December 31, 1999 and 6,594 shares at
December 31, 1998, at cost (2,856) (71)
------------------- ------------------
Total stockholders' equity 53,196 55,324
------------------- ------------------
Total liabilities and stockholders' equity $ 186,333 $ 161,090
=================== ==================
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GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(In thousands, except per share amounts) 1999 1998 1997
--------------- ------------------ ------------
Sales $668,488 $605,884 $486,377
Cost of sales 618,381 554,247 450,454
--------------- ------------------ ------------
Gross margin 50,107 51,637 35,923
Operating expenses 48,515 48,321 40,479
--------------- ------------------ ------------
Income (loss) from operations 1,592 3,316 (4,556)
--------------- ------------------ ------------
Interest and financing income (1,742) (541) (1,326)
Interest expense 652 1,518 1,874
--------------- ------------------ ------------
Interest (income) expense, net (1,090) 977 548
--------------- ------------------ ------------
Income (loss) before income taxes 2,682 2,339 (5,104)
Income tax provision - - -
--------------- ------------------ ------------
Net income (loss) $ 2,682 $ 2,339 $ (5,104)
=============== ================== ============
Basic net income (loss) per share $ 0.29 $ 0.27 $ (0.76)
=============== ================== ============
Diluted net income (loss) per share $ 0.29 $ 0.26 $ (0.76)
=============== ================== ============
Basic weighted average shares outstanding 9,271 8,700 6,733
=============== ================== ============
Diluted weighted average shares outstanding 9,314 8,909 6,733
=============== ================== ============
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GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(In thousands) 1999 1998 1997
------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,682 $ 2,339 $ (5,104)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,584 3,661 3,539
Loss (gain) on disposal of property and equipment 288 - (340)
( Decrease) increase in cash due to changes in
assets and liabilities:
Accounts receivable (21,702) (15,429) (789)
Merchandise inventories (4,939) 9,408 (1,156)
Other assets (217) (2,306) 2,466
Accounts payable 28,389 8,086 (987)
Other accrued expenses and warranty liabilities 1,553 3,333 (2,206)
Other liabilities 657 1,439 1,530
--------------- ------------------- ----------------
Net cash provided by (used in) operating activities 10,295 10,531 (3,047)
--------------- ------------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of property and equipment (5,004) (4,827) (2,377)
Payments related to purchase of BTG Division - (7,826) -
Payments from BTG settlement 132 - -
Proceeds from sales of property and equipment - - 361
--------------- ------------------- ----------------
Net cash used in investing activities (4,872) (12,653) (2,016)
--------------- ------------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments of) proceeds from bank notes, net (5,410) 1,146 5,741
Proceeds from exercises of stock options 97 159 130
--------------- ------------------- ----------------
Net cash (used in) provided by financing activities (5,313) 1,305 5,871
--------------- ------------------- ----------------
Net increase (decrease) in cash 110 (817) 808
Cash at beginning of year 39 856 48
--------------- ------------------- ----------------
Cash at end of year $ 149 $ 39 $ 856
=============== =================== ================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 571 $ 2,114 $ 2,744
Income taxes $ - $ 2,553 $ 7
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GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
-----------------------------------------------------------------------------------------
Preferred Stock Common Stock
-------------------------------------- Capital Total
Shares Shares in Excess Retained Treasury Stockholders
Issued Amount Issued Amount of Par Earnings Stock Equity
-----------------------------------------------------------------------------------------
(In thousands)
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
Stock awards and options exercised - - - - (326) - 470
144
Acquisition of BTG Division-issuance of 15,375 15,375 - - - - -
Preferred Stock
Acquisition of BTG Division-conversion of
Preferred Stock into
Common Stock (15,375) (15,375) 3,000 15 12,952 - - 12,967
Net income - - - - - 2,339 - 2,339
-----------------------------------------------------------------------------------------
Balance, December 31, 1998 - $ - 9,806 $ 49 $ 45,712 $ 9,634 $ (71) $ 55,324
Stock awards - - - - (81) - 178
97
BTG settlement - purchase of Treasury
Stock and repurchase option - - - - (1,944) - (2,963) (4,907)
Net income - - - - - 2,682 - 2,682
-----------------------------------------------------------------------------------------
Balance, December 31, 1999 - $ - 9,806 $ 49 $ 43,687 $ 12,316 $ (2,856) $ 53,196
=======================================================================================
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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."
ACQUISITION OF BTG DIVISION
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 as 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,
was held under an escrow agreement to secure BTG's indemnification obligations
under the Asset Purchase Agreement. Under the Asset Purchase Agreement, BTG was
obligated to repay to the Company up to $4.5 million to the extent that there
was a shortfall in the amounts that the Company received from dispositions of
certain inventory acquired.
The acquisition of the BTG division was accounted for using the purchase
method of accounting. The purchase price was allocated to tangible assets based
on fair market value. The financial statements include the results of operation
of the BTG Division since the acquisition date.
The following table sets forth the unaudited pro forma results of the
operations of the Company and the BTG Division for the years ended December 31,
1998 and 1997, assuming the acquisition occurred on January 1, 1997. Net income
for 1998 excludes approximately $1 million of nonrecurring cost and $270,000 of
interest expense directly attributable to the acquisition.
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(In thousands, except per share data) (unaudited)
1998 1997
----------- --------------
Revenues $ 647,021 $ 913,923
Net income (loss) $ 1,970 $ (6,763)
Basic income (loss) per share $ 0.23 $ (0.78)
Diluted income (loss) per share $ 0.22 $ (0.78)
The pro forma results are not indicative of the results of operations had
the acquisition taken place on January 1, 1997.
Subsequent to the closing, BTG delivered to the Company certain other
inventory ("Surplus Inventory"). By letter dated May 15, 1998, the Company and
BTG agreed that BTG would invoice GTSI an aggregate of $3,912,419 for Surplus
Inventory. In addition, BTG agreed to pay to the Company $1 million on June 30,
1998, which constituted full and complete payment for any inventory shortfall as
described in the Asset Purchase Agreement, as well as $250,000 for costs
associated with processing the Surplus Inventory.
Pursuant to the Asset Purchase Agreement, the Company agreed to convene a
meeting of stockholders no later than January 1, 1999 to approve a proposal to
convert the Series C Preferred Stock into 3,000,000 shares of Common Stock (the
"Conversion Proposal"), and a proposal to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock from
10,000,000 to 20,000,000 (the "Charter Amendment Proposal"). At the Company's
annual meeting of stockholders held on May 12, 1998, the Company's stockholders
approved the Conversion Proposal and the Charter Amendment Proposal. The Series
C Preferred Stock was converted automatically into 3,000,000 shares of Common
Stock valued at $5.125 per share and which, pursuant to the exemption provided
under Section 4(2) of the Securities Act of 1933, as amended ("Securities Act"),
were not registered under the Securities Act.
On February 10, 1999, the Company entered into subsequent agreements with
BTG. The agreements relate to the reacquisition of stock by GTSI from BTG, the
terms of certain contracts and the relationship of the parties going forward.
Pursuant to the agreements, GTSI reacquired 600,000 shares of its stock from
BTG. Of the 600,000 shares, 200,000 were tendered to GTSI at no cost and 400,000
were purchased by GTSI for $5.00 per share, in exchange for a three-year, 8%
interest bearing note from BTG with the principal due in three annual
installments of $500,000, $500,000 and $1,000,000, respectively. As part of the
agreements, GTSI has an exclusive five-year option to purchase the remaining 1.3
million shares of GTSI stock held by BTG for $5.25 per share. Under the February
12, 1998 Asset Purchase Agreement, BTG is precluded from selling any of its
holdings, with certain limited exceptions, to a third party for six years
without GTSI's prior consent. Under the February 10, 1999 agreement, GTSI must
consent to a sale by BTG of their stock to any third party. If GTSI consents to
such a sale, BTG is obligated to pay GTSI $0.50 per share on any shares sold by
BTG.
As a result of the agreement, BTG transferred to GTSI all of the cash
portion of the February 12, 1998 escrow, totaling $827,219, and BTG's ownership
interest in GTSI was reduced to 13.3%. Consequently, BTG forfeited its right to
representation on the GTSI Board and Dr. Edward H. Bersoff, Chief Executive
Officer of BTG, resigned from the GTSI Board. The agreements also provide that
BTG
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will novate certain contracts that GTSI had been performing in the capacity of a
subcontractor, and halts all royalty payments by GTSI to BTG after December 31,
1998.
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
intercompany 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. The most significant estimates include the allowance for doubtful
accounts and reserves for future costs to be incurred under the Company's
warranty programs.
Revenue Recognition. The Company recognizes revenue upon shipment of
products and/or acceptance of services rendered.
Financial Instruments. At December 31, 1999, 1998 and 1997, 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.
Merchandise Inventories. Merchandise 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. Depreciation and amortization are calculated using the
straight-line method over estimated useful lives ranging from three to ten
years. Leasehold improvements are amortized using the straight-line method over
the terms of the leases or their estimated useful lives, whichever is shorter.
Intangible Assets. Intangible assets are recorded at cost and amortized
using the straight-line method over their estimated useful lives.
Impairment of Long-Lived Assets. The Company evaluates long-lived assets to
be held for events or changes in circumstances that would indicate that the
carrying value may not be recoverable. In making that determination, the Company
considers a number of factors, including undiscounted future cash flows, prior
to interest expense. The Company measures an impairment loss by comparing the
fair value of the assets to their carrying value.
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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 ("SFAS") 128, "Earnings Per Share,"
which requires dual presentation of basic and diluted earnings per share on the
face of the income statement for all periods presented. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Options to purchase approximately
284,000 weighted average shares of Common Stock at December 31, 1997 were not
included in the computation of earnings per share due to their anti-dilutive
effect.
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 associated expenses of promotional
programs.
Check Overdrafts. Included in accounts payable at December 31, 1999, 1998
and 1997, are approximately $9.1 million, $7.4 million and $2.0 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.
2. ACCOUNTS RECEIVABLE
The composition of accounts receivable as of December 31, 1999 and 1998 is
as follows (in thousands):
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1999 1998
------------ ------------
Trade accounts receivable $ 109,130 $ 93,750
Vendor and other receivables 18,605 18,564
------------ ------------
127,735 112,314
Less: Allowance for uncollectible accounts (2,556) (5,980)
------------ ------------
Accounts receivable, net $ 125,179 $ 106,334
============ ============
3. PROPERTY AND EQUIPMENT
The composition of property and equipment as of December 31, 1999 and 1998
is as follows (in thousands):
1999 1998
------------ ------------
Office furniture and equipment $ 10,379 $ 9,519
Computer software 9,599 6,300
Leasehold improvements 4,797 4,578
-------------------------
24,775 20,397
Less accumulated depreciation and amortization (12,148) (9,016)
-------------------------
Property and equipment, net $ 12,627 $ 11,381
=========================
Depreciation and amortization expense on property and equipment was $3,470,
$3,323 and $3,202 in 1999, 1998 and 1997, respectively.
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 (collectively, the
"Credit Facility"). Additionally, on June 27, 1996, the Company executed a
separate $10.0 million facility with the Principal Lender for inventory
financing of vendor products (the "Wholesale Financing Facility").
On July 28, 1997, the Company and its banks executed the Second Amended and
Restated Business Credit and Security Agreement (the "Credit Agreement") to
modifiy some of the terms and conditions, as well as the amounts available
under the Credit Facility and the Wholesale Financing Facility. These
modifications included the revision of the Credit Facility's term to one year
with a one year automatic renewal.
On, March 31, 1999, the Second Amended and Restated Business Credit
Agreement of July 28, 1997 was amended to make the Tangible Net Worth
requirement for the Company an amount no less than $40 million at all times
beginning the calendar quarter ending March 31, 1999 and each calendar quarter
thereafter. All other material terms of the Credit Agreement remained the same.
On, November 24, 1999, the Company and its banks executed separate
amendments, effective December 1, 1999, for the continuation of the Credit
Agreement through November 30, 2000 with an automatic one year renewal, and
adjusting, among other things, the seasonality of the amount available
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under the Credit Facility. The limit of the Credit Facility is $50 million
during the period July 1 through January 31. During the period February 1
through April 30, the total amount available under the Credit Facility is
limited to $30 million. During the period May 1 though June 30, the total amount
available under the Credit Facility is $20 million. In addition, the interest
rate under the Credit Facility is a rate of the London Interbank Offered Rate
(LIBOR) plus 1.75%. The Wholesale Financing Facility was also amended effective
December 1, 1999 to $50.0 million throughout the fiscal year.
As of December 31, 1999, 1998, and 1997, respectively, the Company's
interest rate on the Credit Facility was 8.24%, 7.83% and 8.89%, respectively.
Amounts due to the Lenders of $9.5 million as of December 31, 1999 down from
$14.9 million as of December 31, 1998 are classified as current liabilities and
the available portion of the Credit Facility was approximately $35.3 million at
December 31, 1999 up from $24.4 million at December 31, 1998.
Borrowing is limited to 85% of eligible accounts receivable. The Credit
Facility is secured by substantially all of the operating assets of the Company.
Current obligations are first funded and then all cash receipts are
automatically applied to reduce outstanding borrowings. The Credit Facility also
contains certain covenants that include restrictions on the payment of dividends
and the repurchase of the Company's Common Stock, as well as provisions
specifying compliance with certain quarterly and annual financial statistical
ratios. At December 31, 1999, the Company was in compliance with all financial
covenants set forth in the credit facility.
The following information pertains to the notes payable for the years ended
December 31, 1999, 1998 and 1997 (dollars in thousands):
1999 1998 1997
---------- --------- ----------
Weighted average interest rate ......................... 7.5% 8.2% 8.0%
Weighted average borrowings ............................ $ 4,100 $ 12,500 $ 18,600
5. INCOME TAXES
The components of the provision (benefit) for income taxes for the years
ended December 31, 1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997
--------- ------------- -------------
Current taxes:
Federal $ 370 $ 1,443 $ (2,191)
State 70 297 (275)
--------- ------------- ------------
440 1,740 (2,466)
--------- ------------- ------------
Deferred taxes:
Federal (397) (1,443) 2,191
State (43) (297) 275
--------- ------------- ------------
(440) (1,740) 2,466
--------- ------------- ------------
Income tax provision $ - $ - $ -
========= ============= ============
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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 1999 and 1998, the Company determined that $5.0 million
and $4.9 million, respectively, of net deferred tax assets were not recoverable.
Accordingly, valuation allowances were recorded against the applicable net
deferred tax assets.
Significant components of the Company's deferred taxes as of December 31,
1999 and 1998 were as follows (in thousands):
December 31,
---------------------------------------
1999 1998
------------------- ------------------
Deferred tax assets:
Accounts receivable and inventory allowances $ 1,436 $ 2,393
Intangible assets 1,819 1,777
Accrued warranty and other contract costs 3,272 1,720
Bid and proposal costs 332 332
Vacation accrual 280 231
Deferred compensation 9 47
Rent abatement 84 65
Other reserves 356 315
------------------- ------------------
Total deferred tax assets 7,588 6,880
------------------- ------------------
Deferred tax liabilities:
Depreciation 118 215
Web site development costs 245 -
------------------- ------------------
Total deferred tax liabilities 363 215
------------------- ------------------
Net deferred tax assets 7,225 6,665
Valuation allowance (5,045) (4,925)
------------------- ------------------
Net deferred tax assets reported $ 2,180 $ 1,740
=================== ===================
The Company's effective tax rate for the years ended December 31, 1999
and 1998 differs from the statutory rate for Federal income taxes as a result of
the following factors:
1999 1998
------------------- ------------------
Statutory rate 34.0% 34.0%
State income taxes, net of Federal tax benefit 4.0 4.2
Valuation allowance (39.8) (36.4)
Other 1.8 (1.8)
------------------- ------------------
- -
=================== ===================
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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 1,600,000 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 four 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:
Weighted
Average Weighted
Exercise Average
Number of Option Exercise Price Price Per Remaining
Shares Per Share 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
Granted 239,000 3.63-5.38 4.90
Forfeited or canceled (62,167) 4.88-5.50 5.07
Exercised - - -
Outstanding at December 31, 1998 296,175 3.63-5.38 4.90
Granted 74,000 2.88-3.75 3.48
Forfeited or canceled (94,250) 3.75-5.31 4.90
Exercised - - -
Outstanding at December 31, 1999 275,925 $2.88-5.38 $4.52 5.0
- ---------------------------------------------------------------------------------------------------------------
1996 Plan:
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
Granted 223,750 4.50-5.25 4.88
Forfeited or canceled (50,500) 5.00-7.31 5.58
Exercised - - -
Outstanding at December 31, 1998 572,750 4.50-5.44 5.05
Granted 826,000 2.88-4.94 3.72
Forfeited or canceled (144,750) 3.75-5.25 4.63
Exercised - - -
Outstanding at December 31, 1999 1,254,000 $2.88-5.44 $4.22 6.7
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Weighted
Average Weighted
Exercise Average
Number of Option Exercise Price Price Per Remaining
Shares Per Share Share Life
- ---------------------------------------------------------------------------------------------------------------
1994 Plan:
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
Outstanding at December 31, 1997 232,500 3.25-13.44 7.02
Granted 80,000 4.53-5.00 4.81
Forfeited or canceled (26,000) 3.50-5.19 4.21
Exercised (15,000) 3.50 3.50
Outstanding at December 31, 1998 271,500 3.25-13.44 6.83
Granted 84,000 2.88-3.75 3.03
Forfeited or canceled (74,000) 5.00-5.25 5.14
Exercised - - -
Outstanding at December 31, 1999 281,500 $ 2.88-13.44 $ 6.13 5.1
- ---------------------------------------------------------------------------------------------------------------
1986 Plan:
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
Granted - - -
Forfeited or canceled (13,000) 3.25 3.25
Exercised (7,000) 3.25 3.25
Outstanding at December 31, 1998 64,500 3.50-14.25 5.48
Granted - - -
Forfeited or canceled (7,500) 14.25 14.25
Exercised - - -
Outstanding at December 31, 1999 57,000 $ 3.50-10.25 $ 4.33 5.4
- ---------------------------------------------------------------------------------------------------------------
Nonstatutory Stock Options:
Outstanding at December 31, 1996 1,105,000 $ 3.75-10.50 $ 4.35
Granted 150,000 5.13-5.25 5.17
Forfeited or canceled - - -
Exercised - - -
Outstanding at December 31, 1997 1,255,000 3.75-10.50 4.67
Granted 81,000 4.88 4.88
Forfeited or canceled (20,000) 6.13 6.13
Exercised - - -
Outstanding at December 31, 1998 1,316,000 3.75-10.50 4.61
Granted 150,000 3.13-4.63 4.13
Forfeited or canceled (321,000) 4.63-5.38 5.05
Exercised - - -
Outstanding at December 31, 1999 1,145,000 $ 3.13-10.50 $ 4.42 5.5
FOR ALL PLANS:
Outstanding at December 31, 1999 3,013,425 $ 2.88-13.44 $ 4.51 6.0
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Outstanding and Exercisable by Price Range as of December 31, 1999
Options Outstanding Options Exercisable
- --------------------------------------------------------------------- -------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Exercise Outstanding at Contractual Average Exercisable at Average
Prices 12/31/99 Life-Years Exercise Price 12/31/99 Exercise Price
- -------------------- -------------- --------------- -------------- -------------- --------------
2.85-4.28 1,948,000 6.4 $ 3.67 1,219,900 $ 3.74
4.28-5.70 864,925 5.5 4.98 732,007 5.00
5.70-7.13 21,500 4.3 6.54 18,500 6.61
7.13-8.55 9,000 4.0 7.31 5,400 7.31
9.98-11.40 107,000 4.4 10.48 107,000 10.48
11.40-12.83 48,000 2.0 12.50 48,000 12.50
12.83-13.44 15,000 4.5 13.10 15,000 13.10
- -------------------- -------------- --------------- -------------- -------------- --------------
3.25-13.44 3,013,425 6.0 $ 4.51 2,145,807 $ 4.80
==================== ============== =============== ============== ============== ==============
The Company adopted the disclosure requirements of SFAS 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
SFAS 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
awards under those plans consistent with the method in SFAS 123, the Company's
income (loss) and net income (loss) per share would have increased to the pro
forma amounts (in thousands, except net income (loss) per share amounts)
indicated below.
1999 1998 1997
---------- ---------- -----------
Net income (loss) -- pro forma $ 1,340 $ 1,504 $ (5,411)
Net income (loss) per share -- pro forma (basic) 0.14 0.17 (0.80)
Net income (loss) per share -- pro forma (diluted) 0.14 0.17 (0.80)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1999: no dividend yield, 68% volatility, a risk-free interest rate of
6%, and an average expected life of seven years; and the following assumptions
were used for grants in 1998 and 1997; no dividend yield, 70% volatility,
risk-free interest rates ranging from 3.79% to 6.90%, and expected lives from
three to eight years.
At December 31, 1999, in the 1997 Plan options for 164,925 shares were
exercisable and 24,075 options were available for grant; in the 1996 Plan
options for 674,416 shares were exercisable and 346,000 options were available
for grant; in the 1994 Plan options for 167,716 shares were exercisable and 800
options were available for grant; and in the 1986 Plan options for 57,000 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
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ESPP is implemented through one offering during each six-month period beginning
January 1 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, 1999 and December 31,
1999, employees purchased 11,912 and 23,641 shares, respectively, at prices of
$4.04 and $3.85, respectively. In the offering periods ended June 30, 1998 and
December 31, 1998, employees purchased 9,367 and 11,943 shares, respectively, at
prices of $4.04 and $3.85, respectively. In the offering periods ended June 30,
1997 and December 31, 1997, employees purchased 13,126 and 15,435 shares,
respectively, at prices of $4.25 and $4.20, respectively. The weighted average
fair market value of shares under the ESPP was $2.73, $3.93 and $4.22 in 1999,
1998 and 1997, respectively. The Company has reserved 250,000 shares of common
stock for the ESPP, of which 36,998 were available for future issuance as of
December 31, 1999.
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. All
outstanding obligations at December 31, 1997 were settled in 1998. 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.
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 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 expired on
November 30, 1998. In October 1997, the Company executed a ten-year lease for a
new administrative facility consisting of approximately 100,500 square feet of
new office space in Chantilly, Virginia. The agreement has one five-year option
period and commenced 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
improvements associated with the lease. This deposit will be reduced by 10%, per
year, over the life of the lease. The Company has recorded leasehold
improvements in the amount of $2.0 million, as well as a liability for deferred
rent of $2.0 million in conjunction with the build-out improvements. The asset
and liability are being amortized over the life of the lease. The Company also
entered into a lease agreement on April 1, 1999 for a 20,000 square foot
distribution center in Chattanooga, Tennessee. Rent expense for the years ended
December 31, 1999, 1998 and 1997 was approximately $2.1 million, $2.8 million
and $2.7 million, respectively. The Company also maintains a sales office in
Germany and has entered into a lease agreement as of January 1, 1999 for term of
two-years ending on December 31, 2000. Collective future minimum lease payments
as of December 31, 1999 are as follows (in thousands):
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40
Operating
Year ending December 31 Leases
- ----------------------- --------------
2000 $ 1,940
2001 1,913
2002 1,936
2003 1,985
2004 2,035
Thereafter 6,692
--------------
Total minimum lease payments $ 16,501
==============
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. In 1999 and 1998, the Company contributed a total of $ 242,917 and
$101,034 to the plan, respectively. No contributions were made in 1997.
9. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information," which
requires certain information about operating segments in the financial
statements and in condensed financial statements of interim periods. The Company
has determined that through December 31, 1999, it operated as one business
segment as defined by SFAS 131. In addition, the Company aggregates and reports
revenues from products which have similar economic characteristics in their
nature, production, and distribution process. The primary customer of the
Company is the Federal Government, which under SFAS 131 is considered a single
customer.
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10. 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.
1999 Quarters Ended
------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------------- --------------------- --------------------- --------------------
(In thousands except per share data)
Sales $ 125,549 100.0% $ 148,760 100.0% $ 194,494 100.0% $ 199,685 100.0%
Cost of sales 115,477 92.0% 136,514 91.8% 181,002 93.1% 185,388 92.8%
Gross margin 10,072 8.0% 12,246 8.2% 13,492 6.9% 14,297 7.2%
Operating expenses 12,530 10.0% 12,345 8.3% 11,102 5.7% 12,538 6.3%
(Loss) income from operations (2,458) (2.0)% (99) (0.1)% 2,390 1.2% 1,759 0.9%
Interest (income) expense, net (565) (0.5)% (168) (0.1)% (358) (0.2)% 1 0.0%
(Loss) income before income taxes (1,893) (1.5)% 69 0.0% 2,748 1.4% 1,758 0.9%
Net (loss) income (1,893) (1.5)% 69 0.0% 2,748 1.4% 1,758 0.9%
Basic net (loss) income per share ($0.20) $0.01 $0.30 $0.19
Diluted net (loss) income per share ($0.20) $0.01 $0.30 $0.19
Basic weighted average shares
outstanding 9,466 9,200 9,211 9,212
Fully diluted shares
outstanding 9,466 9,859 9,308 9,215
1998 Quarters Ended
-------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------------- --------------------- --------------------- ---------------------
(In thousands except per share data)
Sales $ 99,094 100.0% $ 136,901 100.0% $ 196,029 100.0% $ 173,860 100.0%
Cost of sales 90,562 91.4% 124,560 91.0% 178,182 90.9% 160,943 92.6%
Gross margin 8,532 8.6% 12,341 9.0% 17,847 9.1% 12,917 7.4%
Operating expenses 11,602 11.7% 11,789 8.6% 13,535 6.9% 11,395 6.6%
(Loss) income from operations (3,070) (3.1)% 552 0.4% 4,312 2.2% 1,522 0.9%
Interest expense (income), net 439 0.4% 384 0.3% 352 0.2% (198) (0.1)%
(Loss) income before income taxes (3,509) (3.5)% 168 0.1% 3,960 2.0% 1,720 1.0%
Net (loss) income (3,509) (3.5)% 168 0.1% 3,960 2.0% 1,720 1.0%
Basic net (loss) income per share ($0.52) ($0.02) $0.40 ($0.18)
Diluted net (loss) income per share ($0.52) ($0.02) $0.40 ($0.17)
Basic weighted average shares
outstanding 6,756 8,422 9,788 9,788
Fully diluted shares
outstanding 6,756 8,631 9,849 9,845
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42
GOVERNMENT TECHNOLOGY SERVICES, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands) Balance at Charged to Balance
Beginning Costs and at end
Description Of Period Expenses Deductions (1) of Period
- -------------------------------------------- --------- -------- -------------- ---------
Year ended December 31, 1999:
Allowance for bad debts $ 5,980 $ (902) $ (2,522) $ 2,556
Year ended December 31, 1998:
Allowance for bad debts $ 4,093 $ 2,097 $ (210) $ 5,980
Year ended December 31, 1997:
Allowance for bad debts $ 4,535 $ 2,800 $ (3,242) $ 4,093
- --------------
(1) Adjustments and amounts written off during the period.
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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 16, 2000, entitled "Election of Directors --
Nominees," "Executive Officers" and "Common Stock Ownership of Principal
Stockholders and Management -- Compliance with 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 16, 2000, 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 16, 2000, 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 16, 2000, entitled "Election of Directors --
Nominees" and "Executive Compensation and Other Information--Compensation
Committee Interlocks and Insider Participation," to be filed with the
Commission.
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 23 of this Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
See the Index included in Item 8 on Page 23 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
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44
3.1 Certificate of Incorporation, as amended
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
10.1 Amended and Restated 1986 Stock Option Plan, including forms of
Stock Option Agreements and Stock Purchase Agreement
10.2 Employee Stock Purchase Plan, as amended to date
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, 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; and Modifications
during the quarter ended December 31, 1994
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
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
10.7 Lease dated March 31, 1993 between the Registrant and West 50
Associates covering office and warehouse facilities; and
Amendment thereto dated September 21, 1995
10.8 Letter Agreement dated September 17, 1990, as amended, between
the Registrant and R. M. Rickenbach
10.9 Warrant of the Registrant dated December 6, 1990 issued to
Lawrence J. Schoenberg
10.10 Nonstatutory Stock Option Agreement dated October 9, 1992
between the Registrant and Frank H. Slovenec
10.11 Officer Severance Plan, as amended to date
10.12 GTSI Employees' 401(k) Investment Plan; and Amendment No. 1;
Amendment No. 2 and Amendment No. 3 thereto
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
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45
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; Modifications during 1992; and
Modifications during 1993
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; and Amendment thereto dated December 29, 1995
(see also Exhibit 10.)
10.16 Stock Bonus Agreement dated August 25, 1993 between the
Registrant and R. M. Rickenbach
10.17 Stock Bonus Agreement dated August 25, 1993 between the
Registrant and Frank H. Slovenec
10.18 Authorized Apple Dealer Sales Agreement between Apple Computer,
Inc. and the Registrant, effective April 1993
10.19 U.S. Air Force Desktop IV Microsystems Contract No.
F01620-93-D-0001 dated February 2, 1993; Modifications during
1993; and Modifications during the quarter ended March 31,
1994; and Modifications during the quarter ended June 30, 1995
10.20 National Aeronautics and Space Administration Scientific &
Engineering Workstation Procurement Contract No. NAS5-37008
dated February 19, 1993; Modifications during 1993; and
Modifications during the quarter ended March 31, 1994
10.21 Stock Bonus Agreement dated November 16, 1994 between the
Registrant and R. M. Rickenbach
10.22 Stock Bonus Agreement dated November 16, 1994 between the
Registrant and Frank H. Slovenec
10.23 Stock Bonus Agreement dated November 16, 1994 between the
Registrant and Thomas L. Smudz
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
10.25 Lease dated August 11, 1995 between the Registrant and Security
Capital Industrial Trust covering new distribution center
facility
10.26 Letter agreement dated January 16, 1996 between the Registrant
and Microsoft Corporation
10.27 Employment Agreement dated December 18, 1995 between the
Registrant and M. Dendy Young
10.28 Employment Agreement dated December 18, 1995 between the
Registrant and Peter E. Janke
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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
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)
10.31 Standstill Agreement between the Registrant and BTG, Inc. dated
as of February 12, 1998
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
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)
10.38 Amendment of Certificate of Incorporation filed May 12, 1998
with the Secretary of State of Delaware
10.39 Letter Agreement between the Registrant and BTG, Inc. executed
on May 18, 1998
10.40 Standstill Agreement between the Registrant and Linwood A.
("Chip") Lacy, Jr. dated July 29, 1998
10.41 Amendment, dated as of July 2, 1998, to 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
10.42 Amendment, dated as of July 2, 1998, to Agreement for Wholesale
Financing dated as of June 27, 1996, among the Registrant and
Deutsche Financial Services Corporation
10.43 Agreement among the Registrant, BTG, Inc., BTG Technology
Systems, Inc. and Concept Automation, Inc. of America dated
February 10, 1999
10.44 Stock Transfer Agreement between the Registrant and BTG, Inc.
dated February 10, 1999
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10.45 Amendment, dated as of November 24, 1999 to Second Amended and
Restated Business Credit and Security Agreement, dated July 28,
1997, among the Registrant, certain lenders named [in such
agreement] and Deutsche Financial Services Corp., as a Lender
and Agent
10.46 Addendum, dated as of November 23, 1999 to Agreement for
Wholesale Financing dated June 27, 1996, among the Registrant
and Deutsche Financial Services Corp.
11.1 Computation of Earnings Per Share
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
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(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.
(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-Q
(File No. 0-19394) for the year ended December 31, 1994.
(13) Incorporated by reference to the Registrant's Current Report on Form 10-K
(File No. 0-19394) for the year ended December 31, 1996.
(14) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Commission on February 12, 1998.
(15) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-19394) for the year ended December 31, 1997.
(16) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Commission on May 18, 1998.
(17) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Commission on May 21, 1998.
(18) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Commission on August 5, 1998.
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(19) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19394) for the quarter ended June 30, 1998.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
See the list of Exhibits in Item 14(a)(3) beginning on Pages 43-47 of
this Form 10-K.
(d) FINANCIAL STATEMENT SCHEDULES
See the Index included in Item 8 on Page 23 of this Form 10-K.
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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, 2000 By: /S/ M. DENDY YOUNG
----------------------
M. Dendy Young,
Chairman 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/ M. DENDY YOUNG Chairman and March 30, 2000
- --------------------------- Chief Executive Officer
M. Dendy Young (Principal Executive Officer)
and a Director
/S/ ROBERT D. RUSSELL Senior Vice March 30, 2000
- --------------------------- Chief Financial Officer
Robert D. Russell (Principal Financial and
Accounting Officer)
/S/ TANIA AMOCHAEV Director March 30,2000
- ---------------------------
Tania Amochaev
/S/ GERALD W. EBKER Director March 30, 2000
- ---------------------------
Gerald W. Ebker
/S/ LEE JOHNSON Director March 30, 2000
- ---------------------------
Lee Johnson
/S/ STEVEN KELMAN Director March 30, 2000
- --------------------------
Steven Kelman, Ph.D.
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Signature Title Date
--------- ----- ----
/S/ JAMES J. LETO Director March 30, 2000
- --------------------------
James J. Leto
/S/ LAWRENCE J. SCHOENBERG Chairman Emeritus March 30, 2000
- ---------------------------------
Lawrence J. Schoenberg
/S/ JOHN M. TOUPS Director March 30, 2000
- ------------------------
John M. Toups
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