GTSI CORP - 10-K Annual Report

Disclosure Regarding Forward-Looking Statements

Readers are cautioned that this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) relating to our operations that are based on our current expectations, estimates and projections. Words such as “expect,” “believe,” “anticipate,” “plan,” “intend” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from what is expressed or projected in these forward-looking statements. The reasons for this include the factors discussed in the Risk Factors subheading in this Business section. We specifically disclaim any obligation to update these forward-looking statements. These forward-looking statements should not be relied on as representing our estimates or views as of any subsequent date.

PART I

ITEM 1. BUSINESS

Overview

GTSI Corp. is a recognized IT solutions leader, providing products and services primarily to federal government customers. We use the terms “GTSI,” “we,” “our,” and “us” to refer to GTSI Corp. and its subsidiaries. GTSI, a Delaware corporation, was founded in 1983 and has more than 20 years of government-focused experience. Our complete product and solution offering, technical expertise, logistics strengths, extensive contracts portfolio, customer relationships and proven performance record make GTSI equally valuable to our customers and technology partners.

We offer our customers a convenient and cost-effective centralized source for computer, workstation, software, networking and other IT solutions through our broad selection of popular products and services at competitive prices. We specialize in understanding both the various IT needs and the procurement processes of government customers. GTSI sells to most departments and agencies of the U.S. Federal Government, as well as state and local governments, and prime contractors. Our total sales were $1.08 billion, $954.1 million and $934.7 million for the years ended December 31, 2004, 2003 and 2002, respectively. The approximate percentage of our sales by customer type as of December 31 was:

	2004		2003		2002
Federal Government	75	%	80	%	76	%
Prime Contractors	20		17		21
State and Local Governments	5		3		3
Total	100	%	100	%	100	%

Additional information related to net income, total assets, significant customers and long-lived assets is provided in the consolidated financial statements and in Note 15 of the financial statements appearing in Part II, Item 8 of this Form 10-K.

GTSI currently offers access to approximately 350,000 IT products from over 1,380 key manufacturers including Panasonic, HP, Sun Microsystems, Cisco Systems and Microsoft. We believe we provide our vendor partners with a cost effective marketing and distribution channel to the many end-users constituting the government market, while substantially insulating these partners from complex government procurement rules and regulations.

We fulfill many of our customers’ orders from our state-of-the-art 140,000 square-feet distribution center located in Northern Virginia in close proximity to Washington Dulles International Airport. We inventory many popular IT products to enable quick delivery to our customers. In addition, we leverage our Distribution Center and logistics expertise to offer a wide variety of managed fulfillment services to our

customers. Within the Distribution Center, we manage a 30,000 square foot integration center where we perform a number of value added services including:

· Standard hardware integration;

· Customer image propagation;

· Automated system diagnostics and data capture;

· Customer asset tagging; and

· Complex configurations of various IT Solutions, such as Voice over Internet Protocol.

GTSI’s distribution and integration operations are ISO 9001:2000 certified.

“GTSI” is a registered service mark of GTSI Corp. All other trademarks and service marks are proprietary to their respective owners.

Business Strategy

GTSI is committed to and focused on the government customer. We believe there are significant opportunities to increase our relatively low market share within the growing government IT market, and to improve our overall profitability as we grow our revenue base. In mid 2004, we launched a strategic growth plan to accomplish the following key business initiatives during the next three years:

· Double the revenue base of GTSI from $1 billion to $2 billion primarily through organic measures, supplemented by strategic acquisitions,

· Improve our gross margins each year during the next three years through enhanced focus on purchasing and pricing initiatives, and

· Drive enhanced profitability through continued process re-engineering initiatives aimed at streamlining processes and procedures, while enhancing overall corporate wide productivity.

We plan to continue to increase our work force to take advantage of the growing government IT market. Our management has undertaken a number of initiatives consistent with this revenue and earnings growth strategy (e.g., hiring and training additional personnel, creating a centralized pricing organization, creating a centralized purchasing organization and implementing the final phase of our new ERP system).

Focus on the Growing Government IT Market

Because of our historical focus on government, GTSI has developed the expertise and established the partner and customer relationships necessary to be a leader in this market. As a result, our marketing and sales force are effective at reaching and servicing the government market, which consists of procurement and contracting officers, information resource managers, Chief Information Officers, government IT executives, systems integrators, value-added resellers, prime contractors and a wide array of end-users. We continue to increase our sales organization to widen customer coverage and broaden our enterprise solutions, products and services. In addition, by concentrating on the government market, we have avoided the higher credit risk of commercial customers.

Execute New Government Contracts and Utilize Flexible Contract Vehicles

GTSI holds a wide range of government contracts, including multimillion 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 with a variety of DoD and civilian agencies. We also serve as a subcontractor, providing products and services to other companies holding government contracts. GTSI intends to continue to identify and pursue contract vehicles that best leverage our broad selection of solutions, services, integration and distribution capabilities and partner relationships.

Provide a High-Quality Centralized Source for Procuring IT Products and Services

In addition to offering a full line of computer hardware, software and peripheral products, 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 we sell. Furthermore, by offering a wide range of IT solutions and products through a variety of procurement mechanisms, we offer our customers the convenience, flexibility and cost savings of purchasing from a centralized source. In our interactions with our customers, our employees focus on providing high quality customer services associated with the order, delivery, installation and repair of the products we sell. In addition to our product offerings, we now offer service solutions to meet our customer needs in networking and telecommunications, storage and continuity of operations solutions, enterprise software deployment and managed logistics support.

Establish and Maintain Strong Partner Relationships

To provide a centralized source of products and solutions for our customers, GTSI maintains strong relationships with leading hardware, software and services partners. GTSI offers our partners a wide range of marketing and sales services, which provide them with access to the millions of end-users constituting the government market. In addition, we insulate our partners from the procurement regulatory complexities, costs and complicated billing requirements associated with the government market.

Improve Internal Efficiencies

GTSI has undertaken a variety of activities aimed at improving financial performance. We believe that our improved product pricing, supply chain management, and quality and expense control will lead to improved operating and net margins. In addition, we plan to increase employee productivity through training, use of the improved technology from our new Enterprise Resource Planning (“ERP”) system, and a heightened focus on our customer relationship management (“CRM”) initiatives.

Customers

GTSI’s sales are predominantly generated from multiple agencies and departments of the U.S. Federal Government, either directly or ultimately through prime contractors. Our revenue from the federal government accounted for approximately 95%, 98% and 97% of our sales during 2004, 2003 and 2002, respectively. Federal government sales were earned from numerous agencies and departments as approximated below:

	2004		2003		2002
Department of Defense	37	%	41	%	41	%
Civilian Agencies and Departments	42		41		38
Prime Contractors	21		18		21
Total	100	%	100	%	100	%

Contracts

GTSI achieves its sales through federal, state and local government contracts and open market procurements. Our contracts with the federal government include a General Services Administration (“GSA”) Schedule contract, Indefinite Delivery/Indefinite Quantity (“IDIQ”) contracts and Blanket Purchase Agreements (“BPAs”). We pursue formal government bids for IDIQ contracts and BPAs. Substantially all of these bids are awarded on a “best value” to the government basis (which, depending on the bid, can be a combination of price, technical expertise, past performance on other government contracts and other factors). We seek to use our partner contacts, purchasing power, distribution strength and procurement expertise to compete successfully on these bids. These major procurements may equal millions of dollars in total revenue, span multiple years and provide a purchasing vehicle for many

government agencies. In some cases, various government agencies levy an administrative fee on purchases made by departments outside of the agency that awarded the contract. These fees are collected by GTSI and remitted to the respective agency on a contract specified payment schedule. Items offered under our contracts include platform solutions, peripherals, maintenance, training and services. All of our contracts allow for the addition of products under certain circumstances. Additional details regarding our platform solutions and peripherals are provided in the Products, Solutions, and Services subheading in this Business section.

General Services Administration

GTSI holds a GSA designated Schedule 70 contract for the sale of IT products and services. Schedule 70 contracts are multi-award schedule contracts managed by the GSA IT Acquisition Center. In March 2002, the government formally exercised its first of three five-year options to extend the GTSI contract through 2007. GSA contracts provide all government agencies, certain international organizations, authorized prime contractors, and state and local governments with an efficient and cost-effective means for buying commercial products. GSA purchasers may place unlimited orders for products under GSA contracts.

Our GSA contract contains price reduction clauses requiring that we pass on to government customers certain reduced prices we may receive from our partners, but prohibits us from passing on price increases for a period of one year. To mitigate the potentially adverse impact of any such price increase, we require substantially all of our partners who supply our GSA contract to provide us with supply and price protection.

Indefinite Delivery/Indefinite Quantity

IDIQ contracts offer greater flexibility than GSA contracts because they allow products to be added quickly and allow contractors more pricing flexibility. IDIQ contracts are pre-competed; therefore, orders placed under these contracts are not subject to protest unless the order is beyond the scope of the contract. There are three types of IDIQ contracts: government-wide acquisition contracts (“GWAC”), multi-agency contracts (“MAC”), and single agency contracts. A GWAC is a task-order or delivery-order contract for information technology established by a single federal agency for government-wide use upon approval by the Office of Management and Budget, while MACs accept orders from other agencies under the authority of the Economy Act.

Details regarding our IDIQ contracts are as follows:

Contract Name	IDIQ Type	Contracting Agency	Expiration Date
Scientific Engineering Workstation Procurement III(a)	GWAC	NASA	July 30, 2006
Electronic Commodity Store III	GWAC	NIH(b)	Nov. 26, 2012
Maxi-Minis and Databases	MAC	Army	May 25, 2005(c)
Information Technology Enterprise Solutions	MAC	Army	Nov. 1, 2006(c)
Procurement of Computer Hardware and Software -2	single agency	Veterans Administration	April 2, 2005(c)

(a) Comprises three contracts which each relate to a specific category of IT products

(b) National Institute of Health

The products are sold under the contract at a fixed price; however, the government typically negotiates a lower price for large quantity or high value orders.

Blanket Purchase Agreements

Individual GSA ordering agencies may enter into GSA-authorized BPAs with GSA contract holders. BPAs are similar to second-tier contracts under a contractor’s GSA contract. BPAs enable agencies to obtain better pricing based on volume ordering and they decrease an agency’s administrative costs by streamlining the ordering process.

GTSI maintains several Federal Supply Schedule BPAs that are authorized under our GSA Schedule 70 contract. GSA authorized BPAs incorporate many terms, conditions and products offered on GSA Schedule contracts, often at prices lower than those available on the GSA schedules. We normally enter into separate agreements with partners to offer reduced BPA prices to the government. Our BPAs are agency specific and allow us to focus specific partner relationships on specific customers.

State and Local

In 2003, GTSI was awarded U.S. Communities, a multi-state contract available to cities, counties, special districts (airport, water, etc.), state agencies, schools and large non-profits such as hospitals and clinics. In addition, GSA now allows state and local government agencies to utilize GSA Schedules. Multi-state contracts enable individual states to utilize the buying power of multiple states, which results in lower costs based on volume purchasing. The initial term of the U.S. Communities contract expires on May 1, 2006 and the contract has three one-year extension options.

The products are sold under the contract at a fixed price; however, governments typically negotiate a lower price for large quantity or high value orders. In addition, these contracts include an administrative fee calculated on the product price. We collect this fee and remit it on a quarterly basis to the contract’s administering agency.

Many purchases in the state and local government market are still made through individual competitive procurements, although many state and local governments issue invitations to bid for statewide computer term contracts. State and local procurements typically require formal responses from a prospective bidder. Each state maintains a separate code of procurement regulations that must be understood. Compliance is required to successfully market and sell to individual states. GTSI currently maintains several state and local IT contracts, regularly submits oral and written bids to state and local governments and is on a number of state and local government bid lists.

Open Market

We also sell many IT products through open market procurements. These procurements are separate and apart from GSA Schedules, IDIQs and BPAs. Open market procurements include simplified acquisition procedures, requests for quotes, invitations for bids and requests for proposals. GTSI is on most government bid lists relevant to its product offerings and responds with proposals to hundreds of such bid solicitations each year. We also sell to prime contractors to the government, including systems integrators, through open market procurements.

Products, Solutions and Services

GTSI is a leading, dedicated business-to-government provider of IT solutions. We continuously monitor and evaluate existing and emerging technologies to ensure that we offer our customers state-of-the-art technology products and solutions. GTSI also offers simplified buying through our website, gtsi.com.

Hardware

GTSI has strong strategic relationships with global market leaders such as Sun Microsystems, HP, Panasonic, Cisco Systems, Network Appliance, IBM, Dell, Gateway, Apple, APC and SGI. It also has resources dedicated to incubating new partners as technology develops and emerges. Whether it is

high-performance computing, physical security or telecommunication technology, GTSI offers state-of-the-art hardware solutions targeted at meeting a wide variety of customer needs. In addition to reselling workstations, desktops, laptops, notebooks, servers, facsimile products, and internet and extranet products; peripherals resold by us include disk drives, CD-ROM and DVD drives, printers, monitors, scanners, modems and related products. Our networking products including LANs, WANs, metropolitan area networks, and personal area networks are supplemented by GTSI services, which include assisting customers in selecting, configuring, installing and maintaining networks. Through its extensive relationships, GTSI is able to secure state-of-the-art hardware to meet ever changing customer needs.

Software

We provide products and solutions from virtually every leading desktop and enterprise software publisher including Adobe, BEA, BMC/Remedy, Citrix, Computer Associates, IBM, McAfee, Mercury, Microsoft, Novell, Oracle, Red Hat and Symantec/Veritas. GTSI’s breadth of software providers is one of the broadest in the industry.

Solutions

GTSI has a number of Enterprise Technology Practices. Each practice brings together talent that is focused on specific industry and technical disciplines. Practices include focused concentration in software, physical security, enterprise security, satellite, power, networks, telecommunications, enterprise computing, storage and mobile technologies. The practices are designed to provide a thorough understanding and alignment to specific partners such as Sun Microsystems, Cisco Systems, Hewlett Packard, IBM and Panasonic. Each team includes professionals with extensive industry knowledge and experience in systems engineering, project management and customized solution development.

Services and Warranty

We provide professional management of the creation and delivery of services to our customers. GTSI’s services solutions capitalize on core business capabilities through managed fulfillment and support services, implementation of technical product services and technology consulting services, either through our own business resources or through our alliance with partners. GTSI typically offers warranties on products for the same term as the manufacturer’s warranty. We also sell extended warranties ranging from three to five years beyond the manufacturer’s warranty on certain products.

The following table indicates, for the years ended December 31 (dollars in millions), the approximate sales by product category along with related percentages of total sales.

Products	2004				2003				2002
Hardware	$	834.1	77.5	%	$	692.5	72.6	%	$	673.7	72.1	%
Software	155.7		14.5		154.5		16.2		196.4		21.0
Resold third-party service products	66.6		6.2		91.2		9.5		50.8		5.4
Services	19.7		1.8		15.9		1.7		13.8		1.5
Total

Delaware	54-1248422
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3901 Stonecroft Boulevard, Chantilly, VA	20151-1010
(Address of principal executive offices)	(Zip Code)
703-502-2000
(Registrant’s telephone number, including area code)

			Page
PART I	Item 1.	Business	3
	Item 2.	Properties	15
	Item 3.	Legal Proceedings	15
	Item 4.	Submission of Matters to a Vote of Security Holders	15
PART II	Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	16
	Item 6.	Selected Financial Data	17
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	29
	Item 8.	Financial Statements and Supplementary Data	30
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	49
	Item 9A.	Controls and Procedures	49
PART III	Item 10.	Directors and Executive Officers of the Registrant	51
	Item 11.	Executive Compensation	51
	Item 12.	Security Ownership of Certain Beneficial Owners and Management	51
	Item 13.	Certain Relationships and Related Transactions	51
	Item 14.	Principal Accounting Fees and Services	51
	Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	52
		Signatures	53
Schedule II		Valuation and Qualifying Accounts	55
		Exhibit Index	56