Attached files
file | filename |
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EX-32 - EXHIBIT 32 - GTSI CORP | c05818exv32.htm |
EX-31.1 - EXHIBIT 31.1 - GTSI CORP | c05818exv31w1.htm |
EX-23.1 - EXHIBIT 23.1 - GTSI CORP | c05818exv23w1.htm |
EX-99.1 - EXHIBIT 99.1 - GTSI CORP | c05818exv99w1.htm |
EX-23.2 - EXHIBIT 23.2 - GTSI CORP | c05818exv23w2.htm |
EX-31.2 - EXHIBIT 31.2 - GTSI CORP | c05818exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K/A
Amendment
1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission File Number: 0-19394
GTSI CORP.
(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 No.) | |
2553 Dulles View Drive, Suite 100, Herndon, VA | 20171-5219 | |
(Address of principal executive offices) | (Zip Code) |
703-502-2000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.005 par value | NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of
the Securities Act. YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. YES o NO þ
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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive DataFile required to be submitted and posted pursuant
to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). YES o NO
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of accelerated filer,
large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). YES o NO þ
The aggregate market value of the voting common equity held by non-affiliates computed by reference
to the price at which the common equity was last sold, as of June 30, 2009 was $42,809,049.
The number of shares outstanding of the registrants common stock on February 26, 2010 was
9,577,750.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K are incorporated by reference to
GTSIs proxy statement to be filed with the Securities and Exchange Commission in connection with
the Annual Meeting of GTSIs Stockholders scheduled to be held on April 21, 2010.
Table of Contents
EXPLANATORY
NOTE
This
Amendment No. 1 to the Annual Report on Form 10-K of GTSI Corp.
(GTSI or the Company) amends the
Companys Annual Report on Form 10-K for the 12 months ended
December 31, 2009, which was filed with the Securities and Exchange
Commission on March 5, 2010 (Original Filing). The
Company is filing this Amendment No. 1 for the sole purpose of
correcting Pricewaterhouse Coopers LLPs audit report to reflect
the three years covered by the audit report from the two years
previously indicated, along with the consent from Pricewaterhouse
Coopers LLP and Aronson & Company (Exhibit 23.1 & 23.2).
CONTENTS
Page | ||||||||
PART II |
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1 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
29 | ||||||||
30 | ||||||||
31 | ||||||||
32 | ||||||||
Exhibit 23.1 | ||||||||
Exhibit 23.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 | ||||||||
Exhibit 99.1 |
Table of Contents
ITEM 8. | FINANCIAL STATEMENTS & SUPPLEMENTARY DATA |
Report of Independent Registered Public Accounting Firm
To Board of Directors and Stockholders
of GTSI Corp.:
of GTSI Corp.:
In our opinion, based on our audits
and the report of other auditors, the accompanying consolidated balance sheets and the
related consolidated statement of operations, of changes in stockholders equity, and of
cash flows present fairly, in all material respects, the financial position of GTSI Corp.
and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their
operations and their cash flows for each of the three years in the period ended December 31,
2009 in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management
is responsible for these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in Managements
Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility
is to express opinions on these financial statements and on the Companys internal control over
financial reporting based on our integrated audits. We did not audit the financial statements
of Eyak Technology, LLC, an investment accounted for under the equity method, for which GTSI
Corp. reflected other assets of $8.0 million and $5.3 million as of December 31, 2009 and 2008,
respectively, and reflected income from affiliate of $8.3 million, $4.9 million, and $3.8 million
for the years ended December 31, 2009, 2008, and 2007, respectively. The financial
statements of Eyak Technology, LLC were audited by other auditors whose report thereon has
been furnished to us, and our opinion on the financial statements expressed herein, insofar
as it relates to the amounts included for Eyak Technology, LLC, is based solely on the report
of the other auditors. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits
of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinions.
A companys internal
control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles.
A companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect
on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 5, 2010
McLean, Virginia
March 5, 2010
1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Eyak Technology, LLC
Dulles, Virginia
Eyak Technology, LLC
Dulles, Virginia
We have audited the accompanying Consolidated Balance Sheets of Eyak Technology, LLC and Subsidiary
as of December 31, 2009 and 2008, and the related Consolidated Statements of Income, Members
Equity, and Cash Flows for each of the three years in the period ended December 31, 2009. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Eyak Technology, LLC and Subsidiary as of
December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Aronson & Company
Rockville, Maryland
March 2, 2010
Rockville, Maryland
March 2, 2010
2
Table of Contents
GTSI CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, | ||||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 7,894 | $ | | ||||
Accounts receivable, net |
209,595 | 190,740 | ||||||
Inventory |
13,477 | 13,491 | ||||||
Deferred costs |
1,807 | 7,849 | ||||||
Other current assets |
4,140 | 7,807 | ||||||
Total current assets |
236,913 | 219,887 | ||||||
Depreciable assets, net |
10,960 | 13,664 | ||||||
Long-term receivables and other assets |
40,758 | 14,078 | ||||||
Total assets |
$ | 288,631 | $ | 247,629 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Borrowings under credit facility |
$ | | $ | 22,387 | ||||
Accounts payable |
109,723 | 103,553 | ||||||
Accounts payable floor plan |
34,889 | | ||||||
Financed lease debt, current portion |
831 | 6,538 | ||||||
Accrued liabilities |
26,127 | 17,857 | ||||||
Deferred revenue |
3,176 | 2,079 | ||||||
Total current liabilities |
174,746 | 152,414 | ||||||
Long-term financed lease debt |
| 2,530 | ||||||
Other liabilities |
17,598 | 2,571 | ||||||
Total liabilities |
192,344 | 157,515 | ||||||
Commitments and contingencies (See Note 11) |
||||||||
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; 10,119,038 issued and 9,637,676
outstanding at December 31, 2009; and 10,140,757 issued and 9,866,662 outstanding at December 31,
2008 |
50 | 50 | ||||||
Capital in excess of par value |
52,698 | 50,722 | ||||||
Retained earnings |
44,925 | 39,469 | ||||||
Treasury stock, 277,850 shares at December 31, 2009 and 16,176 shares at December 31, 2008, at cost |
(1,386 | ) | (127 | ) | ||||
Total stockholders equity |
96,287 | 90,114 | ||||||
Total liabilities and stockholders equity |
$ | 288,631 | $ | 247,629 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
GTSI CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
SALES |
||||||||||||
Product |
$ | 677,966 | $ | 745,366 | $ | 641,560 | ||||||
Service |
55,625 | 56,529 | 59,658 | |||||||||
Financing |
28,279 | 19,270 | 22,247 | |||||||||
761,870 | 821,165 | 723,465 | ||||||||||
COST OF SALES |
||||||||||||
Product |
611,310 | 673,858 | 568,247 | |||||||||
Service |
33,236 | 31,551 | 40,609 | |||||||||
Financing |
15,872 | 8,403 | 9,889 | |||||||||
660,418 | 713,812 | 618,745 | ||||||||||
GROSS MARGIN |
101,452 | 107,353 | 104,720 | |||||||||
SELLING, GENERAL & ADMINISTRATIVE EXPENSES |
98,107 | 103,848 | 106,335 | |||||||||
INCOME (LOSS) FROM OPERATIONS |
3,345 | 3,505 | (1,615 | ) | ||||||||
INTEREST AND OTHER INCOME, NET |
||||||||||||
Interest and other income |
923 | 760 | 1,191 | |||||||||
Equity income from affiliates |
8,261 | 4,892 | 3,802 | |||||||||
Interest expense |
(2,864 | ) | (3,128 | ) | (4,577 | ) | ||||||
Interest and other income, net |
6,320 | 2,524 | 416 | |||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
9,665 | 6,029 | (1,199 | ) | ||||||||
INCOME TAX (PROVISION) BENEFIT |
(4,209 | ) | 1,806 | (568 | ) | |||||||
NET INCOME (LOSS) |
$ | 5,456 | $ | 7,835 | $ | (1,767 | ) | |||||
EARNINGS (LOSS) PER SHARE |
||||||||||||
Basic |
$ | 0.56 | $ | 0.80 | $ | (0.18 | ) | |||||
Diluted |
$ | 0.56 | $ | 0.79 | $ | (0.18 | ) | |||||
WEIGHTED AVERAGE SHARES OUTSTANDING |
||||||||||||
Basic |
9,706 | 9,760 | 9,571 | |||||||||
Diluted |
9,762 | 9,865 | 9,571 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
GTSI CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands)
Common Stock | Capital in | Total | ||||||||||||||||||||||
Shares | Excess of | Retained | Treasury | Stockholders | ||||||||||||||||||||
Outstanding | Amount | Par Value | Earnings | Stock | Equity | |||||||||||||||||||
Balance, December 31, 2006 |
9,512 | 49 | 45,110 | 33,717 | (2,193 | ) | 76,683 | |||||||||||||||||
FIN 48 adoption |
| | | (316 | ) | | (316 | ) | ||||||||||||||||
Common stock issued |
189 | | 161 | | 1,126 | 1,287 | ||||||||||||||||||
Stock-based compensation |
| | 1,832 | | | 1,832 | ||||||||||||||||||
Tax impact
from stock-based compensation |
| | (6 | ) | | | (6 | ) | ||||||||||||||||
Net (loss) |
| | | (1,767 | ) | | (1,767 | ) | ||||||||||||||||
Balance, December 31, 2007 |
9,701 | 49 | 47,097 | 31,634 | (1,067 | ) | 77,713 | |||||||||||||||||
Common stock issued |
104 | | (260 | ) | | 816 | 556 | |||||||||||||||||
Common stock purchased |
(24 | ) | | | | (217 | ) | (217 | ) | |||||||||||||||
Stock-based compensation |
| | 2,946 | | | 2,946 | ||||||||||||||||||
Restricted stock issued |
86 | 1 | (343 | ) | | 341 | (1 | ) | ||||||||||||||||
Tax impact
from stock-based compensation |
| | 1,282 | | | 1,282 | ||||||||||||||||||
Net income |
| | | 7,835 | | 7,835 | ||||||||||||||||||
Balance, December 31, 2008 |
9,867 | $ | 50 | $ | 50,722 | $ | 39,469 | $ | (127 | ) | $ | 90,114 | ||||||||||||
Common stock issued |
156 | | | | 717 | 717 | ||||||||||||||||||
Common stock purchased |
(466 | ) | | | | (2,251 | ) | (2,251 | ) | |||||||||||||||
Stock-based compensation |
| | 2,387 | | | 2,387 | ||||||||||||||||||
Restricted stock issued |
81 | | (275 | ) | | 275 | | |||||||||||||||||
Tax impact
from stock-based compensation |
| | (136 | ) | | | (136 | ) | ||||||||||||||||
Net income |
| | | 5,456 | | 5,456 | ||||||||||||||||||
Balance, December 31, 2009 |
9,638 | $ | 50 | $ | 52,698 | $ | 44,925 | $ | (1,386 | ) | $ | 96,287 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
GTSI CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss) |
$ | 5,456 | $ | 7,835 | $ | (1,767 | ) | |||||
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
||||||||||||
Depreciation and amortization |
3,826 | 3,448 | 3,807 | |||||||||
Loss on sale of depreciable assets |
137 | 276 | | |||||||||
Stock based compensation |
2,387 | 2,946 | 1,832 | |||||||||
Tax impact from stock-based compensation |
(11 | ) | 640 | (6 | ) | |||||||
FIN 48 adoption |
| | (138 | ) | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
(27,091 | ) | (33,288 | ) | 39,028 | |||||||
Inventory |
14 | 8,086 | 14,114 | |||||||||
Other assets |
(16,866 | ) | (3,712 | ) | 31,709 | |||||||
Accounts payable |
6,169 | 18,838 | (57,502 | ) | ||||||||
Accrued liabilities |
8,134 | 3,131 | (8,468 | ) | ||||||||
Other liabilities |
16,123 | 744 | (8,642 | ) | ||||||||
Net cash (used in) provided by operating activities |
(1,722 | ) | 8,944 | 13,967 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchase of depreciable assets |
(1,259 | ) | (5,230 | ) | (2,338 | ) | ||||||
Sale of depreciable assets |
| 120 | | |||||||||
Sale of equity investment |
| | 660 | |||||||||
Net cash used in investing activities |
(1,259 | ) | (5,110 | ) | (1,678 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
(Payments on) borrowings under credit facility |
(22,387 | ) | 4,356 | (12,882 | ) | |||||||
Borrowings under Floor Plan |
34,889 | | | |||||||||
Payment of deferred financing costs |
(104 | ) | | (570 | ) | |||||||
Payment of long-term debt |
| (10,000 | ) | | ||||||||
Tax impact from stock-based compensation |
11 | 642 | | |||||||||
Common stock Purchases |
(2,251 | ) | (217 | ) | | |||||||
Proceeds from common stock issued |
717 | 556 | 1,287 | |||||||||
Net cash provided by (used in) financing activities |
10,875 | (4,663 | ) | (12,165 | ) | |||||||
NET INCREASE (DECREASE) IN CASH |
7,894 | (829 | ) | 124 | ||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
| 829 | 705 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | 7,894 | $ | | $ | 829 | ||||||
CASH PAID DURING THE YEAR FOR: |
||||||||||||
Interest |
$ | 56 | $ | 773 | $ | 2,579 | ||||||
Income taxes |
$ | 353 | $ | 191 | $ | 92 |
The accompanying notes are an integral part of these consolidated financial statements.
6
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GTSI CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2009, 2008 and 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2009, 2008 and 2007
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Business
GTSI Corp. (collectively with its subsidiaries, GTSI or the Company) is an IT hardware and
solutions provider, focusing predominantly on U.S. federal, state, and local government customers
and to prime contractors who are working directly on government contracts. GTSI solves government
technology challenges with industry-leading solutions, a powerful collection of contracts,
dedicated teams of certified experts, flexible financing options, and ISO 9001:2000 registered
global integration and distribution.
To help customers acquire, manage and refresh their technology in a strategic and
application-appropriate manner, GTSI has created a mix of hardware and professional and financial
services capable of managing and funding the entire technology lifecycle. GTSI has enhanced its
professional services organization to handle the increase in engineering, maintenance, and
management services supporting its solutions. The Company offers leasing arrangements to allow
government agencies to acquire access to technology as an evenly distributed operating expense,
rather than the more budget-sensitive and discontinuous capital expense. Additionally, GTSI markets
and sells products, primarily computer hardware and software, and solutions through its website,
www.GTSI.com, providing a convenient, customized shopping experience to meet the unique and
changing needs of its customers.
B. Risks and Uncertainties
There are many factors that affect the Companys business and results of operations and many of
such factors are beyond our control, including reliance on a small number of transactions for a
significant portion of our sales and gross margins, increased competition, adverse changes in U.S.
Federal Government spending, and infrastructure failures that could adversely affect our ability to
process orders, track inventory and ship products in a timely manner.
The Company terminated the Credit Facility entered into in 2006 on May 27, 2009 and entered into a
new $135 million credit agreement with Castle Pines Capital LL (CPC) and other lenders (the
Credit Agreement), which includes inventory financing. The Credit Agreement provides a vendor
and distributor program under which we receive financing for inventory purchases from several of
our largest CPC approved vendors with extended payment terms. The Credit Agreement, which matures
on May 27, 2011, carries an interest rate indexed at 1-Month LIBOR plus 300 basis points for
revolving loan advances and 1-Month LIBOR plus 350 basis points for floor plan loans. The Company
relies on the Credit Agreement as the primary vehicle to finance operations. The Credit Agreement
imposes financial and informational covenants on the Company. The Company was in compliance with
all financial and informational covenants as set forth in the Credit Agreement as of December 31,
2009.
While the Company believes that we will remain in compliance with all of the financial and
information covenants under the Credit Agreement, there can be no assurance that we will do so. A
breach of any of the covenants or restrictions in the Credit Agreement could result in an event of
default under the Credit Agreement. Such a default could result in the lenders discontinuing
lending or declaring all outstanding borrowings, including inventory financing, to be due and
payable. If any of these events occur, we would need to find additional or alternative financing,
if available, to refinance any such accelerated obligations. There can be no assurance that such
financing would be available.
C. Principles of Consolidation
The consolidated financial statements include the accounts of GTSI and its wholly-owned
subsidiaries, GTSI Financial Services, Inc., GTSI Professional Services, Inc. and Technology
Logistics, Inc. All intercompany accounts and transactions have been eliminated. Investments in
entities which the Company does not control but has the ability to exercise significant influence
over are accounted for using the equity method of accounting.
7
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D. Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at year end, and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates. Managements estimates and assumptions are evaluated on an ongoing basis and
are based on historical experience, current conditions and available information. Significant items
subject to such estimates and assumptions include valuation allowances for receivables and deferred
tax assets, accrual of warranties, proportional performance estimates related to open professional
service contracts, recoverability of capitalized internal use software, market value of inventory,
accruals of liabilities and the fair value of stock options.
E. Revenue Recognition
GTSI recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has
occurred or services have been rendered, the sales price is fixed or determinable, and
collectability is reasonably assured in accordance with FASB ASC 605-10, Revenue Recognition,
Overall (ASC 605-10).
The Company recognizes software revenue pursuant to the requirements of FASB ASC 985-25, Software
Revenue Recognition (ASC 985-25). In accordance with ASC 985-25, the Company recognizes software
related revenue from re-selling third party software licenses that do not require significant
production, modification or customization, when persuasive evidence of a sale arrangement exists,
delivery has occurred or services have been rendered, the sales price is fixed or determinable, and
collectability is reasonably assured.
When a customer order contains multiple items such as hardware, software and services which are
delivered at varying times, the Company determines whether the delivered items can be considered
separate units of accounting as prescribed under FASC ASC 605-25, Revenue Recognition,
Multiple-Element Arrangements (ASC 605-25). ASC 605-25 states that delivered items should be
considered separate units of accounting if delivered items have value to the customer on a
standalone basis, there is objective and reliable evidence of the fair value of undelivered items,
and if delivery of undelivered items is probable and substantially in GTSIs control.
Generally, the Company is able to establish fair value for all elements of the arrangement. In
these instances, revenue is recognized on each element separately. However, if fair value cannot be
established or if the delivered items do not have stand alone value to the customer without
additional services provided, the Company recognizes revenue on the contract as a single unit of
accounting, based on either the completed-contract or proportional-performance methods as described
below.
In most cases, revenue from hardware and software product sales is recognized when title passes to
the customer. Based upon the Companys standard shipping terms, FOB destination, title passes upon
delivery of the products to the customer. However, occasionally GTSIs customers will request
bill-and-hold transactions in situations where the customer does not have space available to
receive products or is not able to immediately take possession of products for other reasons, in
which case GTSI will store the purchased equipment in its distribution center. Under ASC 605-10,
the Company only recognizes revenue for bill-and-hold transactions when the goods are complete and
ready for shipment, title and risk of loss have passed to the customer, management receives a
written request from the customer for bill-and-hold treatment, and the ordered goods are segregated
in GTSIs warehouse from other inventory and cannot be used to fulfill other customer orders.
Revenue is recognized on service contracts using either the completed-performance or
proportional-performance method depending on the terms of the service agreement. When there are
acceptance provisions based on customer-specified subjective criteria, the completed-performance
method is used. For contracts where the services performed in the last series of acts is very
significant, in relation to the entire contract, performance is not deemed to have occurred until
the final act is completed. Once customer acceptance has been received, or the last significant act
is performed, revenue is recognized. The Company uses the proportional-performance method when a
service contract specifies a number of acts to be performed and the Company has the ability to
determine the pattern in which service is provided to the customer.
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In many contracts, billing terms are agreed upon based on performance milestones such as the
execution of a contract, the customers acceptance of the equipment and/or vendor for products, the
partial or complete delivery of products and/or the completion of specified services. Payments
received before delivery has occurred or services
have been rendered are recorded as deferred revenue until the revenue recognition criteria are met.
Deferred revenue from extended warranty contracts is recognized over the terms of the extended
warranty.
The Company sells products to certain customers under sales-type lease arrangements for terms
typically ranging from two to four years. The Company accounts for its sales-type leases according
to the provisions of FASB ASC 840, Leases (ASC 840), and, accordingly, recognizes current and
long-term lease receivables, net of unearned income, on the accompanying balance sheets. The
present value of all payments is recorded as sales and the related cost of the equipment is charged
to cost of sales. The associated interest is recorded over the term of the lease using the
effective interest method.
In many cases, GTSI transfers these receivables to various unrelated financing companies and
accounts for the transfers in accordance with FASB ASC 860, Transfers and Servicing (ASC 860).
The transfer of receivables in which GTSI surrenders control is accounted for as a sale. To
surrender control, the assets must be isolated from the Company, the transferee has the right to
pledge or exchange the receivables and GTSI must not have an agreement that entitles and obligates
the Company to repurchase the receivables or the ability to unilaterally cause the holder to return
specific assets. If the transfer of receivables does not meet the criteria for a sale under ASC
860, the transfer is accounted for as a secured borrowing with a pledge of collateral. As a result,
the Company has recorded certain transferred receivables and secured borrowings, within accounts
receivable and long-term financing receivables, and as financed lease debt on the balance sheet.
The Company may also enter into sales arrangements with customers where the Company performs as an
agent or broker without assuming the risks and rewards of ownership of the goods and services. The
Company recognizes revenue from these transactions on a net basis in accordance with FASB ASC
605-45, Revenue Recognition, Principal Agent Considerations (ASC 605-45). The Company sells
services performed by third parties, such as maintenance contracts, and recognizes revenue on a net
basis at the time of sale.
GTSI offers rights of return to its customers on the products it sells. In accordance with FASB ASC
605-15, Revenue Recognition, Product (ASC 605-15), the Company records a sales return allowance
based on historical trends in product return rates, when such returns became material. The
allowance for future sales returns as of December 31, 2009 and December 31, 2008 was $0.7 million
and $1.4 million, respectively, and was recorded as a reduction of accounts receivable, net. The
estimated cost of sales of $0.6 million and $1.2 million related to these sales were also deferred
and recorded on the consolidated balance sheet as of December 31, 2009 and December 31, 2008,
respectively, as deferred costs.
In accordance with FASB ASC 605-50, Revenue Recognition, Customer Payments and Incentives (ASC
605-50), the Company records cash received from a vendor as a reduction of inventory and a
subsequent reduction in cost of sales, unless the cash is a reimbursement of a specific,
identifiable, incremental cost related to selling the vendors product or the vendor receives, or
will receive, an identifiable benefit in exchange for the cash.
We record vendor rebates received under its vendor incentive programs pursuant to a binding
arrangement as a reduction of cost of sales based on a systematic and rational allocation that
results in progress by the Company toward earning the rebate provided the amounts are probable and
reasonably estimable. If the rebate is not probable and reasonably estimable, it is recognized as
the milestones are achieved. In accordance with FASB ASC 605-45, Revenue Recognition, Principal
Agent Considerations (ASC 605-45), the Company records freight billed to customers as sales and
the related shipping costs as cost of sales.
In accordance with ASC 605-45, the Company collects and remits sales and property taxes on products
and services that it purchases and sells under its contracts with customers, and reports such
amounts under the net method in its consolidated statements of operations.
We amortize costs that are directly related to the acquisition of a long-term contract and that
would have not been incurred but for the acquisition of that contract (incremental direct
acquisition costs). As long-term contracts are awarded the related up-front incentive costs, which
are specific incremental costs associated with the acquisition of long-term contracts, are recorded
as prepaid/deferred assets and amortized over the term of the contract or five years, whichever is
shorter as a component of selling, general and administrative expenses.
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F. Cash
Cash consists of all cash balances held in bank accounts at the end of the year. The Company places
its temporary cash investments with high credit quality financial institutions. At times such
investments may be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit.
Management monitors balances in excess of insured limits and believes they do not represent a
significant credit risk to the Company.
G. Concentration of Credit Risk
Accounts receivable principally represents amounts collectible from the U.S. Federal, state and
local governments and prime contractors that are working directly on government contracts. The
Company periodically performs credit evaluations of its non-governmental customers and generally
does not require collateral. As of December 31, 2009 and 2008, trade accounts receivable from the
U.S. Federal Government were $103.9 million or 73.4% and $96.6 million or 68.5%, respectively. The
Department of Defense accounted for 36.9% and 39.8% of total trade accounts receivable as of
December 31, 2009 and 2008, respectively. One civilian agency accounted for 15.7% of total trade
accounts receivable as of December 31, 2009. No other single U.S. Federal Government department or
agency accounted for 10% or more of accounts receivable. Credit losses have been insignificant.
H. Allowance for Doubtful Accounts
The Companys accounts receivable balances are net of an estimated allowance for doubtful accounts.
The allowance for doubtful accounts is based on a specific identification of probable losses and an
analysis of historical trade receivable write-offs. These estimates could differ from actual
collection experience and are subject to adjustment. Therefore, the valuation reserve is
re-evaluated quarterly and adjusted as information about the ultimate collectability of accounts
receivable becomes available.
I. Software Development Costs
The Company capitalizes the cost of internally developed software that has a useful life in excess
of one year in accordance with FASB ASC 350-40, Intangibles-Goodwill and Other Internal-Use
Software (ASC 350-40). These costs consist of the fees paid to consultants and the salaries of
employees working on such software development to customize it to the Companys needs as well as
any third party hardware/software purchases specific to development. Costs incurred in connection
with the development of upgrades or enhancements that result in additional functionality are also
capitalized and amortized over the useful life of the software once the enhancements are
implemented. Software maintenance and training costs are expensed in the period in which they are
incurred.
J. Impairment of Long-Lived Assets
Long-lived assets, consisting primarily of furniture, equipment and capitalized internal use
software costs, are tested for recoverability whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable in accordance with FASB ASC 360, Property, Plant,
and Equipment, (ASC 360). Recoverability of long-lived assets is assessed by a comparison of the
carrying amount to the estimated future net cash flows expected to result from the use of the
assets and their eventual disposition. If estimated undiscounted future net cash flows are less
than the carrying amount, the asset is considered impaired and a loss would be recognized based on
the amount by which the carrying value exceeds the fair value of the asset.
K. Accounts Payable
The Company purchases significant amounts of inventory each year and records an estimate of the
payable based on the purchases as of the balance sheet date and the historic rate of purchase price
variances, which is analyzed and adjusted on a quarterly basis. As invoices are received, the
Company records adjustments for purchase price variances.
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L. Stock-based Compensation
On January 1, 2006, the Company adopted the fair value recognition provisions of FASB ASC 718,
Compensation-Stock Compensation, (ASC 718), using the modified-prospective transition method.
Under this method,
compensation cost recognized in the years ended December 31, 2009, 2008 and 2007 includes: (a)
compensation cost for all share-based payments granted prior to, but not yet vested as of January
1, 2006, based on the grant date fair value estimated and (b) compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated.
Stock-based compensation expense for the years ended December 31, 2009, 2008, 2007 was $2.4
million, $2.9 million and $1.8 million, respectively. ASC 718 requires the cash flows from the tax
benefits resulting from tax deductions in excess of the compensation cost recognized for those
share based awards (tax windfalls) to be classified as financing cash flows. Since there was no tax
benefit for stock based compensation during the year ended December 31, 2007, there was no impact
to the Companys Statement of Cash Flows after the adoption of ASC 718. For the year ended
December 31, 2008, there was $1.1 million tax impact from stock-based compensation.
For the year ended December 31, 2009, there was $0.8 million tax impact from stock-based compensation.
M. Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which requires
the recognition of deferred tax assets and liabilities for the expected 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. ASC 740 requires that a valuation
allowance be established when it is more likely than not that some portion or all of a deferred tax
asset will not be realized. A full valuation allowance on the net deferred tax asset was recorded
as of December 31, 2007 and was reversed in 2008 as discussed in Note 13. A tax provision of $4.2
million was recorded as of December 31, 2009.
N. Advertising
The costs of advertising are expensed as incurred.
O. Fair Value of Financial Instruments
At December 31, 2009 and 2008, the recorded values of financial instruments such as trade
receivables, accounts payable and Credit Facility borrowings approximated their fair values based
on the short-term maturities of these instruments. As of December 31, 2009 and 2008, the Company
believes the carrying amount of its current and long-term lease receivables and financed lease debt
approximate their fair value.
P. Equity Investments
Investments in joint ventures and entities over which the Company exercises significant influence
but not control are accounted for using the equity method as prescribed by FASB ASC 323-30,
Investments Equity Method and Joint Ventures, Partnerships, Joint Ventures, and Limited Liability
Entities, (ASC 323-30). Under this method of accounting, which generally applies to investments
that represent a 20% to 50% ownership of the equity securities of the entities, the Companys share
of the net earnings or losses of the affiliated entities is included in other income and expenses.
Q. New Accounting Pronouncements
In June 2009, the FASB issued new guidance on accounting for transfers of financial assets, which
is included in the Codification under FASB ASC 860, Transfers and Servicing. The guidance removes
the concept of a qualifying special-purpose entity and requires enhanced disclosures to provide
financial statement users with greater transparency about transfers of financial assets and a
transferors continuing involvement with transferred financial assets. The guidance must be applied
as of the beginning of each reporting entitys first annual reporting period that begins after
November 15, 2009. The adoption of this statement will not impact the Companys financial position
and results of operations.
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In June 2009, the FASB issued amendments to the accounting and disclosure requirements for the
consolidation of variable interest entities, which is included in the Codification under FASB ASC
810, Consolidation. The guidance affects the overall consolidation analysis and requires enhanced
disclosures on involvement with variable interest entities. The guidance is effective for fiscal
years beginning after November 15, 2009. The adoption of this statement will not impact the
Companys financial position and results of operations.
In October 2009, the FASB issued amendments to the accounting and disclosure for revenue
recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010,
modify the criteria for recognizing revenue in multiple element arrangements and the scope of what
constitutes a non-software deliverable. The guidance relates to the determination of when the
individual deliverables included in a multiple-element arrangement may be treated as separate units
of accounting and modifies the manner in which the transaction consideration is allocated across
the individual deliverables. Also, the guidance expands the disclosure requirements for revenue
arrangements with multiple deliverables. This guidance removes tangible products from the scope of
the software revenue guidance if the products contain both software and non-software components
that function together to deliver a products essential functionality and provides guidance on
determining whether software deliverables in an arrangement that includes a tangible product are
within the scope of the software revenue guidance. The guidance must be applied as of the
beginning of each reporting entitys first annual reporting period that begins after June 15, 2010,
and may be applied retrospectively for all periods presented or prospectively to arrangements
entered into or materially modified after the adoption date. The Company is currently evaluating
the potential impact on its financial position and results of operations.
R. Comprehensive Income
For the years ended December 31, 2009, 2008 and 2007, respectively, the Company had no reportable
Comprehensive Income.
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2. Accounts Receivable
Accounts receivable consists of the following as of December 31 (in thousands):
2009 | 2008 | |||||||
Trade accounts receivable |
$ | 143,541 | $ | 153,742 | ||||
Unbilled trade accounts receivable |
32,784 | 9,795 | ||||||
Lease receivables, net |
12,876 | 14,740 | ||||||
Vendor and other financing receivables |
21,291 | 14,212 | ||||||
Total accounts receivable |
$ | 210,492 | $ | 192,489 | ||||
Less: Allowance for doubtful accounts |
(223 | ) | (393 | ) | ||||
Sales return allowance |
(674 | ) | (1,356 | ) | ||||
Accounts receivable, net |
$ | 209,595 | $ | 190,740 | ||||
3. Long-term receivables and other assets
The Companys long-term receivables and other assets were as follows as of (in thousands):
2009 | 2008 | |||||||
Lease and other receivables, net of unearned
interest |
$ | 31,572 | $ | 6,987 | ||||
Equity Investment in EyakTek |
7,956 | 5,261 | ||||||
Other Assets |
1,230 | 1,830 | ||||||
$ | 40,758 | $ | 14,078 | |||||
4. Lease and Other Related Receivables
The Company leases computer hardware, generally under sales-type leases, in accordance with ASC
840. In connection with those leases, the Company sometimes sells related services, software and
maintenance to its customers. The terms of the receivables from the sale of these related services
are often similar to the terms of the leases of computer hardware; that is, receivables are
interest bearing and are often due over a period of time that corresponds with the terms of the
leased computer hardware.
The Company recognized revenue of $99.5 million, $85.1 million and $35.6 million for the years
ended December 31, 2009, 2008 and 2007, respectively, from sales-type lease and related
transactions. Other related receivables include long term receivables for items such as
maintenance, services and software. As of December 31, 2009, the Company had current and long-term
outstanding lease and other receivables of $63.3 million compared with $33.2 million as of December
31, 2008.
Future minimum payments for lease and other related receivables are as follows as of December 31,
2009 (in thousands):
2010 |
$ | 30,040 | ||
2011 |
12,779 | |||
2012 |
11,669 | |||
2013 |
8,856 | |||
Thereafter |
| |||
Future minimum payments |
$ | 63,344 | ||
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Lease Receivables
The Companys investments in sales-type lease receivables were as follows as of December 31 (in
thousands):
2009 | 2008 | |||||||
Future minimum lease payments receivable |
$ | 10,719 | $ | 14,921 | ||||
Unguaranteed residual values |
| 3,458 | ||||||
Unearned income |
(1,039 | ) | (1,164 | ) | ||||
$ | 9,680 | $ | 17,215 | |||||
Other Related Receivables
The Companys investment in other receivables was as follows as of December 31 (in thousands):
2009 | 2008 | |||||||
Future minimum payments receivable |
$ | 52,625 | $ | 14,802 | ||||
Unearned income |
(2,958 | ) | (1,479 | ) | ||||
$ | 49,667 | $ | 13,323 | |||||
5. Transferred Receivables and Financed Lease Debt
During the years ended December 31, 2009 and 2008, there were no receivables transferred to third
party financing companies. Financing receivables typically have terms from two to four years and
are usually collateralized by a security interest in the underlying assets. Though the Company
receives cash for the transfer of these receivables, the transfers do not meet the criteria for a
sale under ASC 860. As a result, the receivables remain on the Companys balance sheets and are
characterized as financing receivables. As of December 31, 2009 and 2008, such financing
receivables were $0.9 million and $9.9 million, respectively and are included in the lease and
other related receivables above. The interest income on these receivables is recognized over the
terms of the respective agreements as financing revenues, as a majority of transferred receivables
are lease receivables. As payments on these receivables are made by our customers directly to the
third party financing companies, the related reduction of these receivables and financed lease debt
is a non-cash transaction and excluded from the statement of cash flows. These non-cash items
totaled $0.8 million, $9.1 million, and $17.6 million for the years ended December 31, 2009, 2008,
and 2007, respectively.
The terms of the financed lease debt, which is backed by the transferred receivables, generally
correspond to the terms of the underlying receivables, generally two to four years. The financed
lease debt had a weighted average interest rate of 7.02%, 6.70% and 7.32% for the years ended
December 31, 2009, 2008 and 2007, respectively. The Company recognized $0.2 million, $0.9 million
and $1.8 million of financing cost of sales associated with the financed lease debt for the years
ended December 31, 2009, 2008 and 2007, respectively.
The maturities of the financed lease debt as of December 31, 2009 are as follows (in thousands):
Year | ||||
2010 |
$ | 831 | ||
2011 |
| |||
2012 |
| |||
2013 |
| |||
2014 |
| |||
Total |
$ | 831 | ||
For the years ended December 31, 2009, 2008, and 2007 the Company transferred lease and other
related receivables to third party financing companies in transactions that met the sale criteria
under ASC 860,
derecognizing the receivables associated with these transfers resulted in a net gain on these sales
in the amount of $6.5 million, $6.0 million and $3.0 million, respectively, which is included in
sales and cost of sales in gross on the accompanying consolidated statements of operations.
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6. Inventory
Inventory (composed of finished goods) is valued at the lower of cost or market. Cost is determined
using the average cost method. The Company writes down its inventory for obsolete or excess
inventory based on assumptions about future demand and market conditions. For the years ended
December 31, 2009, 2008 and 2007, there were no significant charges recorded for obsolete or excess
inventory.
7. Depreciable Assets
Depreciable assets are stated at cost less accumulated depreciation and amortization. Depreciation
and amortization are calculated using the straight-line method over estimated useful lives.
Furniture and equipment useful lives range from three to ten years. Purchased and developed
computer software for internal use, including the GTSI Enterprise Resource Management System
(GEMS), are amortized over expected lives ranging from three to seven years. The useful life for
leasehold improvements is the lesser of the term of the lease or the life of the improvement, which
range from three to ten years. Costs for maintenance and repairs are charged to expense when
incurred. Depreciable assets consist of the following as of December 31 (in thousands):
2009 | 2008 | |||||||
Office furniture and equipment |
$ | 7,421 | $ | 16,689 | ||||
Purchased software for internal use |
2,250 | 7,605 | ||||||
Internally developed software |
16,730 | 16,022 | ||||||
Leasehold improvements |
1,268 | 1,269 | ||||||
27,669 | 41,585 | |||||||
Less: accumulated depreciation and amortization |
(16,709 | ) | (27,921 | ) | ||||
Depreciable assets, net |
$ | 10,960 | $ | 13,664 | ||||
Depreciation expense, including amortization of capitalized software development costs, was
$3.9 million, $3.4 million and $3.8 million for the years ended 2009, 2008 and 2007, respectively.
Amortization of software costs was $2.8 million in 2009, $2.6 million in 2008 and $2.4 million in
2007. During 2009 and 2008, the Company capitalized $0.9 million and $1.2 million, respectively, of
development costs related to GEMS. In addition, during 2009 and 2008, the Company capitalized $0.1
million each year for other purchased software for internal use. The total net book value of
capitalized software development costs was $7.6 million and $9.4 million as of December 31, 2009
and 2008, respectively.
As of December 31, 2008, the Company had an impairment loss of $0.1 million under FASB ASC 360,
Property, Plant & Equipment. There were no indicators of impairment under FASB ASC 360 during 2009
and 2007.
The Company retired or disposed or a total of $15.1 million of depreciable assets and $15.1 million
of related accumulated depreciation as of December 31, 2009.
For the year ended December 31, 2008, the Company retired or disposed of a total of $6.3 million of
depreciable assets and $6.1 million of related accumulated depreciation, resulting in a $0.2
million loss on the sale of depreciable assets, which is included in selling, general and
administrative expenses. The majority of these retirements and disposals related to the move to the
new corporate headquarters.
8. Credit Agreement and Credit Facility
In 2006, the Company entered into a $135 million credit agreement with a group of lenders (the
Credit Facility). This Credit Facility was terminated on May 27, 2009 and the related unamortized
deferred financing costs of $1.5 million were written-off.
On May 27, 2009, we entered into a $135 million credit agreement with Castle Pines Capital LLC
(CPC) and other lenders (the Credit Agreement), which includes inventory financing. The Credit
Agreement provides a
vendor and distributor program under which we receive financing for inventory purchases from
several of our largest CPC approved vendors with extended payment terms. The Credit Agreement,
which matures on May 27, 2011, carries an interest rate indexed at 1-Month LIBOR plus 300 basis
points for revolving loan advances and 1-Month LIBOR plus 350 basis points for floor plan loans.
Borrowing under the Credit Agreement at any time is limited to the lesser of (a) $135 million or
(b) a collateral-based borrowing base (eligible accounts receivable and inventory balances) less
outstanding obligations relating to any borrowings, floor plan loans and stand-by letters of
credits.
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As of December 31, 2009, borrowing capacity and availability under the Credit Agreement was as
follows (in thousands):
Total Credit Agreement |
$ | 135,000 | ||
Borrowing base limitation |
(12,070 | ) | ||
Total borrowing capacity |
122,930 | |||
Less: interest-bearing borrowings |
| |||
Less: non-interest bearing advances (floor plan loans) |
(34,889 | ) | ||
Less: letters of credit |
(5,138 | ) | ||
Total unused availability |
$ | 82,903 | ||
As of December 31, 2009, the Company had no outstanding loan balance (other than non-interest
bearing floor plan loans) under the Credit Agreement and as reflected above, available credit
thereunder of $82.9 million.
The Credit Agreement contains customary covenants limiting our ability to, among other things (a)
incur debt; (b) make guarantees or grant or suffer liens; (c) repurchase of our common stock for an
aggregate purchase price in excess of $5 million, (d) make certain restricted payments (including
cash dividends), purchase of other businesses or investments; (e) enter into transactions with
affiliates; (f) dissolve, change names, merge or enter into certain other material agreement
regarding changes to the corporate entities; (g) acquire real estate; and (h) enter into sales and
leaseback transactions.
The financial covenants of the Credit Agreement requires us, among other restrictions, to:
| Maintain Tangible Net Worth not less than or equal to $45 million as dated the end of each fiscal month | ||
| Maintain Ratio of Total Liabilities to Tangible Net Worth not greater than 5.25 to 1.00 as dated the end of each fiscal month | ||
| Maintain Current Ratio not less than (i) 1.20 to 1.00 as of the last business day of the fiscal months of January, February, March, April, May, June, October, November and December and (ii) 1.15 to 1.00 as of the last business day of the fiscal months of July, August and September. | ||
| Maintain minimum Total Debt Service Coverage Ratio of 1.25 to 1.00 as dated the end of each fiscal month |
Furthermore, the Credit Agreement contains information covenants requiring the Company to provide
the lenders certain information. The Company was in compliance with all financial and informational
covenants as set forth in the Credit Agreement as of December 31, 2009. If the Company fails to
comply with any material provision or covenant of our Credit Agreement, it would be required to
seek a waiver or amendment of covenants.
The Company currently relies on its Credit Agreement as its primary vehicle to finance its
operations. If the Company fails to comply with any material provision or covenant of our Credit
Agreement, it would be required to seek a waiver or amendment of covenants.
The Company defers loan financing costs and recognizes these costs throughout the term of the
loans. The unamortized deferred financing costs of $1.5 million related to the terminated Credit
Facility were written-off during
the second quarter of 2009 and recorded to interest expense. Also, the Company deferred $0.1
million of loan financing costs related to the new Credit Agreement during the second quarter of
2009. Deferred financing costs as of December 31, 2009 and 2008 were $0.1 million and $2.2 million,
respectively.
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9. Accrued Liabilities
Accrued liabilities consists of the following as of December 31 (in thousands):
2009 | 2008 | |||||||
Accrued commissions and bonuses |
$ | 6,113 | $ | 4,154 | ||||
Accrued income taxes |
2,864 | | ||||||
Future contractual lease obligations |
10,079 | 6,083 | ||||||
Other |
7,071 | 7,620 | ||||||
Total accrued liabilities |
$ | 26,127 | $ | 17,857 | ||||
10. Stockholders Equity
Purchase of Capital Stock
On December 19, 2008, the Board authorized a program for periodic purchases of GTSI common stock
over a 24 month period in an aggregate amount not to exceed two million shares. On June 8, 2009,
the Board authorized a program for periodic purchases of common stock through May 27, 2011 for an
aggregate purchase price not to exceed $5 million (as discussed in Note 8), replacing the stock
repurchase program announced in December 2008.
In 2009, under its repurchase program, the Company purchased 122,329 of its common stock throughout
the year and in April 2009, the Company purchased 316,861 shares from one seller in a private
transaction. In addition, the Company acquired 23,905 shares of its common stock related to
restricted stock lapses to cover tax withholdings. The Company did not purchase any of its common
stock in 2008, except for 24,041 shares acquired through net share settlements on option exercises.
During 2007, the Company did not purchase any of its common stock. In 2009 and 2008, common stock
purchased for the Companys treasury was generally reissued for the employee stock purchase plan,
restricted stock award grants and upon the exercise of employee stock options. In 2007, the Company
issued newly registered shares to satisfy the employee stock purchase plan, restricted stock award
grants, and exercises of employee stock options.
Stock Incentive Plans
The Company has two stockholder approved combination incentive and non-statutory stock incentive
plans: the 1994 Stock Option Plan, as amended (1994 Plan), and the Amended and Restated 2007
Stock Incentive Plan (2007 Plan). These plans provide for the granting of options to employees
(both plans) and non-employee directors (only under the 2007 Plan) to purchase up to 300,000 and
4,500,000 shares, respectively, of the Companys common stock. The 2007 Plan also permits the grant
of restricted stock and restricted stock units to its employees and non-employee directors as well
as stock appreciation rights (SARs). The Company has another stockholder approved plan, the 1997
Non-Officer Stock Option Plan (1997 Plan), which provides for the granting of non-statutory stock
options to employees (other than officers and directors) to purchase up to 300,000 shares of the
Companys common stock. In addition, GTSI has utilized a vehicle permitted under NASDAQ marketplace
rules that allows a company without stockholder approval to offer stock options to prospective
employees as an inducement to entering into employment with the company (Capitalization Vehicle).
Under the 2007, 1997 and 1994 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 Companys 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 issued under the
Capitalization Vehicle have a term of seven years, vest over four years and option prices equal the
fair market value of the Companys common stock at the date of grant. The vesting period for
restricted stock and restricted stock units is determined by the Compensation Committee on an
individual award basis. GTSI recognizes stock-based compensation expense for these graded vesting
awards on a straight-line basis over the requisite service period for the entire award, which is
equal to the vesting period specified in the option agreement.
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Valuation Assumptions
The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton
option valuation model that uses the assumptions noted in the following table. Expected
volatilities are based on the historical volatility of GTSIs stock over the historical period of
time equal to the expected term of the options. The Company uses historical data to estimate option
exercises, employee terminations and award forfeitures within the valuation model. The expected
term of options granted has been determined based on historical exercise behavior and represents
the period of time that options granted are expected to be outstanding. The risk-free interest rate
is based on the U.S. Treasury rates at the time of grant that approximates the expected term of the
option. The expected dividend assumption is zero as the Company is currently restricted under its
Credit Agreement from issuing dividends on its common stock and it does not expect to declare a
dividend in the foreseeable future. The fair value of the Companys stock based option awards to
employees was based on the following weighted-average assumptions for the years ended December 31:
2009 | 2008 | 2007 | ||||||||||
Expected volatility |
51.0 | % | 48.3 | % | 51.6 | % | ||||||
Expected dividends |
| | | |||||||||
Expected term (in years) |
5.5 | 5.0 | 5.2 | |||||||||
Risk free interest rate |
2.9 | % | 2.6 | % | 4.6 | % |
Stock Options
A summary of option activity under the Companys stock incentive plans as of December 31, 2009,
2008 and 2007, and related changes during the years then ended is presented below (in thousands):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinstic | ||||||||||||||
Shares | Price | Term | Value | |||||||||||||
Outstanding balance at December
31, 2006 |
2,105 | $ | 7.93 | |||||||||||||
Granted |
57 | $ | 10.45 | |||||||||||||
Exercised |
(181 | ) | $ | 6.23 | ||||||||||||
Forfeited |
(89 | ) | $ | 7.24 | ||||||||||||
Expired |
(110 | ) | $ | 10.19 | ||||||||||||
Outstanding balance at December
31, 2007 |
1,782 | $ | 8.08 | 4.18 | $ | 3,172 | ||||||||||
Granted |
35 | $ | 5.65 | |||||||||||||
Exercised |
(45 | ) | $ | 4.88 | ||||||||||||
Forfeited |
(33 | ) | $ | 8.31 | ||||||||||||
Expired |
(91 | ) | $ | 9.54 | ||||||||||||
Outstanding balance at December
31, 2008 |
1,648 | $ | 8.05 | 3.40 | $ | 261 | ||||||||||
Granted |
400 | $ | 6.40 | |||||||||||||
Exercised |
(75 | ) | $ | 4.24 | ||||||||||||
Forfeited |
(74 | ) | $ | 6.64 | ||||||||||||
Expired |
(219 | ) | $ | 9.62 | ||||||||||||
Outstanding balance at December
31, 2009 |
1,680 | $ | 7.68 | 3.83 | $ | 69 | ||||||||||
Exercisable at December 31, 2009 |
1,070 | $ | 8.23 | 2.60 | $ | 69 | ||||||||||
The weighted-average grant-date fair value of options granted during 2009, 2008 and 2007 was
$6.40, $5.65 and $10.45, respectively. The total intrinsic value of options exercised during 2009,
2008 and 2007 was $0.1 million, $0.1 million and $0.9 million, respectively. For the years ended
December 31, 2009, 2008 and 2007, stock compensation expense related to stock options was $0.7
million, $0.6 million and $0.7 million, respectively.
A tax benefit of $0.8 million and $1.1 million was recognized in 2009 and 2008, respectively, from
the tax impact from stock based compensation. No tax benefit for the exercise of stock
options was recognized during 2007.
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There were no charges for stock-based compensation granted to non-employees in 2009 and 2008. For
2007, the Company recorded charges of less than $0.1 million for stock-based compensation granted
to non-employees based on the fair value method.
Restricted Shares
In 2009, the Company issued restricted stock grants of 26,664 shares of the Companys common stock
to the non-employee Board members, which will vest in April 2010, as well as 36,539 shares of
restricted stock to employees, scheduled to vest in equal installments over a period of five years
from the grant date. During 2008, the Company issued restricted stock grants of 26,664 shares of
the Companys common stock to the non-employee Board members, which vested in April 2009, as
well as 17,821 shares of restricted stock to employees that will vest in equal installments over a
period of five years from the grant date. During 2007, the Company issued restricted stock grants
of 23,331 shares of the Companys common stock to the non-employee Board members, which vested in
April 2008, as well as 347,995 shares of restricted stock to employees that will vest in equal
installments over a period of five years from the grant date. Compensation is recognized on a
straight-line basis over the vesting period of the grants. During 2009, 2008 and 2007, $0.8
million, $1.1 million and $0.8 million respectively, was recorded as stock compensation expense for
restricted stock.
Holders of nonvested restricted stock have similar dividend and voting rights as common
stockholders. The fair value of nonvested restricted stock is determined based on the closing
trading price of the Companys shares on the grant date. A summary of the status of the Companys
nonvested shares as of December 31, 2009, 2008 and 2007, and related changes during the years then
ended is presented below (in thousands):
Weighted | ||||||||
Average | ||||||||
Grant-Date | ||||||||
Shares | Fair Value | |||||||
Nonvested balance at December 31, 2006 |
68 | $ | 7.47 | |||||
Granted |
371 | $ | 12.14 | |||||
Vested |
(24 | ) | $ | 7.37 | ||||
Forfeited |
(37 | ) | $ | 11.13 | ||||
Nonvested balance at December 31, 2007 |
378 | $ | 11.71 | |||||
Granted |
44 | $ | 7.27 | |||||
Vested |
(89 | ) | $ | 12.20 | ||||
Forfeited |
(43 | ) | $ | 12.00 | ||||
Nonvested balance at December 31, 2008 |
290 | $ | 10.83 | |||||
Granted |
63 | $ | 5.54 | |||||
Vested |
(101 | ) | $ | 9.76 | ||||
Forfeited |
(37 | ) | $ | 10.13 | ||||
Nonvested balance at December 31, 2009 |
215 | $ | 9.91 | |||||
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Stock Appreciation Rights (SARs)
In 2009, 76,179 SARs were granted as part of the 2007 long term incentive plan. During 2008 and
2007, there were 42,023 and 918,006 SARs granted as part of the 2007 long term incentive plan. All
SARs are to be settled in stock. During 2009, 2008 and 2007, $0.9 million, $1.2 million and $0.8
million, respectively was recorded as stock compensation expense for SARs. A summary of SARs
activity under the Companys stock incentive plans as of December 31, 2009, 2008 and 2007, and
related changes during the years then ended is presented below (in thousands):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinstic | ||||||||||||||
Shares | Price | Term | Value | |||||||||||||
Outstanding balance at December 31, 2006 |
| |||||||||||||||
Granted |
918 | $ | 9.60 | |||||||||||||
Exercised |
| |||||||||||||||
Forfeited |
(76 | ) | $ | 9.60 | ||||||||||||
Expired |
| |||||||||||||||
Outstanding balance at December 31, 2007 |
842 | $ | 9.60 | 4.76 | $ | 219 | ||||||||||
Granted |
42 | $ | 9.60 | |||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(112 | ) | $ | 9.60 | ||||||||||||
Expired |
(14 | ) | $ | 9.60 | ||||||||||||
Outstanding balance at December 31, 2008 |
758 | $ | 9.60 | 5.09 | $ | | ||||||||||
Granted |
76 | $ | 9.60 | |||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(65 | ) | $ | 9.60 | ||||||||||||
Expired |
(52 | ) | $ | 9.60 | ||||||||||||
Outstanding balance at December 31, 2009 |
717 | $ | 9.60 | 4.44 | $ | | ||||||||||
Exercisable at December 31, 2009 |
250 | $ | 9.60 | 4.13 | $ | | ||||||||||
Unrecognized Compensation
As of December 31, 2009, there was $4.8 million of total unrecognized compensation cost related to
nonvested stock-based awards, which consisted of unrecognized compensation of $1.2 million related
to stock options, $1.5 million related to restricted stock awards and $2.1 million related to SARs.
The cost for unrecognized compensation related to stock options, restricted stock awards, and SARs
is expected to be recognized over a weighted average period of 2.49 years, 2.26 years and 2.61
years, respectively. During 2009, approximately 361,795 stock option and SAR awards and 101,035
restricted stock awards vested.
Employee Stock Purchase Plan
Under GTSIs Employee Stock Purchase Plan (ESPP), eligible employees may elect to set aside,
through payroll deduction, up to 15% of their compensation to purchase Company common stock at 85%
of the fair market value of shares of common stock on the last day of the offering period. The
maximum number of shares that an eligible employee may purchase during any offering period is equal
to 5% of such employees compensation for the 12 calendar-month period prior to the commencement of
an offering period divided by 95% of the fair market value of a share of common stock on the first
day of the offering period. The ESPP is implemented through one offering during each six-month
period beginning January 1 and July 1. Prior to July 1, 2008, the ESPP purchase price was 95% of
the lower of the fair market value of a share of common stock on the last day of the offering
period. No other material changes were made to the plan. The Company uses its treasury shares to
fulfill the obligation of both the employee withholding and the discount.
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The table below summarizes the number of shares purchased by employees under the ESPP during
offering periods indicated:
Number of | ||||||||
shares | Purchase | |||||||
Offering period ended | purchased | price | ||||||
December 31, 2009 |
46,350 | $ | 4.22 | |||||
June 30, 2009 |
34,739 | $ | 4.56 | |||||
December 31, 2008 |
42,556 | $ | 5.10 | |||||
June 30, 2008 |
16,652 | $ | 7.19 | |||||
December 31, 2007 |
16,011 | $ | 9.37 | |||||
June 30, 2007 |
9,392 | $ | 12.26 |
The weighted average fair market value of shares under the ESPP was $4.37 in 2009, $5.69 in 2008
and $10.44 in 2007. GTSI has reserved 1,600,000 shares of common stock for the ESPP, of which
545,418 were available for future issuance as of December 31, 2009.
11. Related Party Transactions
In 2002, GTSI made a $0.4 million investment in Eyak Technology, LLC (EyakTek), and assumed a 37%
ownership of EyakTek. GTSI also has a designee on EyakTeks Board of Directors. The investment in
EyakTek is accounted for under the equity method and adjusted for earnings or losses as reported in
the financial statements of EyakTek and dividends received from EyakTek. In 2003, EyakTek formed a
joint venture with GTSI called EG Solutions (EGS), which GTSI owned a 49% interest. On September
30, 2007, GTSI sold its 49% interest in EGS to EyakTek for $0.7 million. At December 31, 2009 and
2008, the investment balance for EyakTek was $8.0 million and $5.3 million, respectively, and
equity in earnings was $8.3 million and $4.9 million, respectively. The Company recognized sales to
EyakTek of $21.9 million, $23.2 million and $32.4 million during 2009, 2008 and 2007 and
receivables have been recorded by the Company totaling $14.7 million and $1.1 million as of
December 31, 2009 and 2008, respectively. GTSI also receives a fee from EyakTek based on sales from
products sold at cost by GTSI to EyakTek and fees recognized by the Company during 2009, 2008, 2007
are $0.3 million, $1.4 million, and $4.2 million, respectively, which are included in sales in the
accompanying consolidated statements of operations. The amounts due are included in accounts
receivable totaling $0.1 million and $0.3 million for the year ended December 31, 2009 and 2008,
respectively.
The following table summarizes EyakTeks financial information as of and for the year ended
December 31 (in thousands):
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenues |
$ | 408,759 | $ | 273,475 | $ | 228,585 | ||||||
Gross margin |
$ | 42,404 | $ | 31,292 | $ | 20,368 | ||||||
Net income |
$ | 21,707 | $ | 13,044 | $ | 7,005 |
December 31, | ||||||||
2009 | 2008 | |||||||
Current assets |
$ | 155,094 | $ | 104,069 | ||||
Noncurrent assets |
$ | 402 | $ | 1,003 | ||||
Current liabilities |
$ | 134,030 | $ | 93,092 | ||||
Noncurrent liabilities |
$ | 3 | $ | 77 | ||||
Members equity |
$ | 21,463 | $ | 11,901 |
12. Earnings (Loss) Per Share
Basic earnings (loss) per share are calculated by dividing net income or loss by the weighted
average shares outstanding during the period, which includes shares of restricted stock that are
fully vested. Diluted earnings (loss) per share are computed similarly to basic earnings (loss) per
share, except that the weighted average shares outstanding are increased to include equivalents,
when their effect is dilutive.
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In periods of net loss, all diluted shares are considered anti-dilutive and are excluded from the
calculation. Anti-dilutive employee stock options totaling 296 thousand and restricted stock units
totaling 20 thousand have been excluded for 2007.
The following table sets forth the computation of basic and diluted (loss) earnings per share for
the years ended December 31 (in thousands except per share amounts):
2009 | 2008 | 2007 | ||||||||||
Basic earnings (loss) per share: |
||||||||||||
Net income (loss) |
$ | 5,456 | $ | 7,835 | $ | (1,767 | ) | |||||
Weighted average shares outstanding |
9,706 | 9,760 | 9,571 | |||||||||
Basic earnings (loss) per share |
$ | 0.56 | $ | 0.80 | $ | (0.18 | ) | |||||
Diluted earnings (loss) per share: |
||||||||||||
Net income (loss) |
$ | 5,456 | $ | 7,835 | $ | (1,767 | ) | |||||
Weighted average shares outstanding |
9,706 | 9,760 | 9,571 | |||||||||
Incremental shares attributable to the
assumed
exercise of outstanding stock options |
56 | 105 | N/A | |||||||||
Weighted average shares and equivalents |
9,762 | 9,865 | 9,571 | |||||||||
Diluted earnings (loss) per share |
$ | 0.56 | $ | 0.79 | $ | (0.18 | ) | |||||
13. Income Taxes
The (provision) benefit for income taxes consists of the following for the years ended December 31
(in thousands):
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | (2,551 | ) | $ | (1,483 | ) | $ | (445 | ) | |||
State |
(132 | ) | (562 | ) | (129 | ) | ||||||
$ | (2,683 | ) | $ | (2,045 | ) | $ | (574 | ) | ||||
Deferred: |
||||||||||||
Federal |
$ | (1,038 | ) | $ | 3,179 | $ | 5 | |||||
State |
(488 | ) | 672 | 1 | ||||||||
$ | (1,526 | ) | $ | 3,851 | $ | 6 | ||||||
Total income tax (provision) benefit |
$ | (4,209 | ) | $ | 1,806 | $ | (568 | ) | ||||
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Deferred income taxes include the net tax effects of net operating loss (NOL) carryforwards and
tax credits and the net tax effects of temporary differences between the carrying amounts of assets
and liabilities and the amounts recorded for income tax purposes. The components of the deferred
tax assets and liabilities are as follows as of December 31 (in thousands):
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Allowance for bad debt |
$ | 72 | $ | 149 | ||||
Inventory reserves and capitalization |
142 | 297 | ||||||
Reserves |
1,772 | 1,445 | ||||||
Bid and proposal costs |
| 3,882 | ||||||
Deferred revenue |
884 | 238 | ||||||
Deferred rent |
1,108 | 471 | ||||||
Stock compensation |
2,024 | 1,659 | ||||||
Sale of receivables |
65 | 140 | ||||||
Net operating losses and tax credits |
36 | 185 | ||||||
Other |
76 | 92 | ||||||
Total deferred tax assets |
6,179 | 8,558 | ||||||
Deferred tax liabilities: |
||||||||
Prepaid expenses and other |
(339 | ) | (482 | ) | ||||
Prepaid bonuses |
(500 | ) | (492 | ) | ||||
Depreciation and amortization |
(3,196 | ) | (3,842 | ) | ||||
Total deferred tax liabilities |
(4,035 | ) | (4,816 | ) | ||||
Valuation allowance |
| | ||||||
Net deferred tax assets |
$ | 2,144 | $ | 3,742 | ||||
As of December 31, 2009, management believes it is more likely than not that the net deferred tax
assets will be realized and a valuation allowance is not required. The valuation allowance was $0
at December 31, 2008. The tax benefit recorded during 2008 was due to the reversal of the tax
valuation allowance of $4.6 million, partially offset by income tax expense of $2.8 million,
primarily attributable to income from continuing operations.
The following is a reconciliation of the statutory U.S. income tax rate to the Companys effective
tax rate for the years ended December 31:
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Statutory rate |
34.0 | % | 34.0 | % | (34.0 | )% | ||||||
State income taxes, net of federal benefit |
5.1 | 3.4 | 4.1 | |||||||||
Non-deductible executive compensation |
| 7.3 | | |||||||||
Non-deductible meals & entertainment costs |
1.0 | 2.4 | 12.8 | |||||||||
Non-deductible club dues |
| | 1.8 | |||||||||
Non-deductible accrued incentive costs |
0.7 | 1.2 | 8.7 | |||||||||
Tax Return Adjustments & Other |
2.1 | 0.5 | (2.3 | ) | ||||||||
APIC Tax Shortfall |
1.0 | | | |||||||||
Change in the tax contingency |
(0.4 | ) | (1.2 | ) | (1.1 | ) | ||||||
Effectively settled interest expense IRS Audit |
| | 14.4 | |||||||||
Change in valuation allowance |
| (78.1 | ) | 42.9 | ||||||||
Effective tax rate |
43.5 | % | (30.5 | )% | 47.3 | % | ||||||
As of December 31, 2009 and 2008, the Company had fully utilized its NOL
carryforwards. With the implementation of FASB ASC 718, Compensation Stock Compensation, the
amount of the NOL carryforward related to stock-based compensation expense is not recognized until
the stock-based compensation tax deductions reduce taxes payable. Accordingly, the NOLs reported
in gross deferred tax asset do not include the component of the NOL related to excess tax
deductions over book compensation cost related to stock-based compensation. The tax
benefit from the excess tax benefits from the stock-based compensation of $0.8 million and $1.1
million was recorded to capital in excess of par value for years ended December 31, 2009 and 2008,
respectively.
At December 31, 2009, the Company had no alternative minimum tax credit carryforward. The Company
had an alternative minimum tax credit carryforward of approximately $0.1 million at December 31,
2008, with no expiration date.
23
Table of Contents
Tax Uncertainties
Effective January 1, 2007, the Company adopted the provisions of FASB ASC 740, Income Taxes, (ASC
740), which applies to all tax positions related to income taxes subject to ASC 740. ASC 740
requires a new evaluation process for all tax positions taken. ASC 740 clarifies accounting for
income taxes by prescribing a minimum probability threshold that a tax position must meet before a
financial statement benefit is recognized. If the probability for sustaining a tax position is
greater than 50%, then the tax position is warranted and recognition should be at the highest
amount which would be expected to be realized upon ultimate settlement.
GTSI is subject to U.S. federal income tax as well as income tax of multiple states and local
jurisdictions. The statute of limitations related to the consolidated U.S. federal income tax
return is closed for all tax years up to and including 2003. The Company completed during 2007 an
IRS audit with respect to GTSIs 2003, 2004 and 2005 tax years. Currently, no state income tax
returns are under examination.
The Companys tax reserves relate to state nexus issues and the state impact of IRS audit
adjustments for the 2003 through 2005 tax years. With each year the Companys tax exposure rolls
forward with incremental increases expected based on continued accrual of interest. The Companys
tax liability for unrecognized tax benefits are as follows as of December 31 (in thousands):
2009 | 2008 | 2007 | ||||||||||
Balance at beginning of the year |
$ | 197 | $ | 236 | $ | 166 | ||||||
Additions for prior year tax positions |
5 | (21 | ) | 431 | ||||||||
Reductions for settlements |
(2 | ) | (2 | ) | (361 | ) | ||||||
Lapses in statute of limitations |
(43 | ) | (16 | ) | | |||||||
Balance at end of the year |
$ | 157 | $ | 197 | $ | 236 | ||||||
GTSIs practice is to recognize interest and penalties related to uncertain tax positions in income
tax expense. The Company had less than $0.1 million accrued for interest and less than $0.1 million
accrued for penalties as of December 31, 2008. The Company has less than $0.1 million accrued for
interest and less than $0.1 million accrued for penalties as of December 31, 2009. During the year,
accrued interest decreased by less than $0.1 million due primarily to the settlement and payment of
assessed liabilities. Interest will continue to accrue on certain issues in 2010 and beyond.
It is not anticipated that any increase or decrease during the next 12 months in the amount of
unrecognized tax benefits will be material. Further, it is anticipated that the effective tax rate
impact of any unrecognized tax benefits will be immaterial.
14. 401(k) Plan
GTSI maintains the Employees 401(k) Investment Plan (the Plan), a savings and investment plan
intended to be qualified under Section 401 of the IRC. All employees of the Company who are at
least 21 years of age are eligible to participate. The Plan is voluntary and allows participating
employees to make pretax contributions, subject to limitations under IRC, of a percentage (not to
exceed 30%) of their total compensation. Effective, January 1, 2008 new hires are automatically
enrolled in the 401(k) plan at a 3% deferral rate unless the new hire opts out or selects to
increase or decrease their deferral percentage. Employee contributions are fully vested at all
times. Employer contributions vest at 20% over five years. GTSI matches employee contributions 50%
of the first five percent of eligible pay. In 2009, 2008 and 2007, the Company contributed
approximately $1.2 million, $1.1 million and $0.8 million to the Plan, respectively.
24
Table of Contents
15. Commitments and Contingencies
Product Warranties
GTSI offers extended warranties on certain products which are generally covered for three or five
years beyond the warranty provided by the manufacturer. Products under extended warranty require
repair or replacement of defective parts at no cost to the customer. The Company records warranty
liabilities at the time of sale for the estimated costs that may be incurred under its extended
warranty contracts. The following table summarizes the activity related to product warranty
liabilities for the years ended December 31 (in thousands):
2009 | 2008 | |||||||
Accrued warranties at beginning of year |
$ | 155 | $ | 284 | ||||
Charges made against warranty liabilities |
(3 | ) | (22 | ) | ||||
Adjustments to warranty reserves |
(3 | ) | (167 | ) | ||||
Accruals for additional warranties sold |
66 | 60 | ||||||
Accrued warranties at end of year |
$ | 215 | $ | 155 | ||||
Revenue and cost of sales from extended warranty contracts is recorded as deferred revenue and
deferred costs, respectively, and subsequently recognized over the term of the contract. The
following table summarizes the activity related to the deferred warranty revenue for the years
ended December 31 (in thousands):
2009 | 2008 | |||||||
Deferred warranty revenue at beginning of year |
$ | 221 | $ | 130 | ||||
Deferred warranty revenue recognized |
(466 | ) | (317 | ) | ||||
Revenue deferred for additional warranties sold |
1,043 | 576 | ||||||
Deferred warranty revenue at end of year |
$ | 798 | $ | 389 | ||||
Lease Commitments
The Company conducts its operations from leased real properties, which include offices and a
warehouse. These obligations expire at various dates between 2011 and 2019. In December 2007, the
Company executed a lease for a new corporate headquarters. The Company relocated to its new
location in November 2008, which has a number of lease options for current and future space
commitments under its new 10-year term. This new lease expires in 2019. Most of the leases contain
renewal options at inception, some of which have been exercised, as well as escalation clauses,
which are recognized on a straight-line basis over the lease term. No leases contain purchase
options or restrictions of the Companys activities concerning dividends, additional debt, or
further leasing. Rent expense for 2009, 2008 and 2007 was approximately $4.9 million, $3.2 million
and $2.4 million, respectively.
Future minimum lease payments under operating leases that had initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 2009 are as follows (in thousands):
2010 |
$ | 4,508 | ||
2011 |
4,556 | |||
2112 |
3,889 | |||
2013 |
3,986 | |||
2014 |
4,086 | |||
Thereafter |
19,291 | |||
Total minimum lease payments |
$ | 40,316 | ||
Letters of Credit
At December 31, 2008, GTSI was obligated under an operating lease to provide its landlord with a
letter of credit in the amount of $0.2 million as a security deposit for all tenant improvements
associated with the lease. This letter of credit was cancelled in January 2009 after GTSI moved to
the new office space in November 2008.
25
Table of Contents
The Company provided a letter of credit in the amount of $2.4 million as of December 31, 2009 and
2008 for the new office space lease signed in December 2007.
As of December 31, 2008, the Company had an outstanding letter of credit in the amount of $1.2
million to guarantee the performance by the Company of its obligations under customer contracts.
The letter of credit was amended in February 2009 and increased to $2.7 million as of December 31,
2009.
Employment Agreements
At December 31, 2009, GTSI had an employment agreement with its Chief Executive Officer (also see
Note 18 Subsequent Event footnote). This agreement provides for payments of 24 months of base
salary plus bonus equal to the previous years bonus payments upon termination of employment except
for cause. In addition, GTSI has change in control agreements with 14 additional executives and key
employees and severance agreements with 8 executives. These arrangements provide for payments of as
much as 18 months of total target compensation and continuation of benefits upon the occurrence of
specified events. As of December 31, 2009, no accruals have been recorded for these agreements.
Legal Proceedings
The Company is occasionally involved in various lawsuits, claims and administrative proceedings
arising in the normal course of business. The Company believes that any liability or loss
associated with such matters, individually or in the aggregate, will not have a material adverse
effect on the Companys financial condition or results of operations.
16. Segment Reporting
GTSI engages in business activities as one operating segment that resells hardware and software and
provides services primarily to the U. S. Federal Government. The Companys chief operating decision
maker evaluates performance and determines resource allocation based on GTSIs consolidated sales
and operating results.
The following table summarizes the Companys sales by type for the years ended December 31 (in
thousands):
2009 | 2008 | 2007 | ||||||||||
Hardware |
$ | 495,594 | $ | 585,655 | $ | 529,961 | ||||||
Software |
182,372 | 159,711 | 111,599 | |||||||||
Services |
55,625 | 56,529 | 59,658 | |||||||||
Financing |
28,279 | 19,270 | 22,247 | |||||||||
Total |
$ | 761,870 | $ | 821,165 | $ | 723,465 | ||||||
Major Customers
All of GTSIs sales are earned from U.S. entities. Sales to multiple agencies and departments of
the U.S. Federal Government, either directly or through prime contractors, accounted for
approximately 95%, 93% and 90% of the Companys consolidated sales during 2009, 2008, and 2007,
respectively.
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17. Selected Quarterly Financial Data (unaudited)
The following tables illustrate selected quarterly financial data for 2009 and 2008. GTSI has
historically experienced significant seasonal fluctuations in its operations as a result of the
U.S. Federal Government buying and funding
patterns. Results of any one or more quarters are not necessarily indicative of annual results or
continuing trends (in thousands).
2009 | ||||||||||||||||||||
Q1 | Q2 | Q3 | Q4 | Total | ||||||||||||||||
Sales |
$ | 144,072 | $ | 164,601 | $ | 209,684 | $ | 243,513 | $ | 761,870 | ||||||||||
Gross margin |
15,663 | 23,020 | 28,914 | 33,855 | 101,452 | |||||||||||||||
Net income (loss) |
$ | (3,880 | ) | $ | (310 | ) | $ | 3,821 | $ | 5,825 | $ | 5,456 | ||||||||
Basic earnings (loss) per share |
$ | (0.39 | ) | $ | (0.03 | ) | $ | 0.40 | $ | 0.61 | $ | 0.56 | ||||||||
Diluted earnings (loss) per share |
$ | (0.39 | ) | $ | (0.03 | ) | $ | 0.39 | $ | 0.60 | $ | 0.56 |
2008 | ||||||||||||||||||||
Q1 | Q2 | Q3 | Q4 | Total | ||||||||||||||||
Sales |
$ | 142,790 | $ | 159,200 | $ | 257,059 | $ | 262,116 | $ | 821,165 | ||||||||||
Gross margin |
21,406 | 19,405 | 34,775 | 31,767 | 107,353 | |||||||||||||||
Net income (loss) (a) |
$ | (5,064 | ) | $ | (2,909 | ) | $ | 8,227 | $ | 7,581 | $ | 7,835 | ||||||||
Basic earnings (loss) per share |
$ | (0.52 | ) | $ | (0.30 | ) | $ | 0.84 | $ | 0.77 | $ | 0.80 | ||||||||
Diluted earnings (loss) per share |
$ | (0.52 | ) | $ | (0.30 | ) | $ | 0.83 | $ | 0.77 | $ | 0.79 |
(a) | Net income for the quarter ended December 31, 2008 was positively impacted by the reversal of the tax valuation allowance of $4.6 million, partially offset by income tax expense of $1.5 million and $1.3 million of additional tax expense related to FASB ASC 718, Compensation - Stock Compensation shortfall. |
18. Subsequent Events
On January 20, 2010, GTSI announced the retirement of James J. Leto as GTSIs Chief Executive
Officer effective February 15, 2010. Mr. Leto will retire from GTSIs Board of Directors (the
Board) as of April 21, 2010. The Board appointed Scott W. Friedlander, the Companys current
President and Chief Operating Officer, to succeed Mr. Leto as Chief Executive Officer upon Mr.
Letos retirement as Chief Executive Officer on February 15, 2010.
19. Event (Unaudited) Subsequent to the Date of the Independent
Auditors Report
By letter dated May 24, 2010 the U.S. Small Business Administration
(SBA)
advised Eyak Technology, LLC (EyakTek) that its request for a voluntary early graduation
from the SBAs Business Development Program under Section 8(a) of the Small Business Act (Section 8(a)
BD Program) was approved, effective May 10, 2010. EyakTeks operating agreement provides that EyakTek
shall dissolve and commence winding up and liquidating upon its graduation from the Section 8(a) BD Program,
unless EyakTeks members by an affirmative vote of at least 65% of the membership interests decide
to continue EyakTeks business operations. While GTSI has not yet voted its 37% EyakTek membership
interests to continue EyakTeks business operations such operations have continued since EyakTeks
graduation from the Section 8(a) BD Program and GTSI expects that EyakTeks members will resolve this matter.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
An evaluation was carried out under the supervision and with the participation of our management,
including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness
of the design and operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the Exchange Act)
as of December 31, 2009. Our disclosure controls and procedures are designed to (i) ensure that
information required to be disclosed by us in reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms and (ii) is accumulated and communicated to GTSIs
management including our CEO and our CFO, as appropriate to allow timely decisions regarding
required disclosures. Based on this evaluation, our CEO and CFO concluded that our disclosure
controls and procedures were effective as of December 31, 2009.
Managements Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management
is required to assess the effectiveness of our internal control over financial reporting as of the
end of the fiscal year and report, based on that assessment, whether our internal control over
financial reporting is effective.
Our internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles in the United States
of America (GAAP). Management, under the supervision and with the participation of our CEO and
CFO, conducted an assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2009, based upon the criteria set forth in Internal ControlIntegrated Framework
established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this assessment, management concluded that our internal control over financial reporting was
effective as of December 31, 2009.
The effectiveness of the Companys internal control over financial reporting as of December 31,
2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of management, an evaluation was performed to
determine whether there were any changes in our internal control procedures over financial
reporting that occurred during the quarter ended December 31, 2009. Based on this evaluation,
management determined there were no changes in our internal control over financial reporting that
occurred during our last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
None.
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PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENTS AND SCHEDULES: |
(a) (1) Financial Statements
The consolidated financial statements of GTSI Corp. filed are as follows:
Consolidated Balance Sheets as of December 31, 2009 and 2008 |
||||
Consolidated Statement of Operations for each of the three years in the period ended
December 31, 2009 |
||||
Consolidated Statements of Changes in Stockholders Equity for each of the three years in
the period ended December 31, 2009 |
||||
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2009 |
||||
Notes to Consolidated Financial Statements |
(a) (2)Financial Statement Schedules
The financial statement schedules of GTSI Corp. and subsidiaries filed are as follows:
Schedule IIValuation and Qualifying Accounts for each of the three years in the period
ended December 31, 2009 |
All other schedules are omitted because they are not applicable, or the required information
is shown in the consolidated financial statements or the notes thereto.
(c) Eyak Technology, LLC
The Consolidated Balance Sheets of Eyak Technology, LLC as of December 31, 2009 and 2008 and
the related Consolidated Statements of Income, Members Equity and Cash Flows for the three
years ended December 31, 2009 are being filed. These financial statements are filed in
accordance with Rule 3-09 of Regulation S-X.
Exhibits
The
exhibits set forth in the Exhibit Index are filed as part of
this Form 10-K/A.
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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.
GTSI CORP. |
||||
By: | /s/ SCOTT W. FRIEDLANDER | |||
Scott W. Friedlander | ||||
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on
September 10, 2010 by the following persons on behalf of the registrant and in the capacities indicated.
Signature | Title | Date | ||
/s/ SCOTT W. FRIEDLANDER
|
President and Chief Executive Officer | September 10, 2010 | ||
Scott W. Friedlander
|
(Principal Executive Officer) | |||
/s/ PETER WHITFIELD
|
Senior Vice President and | September 10, 2010 | ||
Peter Whitfield
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
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GTSI CORP.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
(In thousands)
SCHEDULE II
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Allowance for Doubtful Accounts |
||||||||||||
Balance at beginning of year |
$ | 393 | $ | 1,001 | $ | 1,612 | ||||||
Additionscharged to expense or other accounts |
193 | 605 | 1,228 | |||||||||
Deductions |
(363 | ) | (1,213 | ) | (1,839 | ) | ||||||
Balance at end of year |
$ | 223 | $ | 393 | $ | 1,001 | ||||||
Sales Return Allowance (1) |
||||||||||||
Balance at beginning of year |
$ | 1,356 | $ | 4,026 | $ | 6,282 | ||||||
Additionscharged to expense or other accounts |
2,147 | 5,008 | 4,306 | |||||||||
Deductions |
(2,829 | ) | (7,678 | ) | (6,562 | ) | ||||||
Balance at end of year |
$ | 674 | $ | 1,356 | $ | 4,026 | ||||||
Deferred Tax Asset Valuation Allowance |
||||||||||||
Balance at beginning of year |
$ | | $ | 4,628 | $ | 3,974 | ||||||
Additionscharged to expense or other accounts |
| | 654 | |||||||||
Deductions |
| (4,628 | ) | | ||||||||
Balance at end of year |
$ | | $ | | $ | 4,628 |
(1) | The sales returns allowance is reported as a reduction of accounts receivable on the consolidated balance sheets. |
All other schedules are omitted because the required information is not present or is not present
in amount sufficient to require submission of the schedule, or because the information is included
in the consolidated financial statements or notes thereto.
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EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
3.1 | Restated Certificate of Incorporation (1) |
|||
3.2 | Bylaws, as amended (2) |
|||
10.1 | GTSI Employees 401(k) Investment Plan, and amendments No. 1, 2 and 3 thereto (3) |
|||
10.2 | Employee Stock Purchase Plan, as amended to date (4) |
|||
10.3 | 1994 Stock Option Plan, as amended to date (5) |
|||
10.4 | Amended and Restated 1996 Stock Incentive Plan (6) |
|||
10.5 | 1997 Non-Officer Stock Option Plan, as amended to date (7) |
|||
10.6 | Lease dated August 11, 1995 between the Company and Security Capital Industrial Trust, and Amendments for distribution center facility (8) |
|||
10.7 | Amended and Restated 2007 Stock Incentive Plan (12) |
|||
10.8 | Lease dated December 5, 2007 between the Company and SP Herndon Development LP for new headquarters facility (13) |
|||
10.9 | Amended 1991 Employee Stock Purchase Plan (16) |
|||
10.10 | GTSI Corp. Long Term Incentive Plan * (10) |
|||
10.11 | GTSI 2005 Executive Incentive Compensation Plan * (3) |
|||
10.12 | Form of GTSI Change in Control Agreement *(3) |
|||
10.13 | Form of GTSI Severance Agreement *(11) |
|||
10.14 | Amendment to Employment Agreements date June 8, 2007* (14) |
|||
10.15 | Employment Agreement dated December 1, 2007 between the Registrant and Scott Friedlander* (15) |
|||
10.16 | 2008 Short Term Incentive Plan Description* (17) |
|||
10.17 | Employment Agreement dated October 29, 2008 between the Registrant and Peter Whitfield* (18) |
|||
10.18 | Credit Agreement dated as of May 27, 2009 among Castle Pines Capital LLC, as Administrative Agent and a Lender, Wells Fargo Foothill, LLC
as Administrative Agent and Collateral Agent, and GTSI Corp (19) |
|||
10.19 | First Amendment to Credit Agreement dated as of May 27, 2009 among GTSI Corp., Castle Pines Capital LLC and Wells Fargo Foothill LLC (19) |
|||
10.20 | GTSIs Board of Directors authorization of common stock repurchase program dated as of June 8, 2009 (20) |
|||
10.21 | Change in Control Agreements and amendments to existing employment agreements* (21) |
|||
10.22 | Election of Board of Director (22) |
|||
14.1 | Code of Ethics (9) |
|||
23.1 | Consent of PricewaterhouseCoopers LLP (filed herewith) |
|||
23.2 | Consent of Aronson & Company (filed herewith) |
|||
31.1 | Section 302 Certification of Chief Executive Officer (filed herewith) |
|||
31.2 | Section 302 Certification of Chief Financial Officer (filed herewith) |
|||
32 | Section 906 Certification of Chief Executive Officer and Chief Financial Officer (filed herewith) |
|||
99.1 | Consolidated Financial Statements for Eyak Technology, LLC for the year ended December 31, 2009, 2008 and 2007 (audited) (filed herewith) |
* | Management contracts and compensatory plans and arrangements required to be filed pursuant to Item 15 (c). | |
(1) | Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended December 31, 2000. |
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(2) | Incorporated by reference to the Registrants Current Report on Form 8-K dated December 1, 2007. | |
(3) | Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended December 31, 2004. | |
(4) | Incorporated by reference to the Registrants Current Report on Form 8-K dated December 27, 2005. | |
(5) | Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended December 31, 2002. | |
(6) | Incorporated by reference to Appendix A of the Registrants 2005 Proxy Statement. | |
(7) | Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended December 31, 2002. | |
(8) | Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the period ended September 30, 2004. | |
(9) | Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended December 31, 2003. | |
(10) | Incorporated by reference to Appendix B of the Registrants 2004 Proxy Statement | |
(11) | Incorporated by reference to the Registrants current report on Form 8-K dated April 28, 2006. | |
(12) | Incorporated by reference to the Registrants current report on Form 8-K dated December 5, 2007. | |
(13) | Incorporated by reference to the Registrants current report on Form 8-K dated February 25, 2008. | |
(14) | Incorporated by reference to the Registrants current report on Form 8-K dated June 8, 2007. | |
(15) | Incorporated by reference to the Registrants current report on Form 8-K dated December 1, 2007. | |
(16) | Incorporated by reference to the Registrants current report on Schedule 14A dated March 31, 2008. | |
(17) | Incorporated by reference to the Registrants current report on Form 8-K dated April 23, 2008. | |
(18) | Incorporated by reference to the Registrants current report on Form 8-K dated October 29, 2008. | |
(19) | Incorporated by reference to the Registrants current report on Form 8-K dated May 27, 2009. | |
(20) | Incorporated by reference to the Registrants current report on Form 8-K dated June 12, 2009. | |
(21) | Incorporated by reference to the Registrants current report on Form 8-K dated September 4, 2009. | |
(22) | Incorporated by reference to the Registrants current report on Form 8-K dated November 9, 2009. |
33