Attached files
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EX-32 - EXHIBIT 32 - GTSI CORP | c08420exv32.htm |
EX-31.2 - EXHIBIT 31.2 - GTSI CORP | c08420exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - GTSI CORP | c08420exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34871
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)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
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 Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation 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 whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting Company þ | |||
(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
Exchange Act). Yes o No þ
The number of shares of common stock, $0.005 par value, outstanding as November 10, 2010 was
9,614,323.
GTSI Corp.
Form 10-Q for the Quarter Ended September 30, 2010
INDEX
Form 10-Q for the Quarter Ended September 30, 2010
INDEX
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32 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GTSI CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 17,286 | $ | 7,894 | ||||
Accounts receivable, net |
195,843 | 209,595 | ||||||
Inventory |
19,202 | 13,477 | ||||||
Deferred costs |
3,270 | 1,807 | ||||||
Other current assets |
2,433 | 4,140 | ||||||
Total current assets |
238,034 | 236,913 | ||||||
Depreciable assets, net |
8,381 | 10,960 | ||||||
Long-term receivables and other assets |
38,734 | 40,758 | ||||||
Total assets |
$ | 285,149 | $ | 288,631 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 88,053 | $ | 109,723 | ||||
Accounts payable floor plan |
54,694 | 34,889 | ||||||
Financed lease debt, current portion |
85 | 831 | ||||||
Accrued liabilities |
23,547 | 26,127 | ||||||
Deferred revenue |
3,252 | 3,176 | ||||||
Total current liablilites |
169,631 | 174,746 | ||||||
Other liabilities |
18,543 | 17,598 | ||||||
Total liabilities |
188,174 | 192,344 | ||||||
Commitments and contingencies (See Note 12) |
||||||||
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; 10,077,724 issued and 9,611,022 outstanding at September 30, 2010; and
10,119,038
issued and 9,637,676 outstanding at December 31, 2009 |
50 | 50 | ||||||
Capital in excess of par value |
53,723 | 52,698 | ||||||
Retained earnings |
45,035 | 44,925 | ||||||
Treasury stock, 364,078 shares at September 30, 2010 and 277,850 shares at December 31,
2009, at cost |
(1,833 | ) | (1,386 | ) | ||||
Total stockholders equity |
96,975 | 96,287 | ||||||
Total liabilities and stockholders equity |
$ | 285,149 | $ | 288,631 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
1
Table of Contents
GTSI CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
SALES |
||||||||||||||||
Product |
$ | 208,797 | $ | 189,234 | $ | 418,456 | $ | 466,822 | ||||||||
Service |
15,907 | 13,985 | 38,581 | 40,835 | ||||||||||||
Financing |
12,663 | 6,465 | 17,191 | 10,700 | ||||||||||||
237,367 | 209,684 | 474,228 | 518,357 | |||||||||||||
COST OF SALES |
||||||||||||||||
Product |
189,092 | 169,550 | 378,833 | 421,566 | ||||||||||||
Service |
10,968 | 8,745 | 25,571 | 25,669 | ||||||||||||
Financing |
7,519 | 2,475 | 9,068 | 3,525 | ||||||||||||
207,579 | 180,770 | 413,472 | 450,760 | |||||||||||||
GROSS MARGIN |
29,788 | 28,914 | 60,756 | 67,597 | ||||||||||||
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES |
20,592 | 23,836 | 64,452 | 71,128 | ||||||||||||
INCOME (LOSS) FROM OPERATIONS |
9,196 | 5,078 | (3,696 | ) | (3,531 | ) | ||||||||||
INTEREST AND OTHER INCOME, NET |
||||||||||||||||
Interest and other income |
57 | 140 | 131 | 985 | ||||||||||||
Equity income from affiliates |
2,170 | 2,020 | 6,029 | 4,960 | ||||||||||||
Interest expense |
(160 | ) | (181 | ) | (516 | ) | (2,694 | ) | ||||||||
Interest and other income, net |
2,067 | 1,979 | 5,644 | 3,251 | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
11,263 | 7,057 | 1,948 | (280 | ) | |||||||||||
INCOME TAX EXPENSE |
(5,329 | ) | (3,236 | ) | (1,838 | ) | (89 | ) | ||||||||
NET INCOME (LOSS) |
$ | 5,934 | $ | 3,821 | $ | 110 | $ | (369 | ) | |||||||
EARNINGS (LOSS) PER SHARE |
||||||||||||||||
Basic |
$ | 0.62 | $ | 0.40 | $ | 0.01 | $ | (0.04 | ) | |||||||
Diluted |
$ | 0.62 | $ | 0.39 | $ | 0.01 | $ | (0.04 | ) | |||||||
WEIGHTED AVERAGE SHARES OUTSTANDING |
||||||||||||||||
Basic |
9,603 | 9,651 | 9,604 | 9,737 | ||||||||||||
Diluted |
9,629 | 9,787 | 9,653 | 9,737 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
2
Table of Contents
GTSI CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | 110 | $ | (369 | ) | |||
Adjustments
to reconcile net income (loss)
to net cash used in operating activities |
||||||||
Depreciation and amortization |
2,897 | 2,875 | ||||||
Loss on sale of depreciable assets |
36 | 135 | ||||||
Stock-based compensation |
1,556 | 1,662 | ||||||
Tax impact from stock-based compensation |
| (1,321 | ) | |||||
Equity income, net of distributions in 2010 and 2009 of $3,630 and
$3,054, respectively |
(2,399 | ) | (1,905 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
13,007 | (32,408 | ) | |||||
Inventory |
(5,725 | ) | (7,877 | ) | ||||
Other assets |
4,610 | (21,934 | ) | |||||
Accounts payable |
(21,669 | ) | 9,643 | |||||
Accrued liabilities |
(2,580 | ) | 3,707 | |||||
Other liabilities |
1,017 | 27,680 | ||||||
Net cash used in operating activities |
(9,140 | ) | (20,112 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of depreciable assets |
(295 | ) | (1,016 | ) | ||||
Net cash used in investing activities |
(295 | ) | (1,016 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITES: |
||||||||
Payments under credit facility, net |
| (22,387 | ) | |||||
Borrowings on floor plan, net |
19,804 | 60,250 | ||||||
Payment of deferred financing costs |
| (50 | ) | |||||
Common stock purchases |
(945 | ) | (1,847 | ) | ||||
Proceeds from common stock issued |
221 | 521 | ||||||
Tax impact from stock-based compensation |
(253 | ) | | |||||
Net cash provided by financing activities |
18,827 | 36,487 | ||||||
NET INCREASE IN CASH |
9,392 | 15,359 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
7,894 | | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 17,286 | $ | 15,359 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
3
Table of Contents
GTSI CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements include the accounts of
GTSI Corp. and its wholly owned subsidiaries (GTSI or the Company). Intercompany accounts and
transactions have been eliminated in consolidation. The statements have been prepared in conformity
with accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. The year-end condensed balance
sheet data was derived from audited financial statements. Because the accompanying condensed
consolidated financial statements do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America, they should be read in
conjunction with the financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates. Cost of sales in the accompanying Unaudited Condensed Consolidated
Statements of Operations is based on the direct cost method.
The results of operations for the three and nine months ended September 30, 2010 are not
necessarily indicative of the results that may be expected for the full year, or future periods.
GTSI has historically experienced seasonal fluctuations in operations as a result of government
buying and funding patterns.
2. New Accounting Pronouncements
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.
4
Table of Contents
3. Accounts Receivable
Accounts receivable consists of the following as of (in thousands):
September 30, 2010 | December 31, 2009 | |||||||
Trade accounts receivable |
$ | 144,147 | $ | 143,541 | ||||
Unbilled trade accounts receivable |
22,538 | 32,784 | ||||||
Lease receivables, net |
4,560 | 6,149 | ||||||
Finance receivables, net |
18,982 | 21,626 | ||||||
Vendor and other receivables |
6,550 | 6,392 | ||||||
Total accounts receivable |
$ | 196,777 | $ | 210,492 | ||||
Less: Allowance for doubtful
accounts |
(205 | ) | (223 | ) | ||||
Sales return allowance |
(729 | ) | (674 | ) | ||||
Accounts receivable, net |
$ | 195,843 | $ | 209,595 | ||||
4. Long-term receivables and other assets
The Companys long-term receivables and other assets were as follows as of (in thousands):
September 30, 2010 | December 31, 2009 | |||||||
Lease receivables, net |
$ | 2,864 | $ | 3,531 | ||||
Finance receivables, net |
24,630 | 28,041 | ||||||
Equity Investment in EyakTek |
10,355 | 7,956 | ||||||
Other Assets |
885 | 1,230 | ||||||
Long-term receivables and other
assets |
$ | 38,734 | $ | 40,758 | ||||
5. Lease and Other Receivables
The Company leases computer hardware generally under sales-type leases, which are classified as
lease receivables in the accompanying Unaudited Condensed Consolidated Balance Sheets, in
accordance with FASB ASC 840 Leases. In connection with those leases, the Company may sell related
services, software and maintenance to its customers, which are classified as finance receivables in
the accompanying Unaudited Condensed Consolidated Balance Sheets. 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 $12.6 million and $30.9 million for the three months ended
September 30, 2010 and 2009, respectively, from sales-type leases and related transactions and
$26.4 million and $63.6 million for the nine months ended September 30, 2010 and 2009,
respectively. As of September 30, 2010, the Company had current and long-term outstanding lease and
finance receivables of $51.0 million, compared with $59.3 million as of December 31, 2009.
The Companys investments in lease receivables were as follows as of (in thousands):
September 30, 2010 | December 31, 2009 | |||||||
Future
minimum lease payments receivable |
$ | 8,142 | $ | 10,719 | ||||
Unearned income |
(718 | ) | (1,039 | ) | ||||
$ | 7,424 | $ | 9,680 | |||||
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Table of Contents
The Companys investment in finance receivables was as follows as of (in thousands):
September 30, 2010 | December 31, 2009 | |||||||
Future
minimum payments receivable |
$ | 46,474 | $ | 52,625 | ||||
Unearned income |
(2,862 | ) | (2,958 | ) | ||||
$ | 43,612 | $ | 49,667 | |||||
6. Transferred Receivables and Financed Lease Debt
The Company transferred gross financing receivables of $19.1 million and $31.1 million for the
three months ended September 30, 2010 and 2009, and $39.9 million and $40.2 million for the nine
months ended September 30, 2010 and 2009, respectively, to third parties that meet the sale
criteria under FASB ASC 860, Transfers and Servicing. In exchange, for the three months ended
September 30, 2010 and 2009, the Company received cash of $18.1 million and $30.4 million and
recorded a profit on the sales of $3.7 million and $3.0 million, respectively. For the nine months
ended September 30, 2010 and 2009, the Company received cash of $38.3 million and $38.0 million and
recorded a profit on the sales of $4.7 million and $3.5 million, respectively. The receivables are
transferred non-recourse to third parties who accept all credit, interest, and termination risk
from the underlying issuer. Continuing involvement with the transferred assets is limited only to
billing and remitting payments on behalf of some third parties at the specific direction of the
third parties.
7. Credit Facility and Credit Agreement
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.
As of September 30, 2010, borrowing capacity and availability under the Credit Agreement was as
follows (in thousands):
Total Credit Agreement |
$ | 135,000 | ||
Borrowing base limitation |
(9,670 | ) | ||
Total borrowing capacity |
125,330 | |||
Less: interest-bearing borrowings |
| |||
Less: non-interest bearing advances (floor plan loans) |
(54,694 | ) | ||
Less: letters of credit |
(2,432 | ) | ||
Total unused availability |
$ | 68,204 | ||
As of September 30, 2010, the Company had no outstanding loan balance (other than non-interest
bearing floor plan loans) under the Credit Agreement and as reflected above, unused available
credit there under of $68.2 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) purchase our common stock; (d) make
certain restricted payments (including cash dividends), purchase 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 our corporate entities; (g) acquire real
estate; and (h) enter into sales and leaseback transactions.
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The financial covenants of the Credit Agreement require us, among other covenants, to:
| Maintain Tangible Net Worth not less than or equal to $45 million as of the end of each fiscal month |
| Maintain Ratio of Total Liabilities to Tangible Net Worth not greater than 5.25 to 1.00 as of the end of each fiscal month |
| Maintain Current Ratio not less than (a) 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 (b) 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 of 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 in the Credit Agreement as of September 30, 2010. 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 covenant or other provision of its 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. During 2009, unamortized deferred financing costs of $1.5 million related to the terminated
Credit Facility were written-off and recorded to interest expense. Also, the Company deferred $0.1
million of loan financing costs related to the new Credit Agreement in 2009. Deferred financing
costs as of September 30, 2010 and December 31, 2009 were less than $0.1 million and $0.1 million,
respectively.
On October 1, 2010, GTSI received a notice from the Small Business Administration (SBA) that the
SBA was temporarily suspending GTSI from any future contract awards from the federal government.
The temporary suspension issued by the SBA caused a potential violation of the Companys credit
agreement under Section 12.8 (No Material Proceedings). Between October 13 to October 19, 2010,
the Company worked with its lenders, Castle Pines Capital LLC and Wells Fargo Capital Finance LLC,
to modify the credit agreement in conjunction with negotiating the administrative agreement with
the SBA.
On October 19, 2010, as referenced in Note 14 Subsequent Events, GTSI entered into an
administrative agreement with the SBA lifting the temporary suspension. In addition, GTSI entered
into an Amended and Restated Credit Agreement, dated October 19, 2010, with Castle Pines Capital
LLC and Wells Fargo Capital Finance LLC. These events had no impact on our historical results for
the nine months ended September 30, 2010.
8. Stockholders Equity
Purchase of Capital Stock
On June 8, 2009, the Companys Board of Directors authorized a program for periodic purchases of
common stock through May 27, 2011 for an aggregate purchase price not to exceed $5 million.
During the nine months ended September 30, 2010 and 2009, under the repurchase program, the Company
purchased 154,377 and 60,075 shares of its common stock, respectively. In addition, during the nine
months ended September 30, 2010 and 2009, the Company acquired 18,831 and 23,288, respectively, of
its common stock related to restricted stock lapses to cover tax withholdings.
Stock-Based Compensation
Stock Incentive Plans
The Company has three stockholder approved stock incentive plans: the 1994 Stock Option Plan, as
amended; the Amended and Restated 2007 Stock Incentive Plan; and the 1997 Non-Officer Stock Option
Plan, which provides for the granting of non-qualified stock options to employees (other than
officers and directors).
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Table of Contents
Stock Options
A summary of option activity under the Companys stock incentive plans as of September 30, 2010 and
changes during the nine months then ended is presented below:
Weighted Average | ||||||||||||||||
Remaining | Aggregate | |||||||||||||||
Shares | Weighted Average | Contractual | Intrinsic Value | |||||||||||||
(in thousands) | Exercise Price | Term | (in thousands) | |||||||||||||
Outstanding at January 1, 2010 |
1,505 | $ | 7.83 | |||||||||||||
Granted |
175 | 5.52 | ||||||||||||||
Exercised |
(30 | ) | 2.81 | |||||||||||||
Forfeited |
(70 | ) | 6.40 | |||||||||||||
Expired |
(535 | ) | 7.54 | |||||||||||||
Outstanding at September 30,
2010 |
1,045 | $ | 7.83 | 3.27 | $ | 477 | ||||||||||
Exercisable at September 30,
2010 |
753 | $ | 8.53 | 2.16 | $ | 139 | ||||||||||
There were 175,000 and 400,000 stock options granted during the nine months ended September 30,
2010 and 2009, respectively. During the nine months ended September 30, 2010 and 2009, 30,000 and
75,000 stock options were exercised under the Companys stock option plans during each period. The
total intrinsic value of options exercised during the nine months ended September 30, 2010 and 2009
was $0.5 million and $0.1 million, respectively. The Company has historically reissued treasury
stock or authorized common stock to satisfy stock option exercises, restricted stock grants, and
employee stock purchases. A tax benefit for the exercise of stock options and the lapse of
restrictions on restricted (including elections under Internal Revenue Service section 83(b)) in
the amount of $0.1 million was recognized for the nine months ended September 30, 2010. A tax
benefit for the exercise of stock options in the amount of $0.2 million was recognized for the nine
months ended September 30, 2009. Less than $0.3 million was recorded for excess tax benefits to
capital in excess of par for the nine months ended September 30, 2010 and 2009, respectively. For
the nine months ended September 30, 2010 and 2009, stock compensation expense for stock options was
$0.4 million for each period.
Restricted Shares
During the nine months ended September 30, 2010 and 2009, 26,664 and 37,795 restricted stock awards
were granted. For the nine months ended September 30, 2010 and 2009, stock compensation expense for
restricted stock was $0.5 million for each period.
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 Companys nonvested restricted
stock as of September 30, 2010, and changes during the nine months then ended is presented below:
Shares | Weighted Average | |||||||
(in thousands) | Grant-Date Fair Value | |||||||
Nonvested at January 1, 2010 |
215 | $ | 9.91 | |||||
Granted |
27 | 5.61 | ||||||
Vested |
(77 | ) | 9.07 | |||||
Forfeited |
(50 | ) | 11.11 | |||||
Nonvested at September 30, 2010 |
115 | $ | 8.93 | |||||
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Table of Contents
Stock
Appreciation Rights (SARs)
A summary of SARs activity under the Companys stock incentive plans as of September 30, 2010 and
changes during the nine months then ended is presented below:
Weighted Average | Aggregate | |||||||||||||||
Shares | Weighted Average | Remaining Contractual | Intrinsic Value | |||||||||||||
(in thousands) | Exercise Price | Term | (in thousands) | |||||||||||||
Outstanding at January 1, 2010 |
717 | $ | 9.60 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(116 | ) | 9.60 | |||||||||||||
Expired |
(163 | ) | 9.60 | |||||||||||||
Outstanding at September 30,
2010 |
438 | $ | 9.60 | 3.88 | $ | | ||||||||||
Exercisable at September 30,
2010 |
213 | $ | 9.60 | 3.41 | $ | | ||||||||||
There were no SARS granted during nine months ended September 30, 2010. There were 8,719 SARs
granted during the nine months ended September 30, 2009. All SARs are to be settled in Company
stock. For the nine months ended September 30, 2010 and 2009, stock compensation expenses for SARs
were $0.7 million and $0.6 million, respectively.
Unrecognized Compensation
As of September 30, 2010, there was $4.9 million of total unrecognized compensation cost related to
nonvested stock-based awards, which consisted of unrecognized compensation of $1.4 million related
to stock options, $2.0 million related to stock appreciation rights and $1.5 million related to
restricted stock awards. The cost for unrecognized compensation related to stock options, stock
appreciation rights and restricted stock awards is expected to be recognized over a weighted
average period of 3.15 years, 2.32 years, and 1.87 years, respectively.
Stockholder Rights Plan
On September 13, 2010, the Companys Board of Directors adopted a stockholder rights plan (the
Rights Plan). The Rights Plan is set forth in the Rights Agreement dated as of September 14,
2010 (the Rights Agreement) between the Company and American Stock Transfer & Trust Company, LLC
(the Rights Agent). In connection with the Rights Plan, the Company declared a dividend of one
preferred share purchase right (individually, a Right and collectively, the Rights) for each
share of outstanding common stock of the Company at the close of business on September 24, 2010.
If the Rights become exercisable, each Right will entitle the registered holder thereof, until
September 12, 2011 (or the earlier redemption, exchange or termination of the Rights), to purchase
from the Company one one-thousandth (1/1000th) of a share of Series A Junior
Participating Preferred Stock, par value $0.25 per share (the Preferred Stock), of the Company,
at a price of $20.00 per one one-thousandth (1/1000th) of a share of Preferred Stock,
subject to certain anti-dilution adjustments.
The Rights are not immediately exercisable. The Rights will initially trade only with the
Companys common stock to which they are attached, and generally become exercisable only if a
person or group becomes an Acquiring Person (as defined in the Rights Agreement) by accumulating
beneficial ownership (as defined in the Rights Agreement) of 20% or more of the Companys
outstanding common stock. If a person becomes an Acquiring Person, the holders of each Right
(other than an Acquiring Person) are entitled, after the tenth business day, to purchase shares of
the Companys preferred stock at the exercise price of the Right, which is initially $20.00 per
Right. The Rights Agreement provides that a person or group currently owning 20% or more of the
Companys outstanding common stock will not be deemed to be an Acquiring Person if the person or
group does not subsequently accumulate an additional 1% of the Companys outstanding common stock
through open market purchases, expansion of the group or other means. The Rights, which only
become exercisable after a person becomes an Acquiring Person, have no objective value at this
time. In the event the Rights become exercisable, any objective determinable value of the Rights
would be accounted for with a charge to retained earnings and a credit to paid-in capital.
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At any time prior to a person becoming an Acquiring Person, the Companys Board of Directors may
cause the Company to redeem the Rights in whole, but not in part, at a price of $0.01 per Right.
The Rights will expire on September 12, 2011 (unless earlier redeemed, exchanged or terminated).
9. Accrued Liabilities
Accrued liabilities consist of the following as of (in thousands):
September 30, 2010 | December 31, 2009 | |||||||
Accrued commissions and bonuses |
$ | 2,855 | $ | 6,113 | ||||
Accrued income taxes |
700 | 2,864 | ||||||
Future contractual lease
obligations |
13,098 | 10,079 | ||||||
Other |
6,894 | 7,071 | ||||||
Total accrued liabilities |
$ | 23,547 | $ | 26,127 | ||||
10. Earnings (Loss) Per Share
Basic earnings(loss) per share is calculated by dividing net income (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 is 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. In periods of net loss, all dilutive shares are considered anti-dilutive.
For the nine months ended September 30, 2009, anti-dilutive employee stock options and SARs
totaling 26,856 weighted-shares were excluded from the calculation. Weighted unvested restricted
stock awards totaling 30,735 have been excluded for the nine months ended September 30, 2009.
The following table sets forth the computation of basic and diluted loss per share (in thousands
except per share data):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic income (loss) per share |
||||||||||||||||
Net income (loss) |
$ | 5,934 | $ | 3,821 | $ | 110 | $ | (369 | ) | |||||||
Weighted average shares outstanding |
9,603 | 9,651 | 9,604 | 9,737 | ||||||||||||
Basic income (loss) per share |
$ | 0.62 | $ | 0.40 | $ | 0.01 | $ | (0.04 | ) | |||||||
Diluted income (loss) per share: |
||||||||||||||||
Net income (loss) |
$ | 5,934 | $ | 3,821 | $ | 110 | $ | (369 | ) | |||||||
Weighted average shares outstanding |
9,603 | 9,651 | 9,604 | 9,737 | ||||||||||||
Incremental shares attributable to the
assumed
exercise of outstanding stock options |
26 | 136 | 49 | N/A | ||||||||||||
Weighted average shares and equivalents |
9,629 | 9,787 | 9,653 | 9,737 | ||||||||||||
Diluted income (loss) per share |
$ | 0.62 | $ | 0.39 | $ | 0.01 | $ | (0.04 | ) | |||||||
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11. Income Taxes
The effective income tax rate was 94.4% and 31.6% for the nine months ended September 30, 2010 and
2009, respectively. The increase in the tax rate from 2009 to 2010 was due to non-deductible stock
expense of $1.3 million during the nine months ended September 30, 2010 that did not occur in the
same period in 2009: partially offset by an income tax benefit of less than $0.2 million was
recorded related to an adjustment to a true-up for the filing of the 2009 tax returns. The
non-deductible stock expense related to 588,474 stock options that expired during the three months
ended September 30, 2010. Excluding the effects of non-deductible stock expense and the benefit
related to the true-up for the filing of the 2009 tax returns, the effective tax rate would have
been 36.5% for the nine months ended September 30, 2010.
As of September 30, 2010 and December 31, 2009, GTSI had $0.1 million and $0.2 million,
respectively, of total unrecognized tax benefits most of which would reduce its effective tax rate
if recognized. The Company does not believe that the total amount of unrecognized tax benefits will
significantly change within 12 months of the reporting date.
GTSIs practice is to recognize interest and/or 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 September 30, 2010 and December 31, 2009. During the first nine
months of 2010, the amount accrued for interest decreased by less than $0.1 million relating to the
expiration of applicable statutes of limitations and increased by an immaterial amount for the
remaining issues. Interest will continue to accrue on certain issues for the remainder of 2010 and
beyond.
12. Commitments and Contingencies
Product Warranties
GTSI offers extended warranties on certain products that 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 (in thousands):
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Accrued warranties at beginning of period |
$ | 215 | $ | 155 | ||||
Charges made against warranty liabilities |
(15 | ) | (3 | ) | ||||
Adjustments to warranty reserves |
(1 | ) | (4 | ) | ||||
Accruals for additional warranties sold |
16 | 44 | ||||||
Accrued warranties at end of period |
$ | 215 | $ | 192 | ||||
Maintenance Warranties
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 (in thousands):
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Deferred warranty revenue at beginning of period |
$ | 798 | $ | 221 | ||||
Deferred warranty revenue recognized |
(1,212 | ) | (335 | ) | ||||
Revenue deferred for additional warranties sold |
3,118 | 323 | ||||||
Deferred warranty revenue at end of period |
$ | 2,704 | $ | 209 | ||||
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Letters of Credit
The Company provided a letter of credit in the amount of $2.4 million as of September 30, 2010 and
December 31, 2009 for its office space lease signed in December 2007.
As of December 31, 2009, the Company had an outstanding letter of credit in the amount of $2.7
million to guarantee the performance of the Companys obligations under specific customer
contracts. During the three months ended September 30, 2010, the letter of credit was no longer
required and was returned to the financial institution.
Employment Agreements
GTSI has change in control agreements with 12 executives and key employees, and severance
agreements with seven 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 September 30, 2010, no accruals have been recorded for these agreements.
Contingencies
The Companys compliance with the administrative agreement with the SBA referenced in Note 14
Subsequent Events, and the outcome of the continuing related investigations of GTSI, which could
result in administrative, civil or criminal penalties, could have a material adverse effect on the
Companys business, financial condition and operating performance.
13. Related Party Transactions
In 2002, GTSI made a $0.4 million investment in Eyak Technology, LLC (EyakTek) and acquired a 37%
ownership of EyakTek. GTSI is not the primary beneficiary of this variable interest entity
because the Company does not control, through voting rights or other means, EyakTek. The investment
balance is included in the long-term receivables and other assets in the accompanying Unaudited
Condensed Consolidated Balance Sheets and represents the maximum exposure to the Company. 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. At
September 30, 2010 and December 31, 2009, the investment balance for EyakTek was $10.4 million and
$8.0 million, respectively, and for the nine months ended September 30, 2010 and 2009, equity in
earnings was $6.0 million and $5.0 million, respectively.
GTSI recognized sales to EyakTek and its wholly owned subsidiary of $6.9 million and $16.7 million
for the three months ended and $25.7 million and $17.3 million for the nine months ended September
30, 2010 and 2009, respectively. GTSI receives a fee from EyakTek based on sales from products sold
at cost by GTSI to EyakTek. Fees recorded by the Company, which are recognized when EyakTek sells
to third party customers, are less than $0.1 million and $0.1 million for the three months ended
and $0.1 million and $0.3 million for the nine months ended September 30, 2010 and 2009,
respectively, which are included in sales in the accompanying Unaudited Condensed Consolidated
Statements of Operations.
The following table summarizes EyakTeks unaudited financial information for the periods presented
in the accompanying Statement of Operations (in thousands):
Three Months ended | Nine Months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues |
$ | 117,323 | $ | 94,162 | $ | 318,577 | $ | 255,981 | ||||||||
Gross margin |
$ | 12,878 | $ | 10,584 | $ | 35,220 | $ | 29,128 | ||||||||
Net income |
$ | 5,866 | $ | 5,459 | $ | 16,294 | $ | 13,341 |
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By letter dated May 24, 2010 the U.S. Small Business Administration (SBA) advised 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.
On September 14, 2010, GTSI filed a Complaint in the Chancery Court of Delaware against EyakTek;
two of EyakTeks three owner/membersThe Eyak Corporation (Eyak Corp.), which owns 51% of
EyakTek, and Global Technology LLC, which owns 12% of EyakTek, (collectively, the Member
Defendants); and several of EyakTeks directors and officers (the Individual Defendants). GTSI
is the third member of EyakTek (GTSI owns 37% of EyakTek). The Complaint alleges that EyakTek and
the Member Defendants have breached EyakTeks Operating Agreement by taking certain actions without
GTSIs approval, which is required under the Operating Agreement, including taking actions leading
to the making of an unsolicited offer to acquire GTSI and the continuation of the business
operations of EyakTek after its graduation from the Section 8(a) BD Program. The Complaint further
alleges that the Individual Defendants have breached their fiduciary duties and the implied
covenant of good faith and fair dealing by allowing EyakTek to take these actions. The Complaint
seeks declaratory and injunctive relief, plus attorneys fees, against all of the Defendants. On
November 3, 2010, GTSI filed an Amended Complaint in the Chancery Court, which clarifies the nature
of relief sought and adds an additional claim for breach of EyakTeks Operating Agreement based
upon EyakTeks refusal to recognize GTSIs designated director to EyakTeks board of directors,
among other matters.
On September 20, 2010, the Member Defendants and Individual Defendants filed an Arbitration Demand
with the American Arbitration Association asserting that GTSIs claims in the Delaware Chancery
Court are subject to arbitration. The Arbitration Demand also asserted that GTSIs filing of the
Delaware Complaint violated EyakTeks Operating Agreement and constituted a breach of fiduciary
duty and the implied covenant of good faith and fair dealing that GTSI allegedly owes to EyakTek as
a member of EyakTek. The Arbitration Demand seeks declaratory relief, damages, and attorneys fees
against GTSI.
GTSI, the Member Defendants and the Individual Defendants have filed motions in the Chancery Court
to dismiss and/or stay the others lawsuit/arbitration. The Delaware Chancery Court heard both
sets of motions on November 5, 2010. As of the date hereof, the Delaware Chancery Court has not
issued any decision in respect of the hearing on the motions. The parties have agreed that the
Amended Complaint does not change the nature of the pending motions to dismiss and/or stay.
By letter dated November 1, 2010, Eyak Corp., through the same counsel that represents EyakTek,
advised GTSI that Eyak Corp. was the owner of 100 shares of GTSIs common stock, and as a GTSI
stockholder Eyak Corp. was demanding that GTSI investigate and take actions on matters set forth in
the letter, including matters that are the subject of GTSIs claims before the Delaware Chancery
Court. Eyak Corp. alleges that GTSIs failure to approve the continuation of EyakTeks business
operations constitutes a breach of fiduciary duties by GTSIs directors and officers and demands
that they cure this breach by approving the continuation of EyakTeks business operations. Eyak
Corp. further demands, if the alleged breach is not cured, that GTSI investigate prior disclosure
related to the disputes and litigation with EyakTek, make appropriate disclosures, including to the
SBA and GTSIs lenders, and investigate GTSIs financial statements and account balances in respect
of GTSIs 37% interest in EyakTek. Further, EyakTek demands that GTSI bring action against GTSIs
employees, officers and directors responsible for the foregoing alleged actions to recover damages
for GTSI. GTSIs board of directors will take such action in connection with the asserted matters
as it deems necessary or appropriate and in the best interest of GTSI and its stockholders, in
accordance with Delaware law.
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14. Subsequent Events
Administrative Agreement with the U.S. Small Business Administration
On October 1, 2010, GTSI received a notice from the Small Business Administration (the SBA) that
the SBA was temporarily suspending GTSI from any future contract awards from the federal
government. The suspension notice cited that it was based on evidence of the commission of fraud
or a criminal offense in connection with GTSI obtaining, attempting to obtain and performing
certain subcontracts with small businesses in 2007 and a lack of business integrity or business
honesty that seriously or directly affects the present responsibility of GTSI as a government
contractor. On October 19, 2010, GTSI Corp entered into an administrative agreement with the U.S.
Small Business Administration (the SBA Agreement). Pursuant to the SBA Agreement, the SBA lifted
the temporary federal contract suspension it imposed on GTSI on October 1, 2010. As a result, GTSI
may, subject to the SBA Agreement, resume full business with most of its existing clients and
pursue new contracts with the federal government.
Pursuant to the SBA Agreement, GTSI agreed that it will not obtain or attempt to obtain any new
federal governmental contracts, subcontracts or any business, which in any capacity, whether
directly or indirectly is intended to benefit small businesses, including task orders and options
on existing contracts. This includes benefits in circumstances involving small businesses serving
as prime contractors and joint ventures with small businesses. GTSI will also discontinue
participating in the SBAs mentor-protégé program. GTSI further agreed to retain an SBA-approved
monitor to regularly report to the SBA on GTSIs compliance with the SBA Agreement and applicable
government contracting laws and regulations (the Monitor). On November 8, 2010, GTSI agreed to
retain Debarment Solutions Institute, LLC as the Monitor and the SBA has approved that Monitor.
The term of the SBA Agreement commenced on October 19, 2010 and will terminate on the earlier of
(a) October 19, 2013, (b) the 90th day after the SBAs Office of Inspector Generals
notification of the completion of its continuing investigation of GTSI, or (c) the notification
date of any proposed debarment of GTSI by the SBA.
In connection with the SBA Agreement, GTSI accepted the voluntary resignations of Scott Friedlander
as Chief Executive Officer, President and a Director of GTSI, and of Charles DeLeon as a Senior
Vice President and General Counsel of GTSI, both effective as of October 26, 2010. In connection
with their voluntary resignations the Company has entered into separation agreements with Messrs.
Friedlander and DeLeon. GTSI also agreed to suspend three other employees for the term of the SBA
Agreement. GTSI committed to adopt, implement and maintain a self-governance program that includes
a business ethics program that covers all employees. As part of the business ethics program, GTSI
will create a position and designate an employee as GTSIs ethics officer, who will be responsible
for managing all aspects of the business ethics program. At least once each calendar year, GTSI
will conduct an internal audit of its business practices, procedures, policies and internal
controls for compliance with the SBA Agreement, GTSIs Code of Business Ethics and the special
requirements regarding government contracting and report the results of such audit to the SBA and
the Monitor. The Board of Directors approved the selection of the Ethics Officer on November 3,
2010.
In connection with the SBA Agreement and the Eyaktek legal matters, the Company expects to incur
additional Selling, General and Administrative expenses of approximately $2 million related to
severance, legal and monitoring expenses during the three months ended December 31, 2010. This
estimate includes the separation agreements with Messrs. Friedlander and DeLeon totaling $850,000
and $260,000, respectively, along with COBRA and long-term care coverage.
The U.S. Attorneys Office for the Eastern District of Virginia is reviewing the same subject
matter that led to the SBA temporary federal contract suspension and the resulting SBA Agreement
and we are providing information in response to that inquiry.
GTSI will continue to cooperate with the continuing investigation of its conduct as a subcontractor
for certain small businesses. The continuing investigation of GTSI by the Government could result
in administrative, civil or criminal penalties, including a recommendation that may adversely
affect GTSIs ability to serve as a government contractor.
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Appointment of Acting Co-Chief Executive Officers
In connection with Mr. Friedlanders voluntary resignation, GTSIs Board of Directors appointed
Sandra B. Gillespie and Peter Whitfield to serve on an interim basis as acting Co-Chief Executive
Officers, effective October 26, 2010 until a permanent replacement for Mr. Friedlander has been
appointed. Ms. Gillespie will continue to hold her position as a Senior Vice President of GTSI and
Mr. Whitfield will continue to hold his positions as a Senior Vice President and Chief Financial
Officer of GTSI.
Amended and Restated Credit Agreement
In connection with the SBA Agreement and the preceding temporary federal contract suspension, GTSI
Corp. entered into an Amended and Restated Credit Agreement, dated as of October 19, 2010, with
Castle Pines Capital LLC (CPC) and Wells Fargo Capital Finance, LLC, formerly known as Wells
Fargo Foothill, LLC (the Amended and Restated Agreement). The Amended and Restated Agreement
amends and restates the Companys Credit Agreement, effective as of May 27, 2009 (the Original
Credit Agreement), as amended, by and among GTSI, CPC and Wells Fargo Foothill, LLC. The Amended
and Restated Agreement reduced the total facility limit from an aggregate principal amount of
$135 million to an aggregate principal amount of $100 million and reduced the aggregate revolving
loan facility limit from $60 million to $45 million. Further, the Amended and Restated Agreement
prohibits GTSI from purchasing any of its common stock. The Amended and Restated Agreement
provides, as did the Original Credit Agreement, that the existence of a material proceeding against
GTSI or GTSIs failure to be in compliance with all material laws constitutes an event of default
under the agreement.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis is provided to increase the understanding of, and should be
read in conjunction with, our unaudited condensed consolidated financial statements and notes
included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our consolidated financial
statements and notes in our Annual Report on Form 10-K for the year ended December 31, 2009. We use
the terms GTSI, we, the Company, our, and us to refer to GTSI Corp. and its subsidiaries.
Disclosure Regarding Forward-Looking Statements
Readers are cautioned that this Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, relating to our operations that are based on our
current expectations, estimates, forecasts and projections. Words such as expect, plan,
believe, anticipate, intend and similar expressions are intended to identify these
forward-looking statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual
results in future periods may differ materially from those expressed or projected in any
forward-looking statements because of a number of risks and uncertainties, including:
| Our reliance on a small number of large transactions for significant portions of our sales and gross margins |
| Our ability to shift our business model from a reseller of products to a high-end solutions provider |
| Any issue that compromises our relationship with agencies of the Federal government would cause serious harm to our business see Note 14 Subsequent Events |
| Changes in Federal government fiscal spending |
| Our ability to meet the covenants under our Amended and Restated Credit Agreement in future periods see Note 14 Subsequent Events |
| Negativity to our business due to the current global economic and credit conditions |
| Possible infrastructure failures |
| Any material weaknesses in our internal control over financial reporting |
| Continued net losses, if we fail to align costs with our sales levels |
| Our quarterly sales and cash flows are volatile, which makes our future financial results difficult to forecast |
| Unsatisfactory performance by third parties with which we work could hurt our reputation, operating results and competitiveness |
| Our ability to adapt to consolidation within the OEM market place |
| Our dependence on certain strategic partners |
| Our ability to integrate any potential future acquisitions, strategic investments or mergers |
| Our ability to enter new lines of business |
| Our ability to attract a new Chief Executive Officer and our ability to retain or attract other key management personnel |
| Adversely affected by increased governmental and regulatory scrutiny or negative publicity |
| Our ability to comply with GTSIs obligations under the October 19, 2010 SBA Agreement with the SBA and the outcome of the continuing investigation of GTSI by the SBAs Office of Inspector General. |
| We believe that EyakTeks future financial performance may be adversely affected because of its graduation from the SBAs Section 8(a) BD Program. |
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For a detailed discussion of risk factors affecting GTSIs business and operations, see Item 1A,
Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009 and Item 1A,
Risk Factors in Part II of this report. We undertake no obligation to revise or update any
forward-looking statements for any reason.
Overview
GTSI has over 27 years of experience in selling IT products and solutions primarily to U.S.
Federal, state and local governments and to prime contractors that are working directly under
government contracts. We believe our key differentiators to be our strong brand among government
customers, extensive contract portfolio, close relationships with wide variety of vendors, and a
technology lifecycle management framework approach.
The IT solutions we offer to our customers have a strong product component, along with a services
component on many solutions. We connect ITs leading vendors, products and services inside the core
technology areas most critical to government success by partnering with global IT leaders such as
Cisco, Microsoft, Oracle, Hewlett Packard, Panasonic and Network Appliance. GTSI has strong
strategic relationships with hardware and software industry leading OEMs and includes these
products in the solutions provided to our customers.
During the past several years, we have continued our realignment around solutions that we believe
will provide us with a greater opportunity for enhanced return on investment. We have directed our
attention to government solutions, including mobile evidence capture, unified communications,
mobile clinical applications, green IT, virtualization and cloud computing.
To help our customers acquire, manage and refresh this technology in a strategic and
application-appropriate manner, GTSI has created a mix of professional and financial services
capable of managing and funding the entire technology lifecycle. Additionally, GTSI offers leasing
arrangements to allow government agencies to acquire access to technology as an evenly distributed
operating expense, rather than the much more budget-sensitive and discontinuous capital expenses.
We believe this model represents a distinctive advantage to our customers.
Summarized below are some of the possible material trends, demands, commitments, events and
uncertainties currently facing the Company:
| On October 1, 2010, GTSI received a notice from the Small Business Administration (SBA) that the SBA was temporarily suspending GTSI from any future contract awards from the federal government. On October 19, 2010, as referenced in Note 14 Subsequent Events, GTSI entered into an administrative agreement with the SBA lifting the temporary suspension (the SBA Agreement). In addition, GTSI entered into an Amended and Restated Credit Agreement, dated October 19, 2010, with Castle Pines Capital LLC and Wells Fargo Capital Finance LLC. These events had no impact on our historical results for the nine months ended September 30, 2010. See our Note 14 Subsequent Events and Legal Proceedings included in Part II, for a discussion of these matters. While we continue evaluating the potential impact of the SBA Agreement on our future business, results of operations and financial condition, we have identified potentially impacted opportunities that may reduce our gross margin by approximately $7 million to $9 million for the three months ended December 31, 2010. Management is currently investigating various alternative opportunities that may reduce the adverse effect of these impacted opportunities. In addition, during the three months ended December 31, 2010, the Company expects to incur additional Selling, General and Administrative expenses of approximately $2 million related to severance, legal and monitoring expenses in connection with the SBA Agreement and the EyakTek legal matters. If the Company is unable to generate additional sales, mitigate impacted opportunities and reduce operating costs to offset for lost sales activity and added administrative costs related to the restrictions under the SBA Agreement it could have a material adverse effect on the Companys business, results of operations and financial condition for the three months ending December 31, 2010. While we continue to evaluate ongoing costs associated with the SBA Agreement, based on the information available today we expect to incur additional Selling, General and Administrative expenses of approximately $1 million to $2 million related to legal, professional, monitoring and other expenses during the first six months of 2011. |
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| In the near term, we face some uncertainties due to the current business environment. We have continued to experience a longer contracting process with Federal Governments Department of Defense agencies, which is one of our traditionally stronger markets. This delay, along with an overall decrease in Federal Government IT spending could have a negative impact on our financial condition, operating performance, revenue, income or liquidity. |
| A shift of expenditures away from programs that we support could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty or to decide not to exercise options to renew contracts. |
| With the Sun/Oracle merger and the continued consolidation within the OEM market place, we are likely to see continued pricing pressure from our partners in the market place. |
The Companys financial results for the nine months ended September 30, 2010 were negatively
impacted by various government agencies spending trends, continued consolidation within the OEM
market place, competitive pricing pressures and weak sales activity in certain pockets of the
hardware and software commodity segments, especially within the U.S. Department of Defense
agencies.
During the nine months ended September 30, 2010, the Company has been reviewing the organizations
various divisions and departments and reducing/adding personnel as the Company determines the
appropriate level of employees to support the business operations. The Company, which had 615
employees as of February 26, 2010, had 504 employees as of November 5, 2010. For the three and
nine months ended September 30, 2010, the Company recorded severance related costs, which are
included in SG&A, of $0.2 million and $0.6 million, respectively. We will continue to aggressively
manage and reduce operating expenses where possible.
For the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009:
| Total sales increased $27.7 million. |
| Gross margin increased $0.9 million. |
| Selling, General & Administrative expenses decreased $3.2 million. |
| Interest and other income increased $0.1 million. |
| Income before income taxes increased $4.2 million. |
| Cash used in operations improved $19.4 million. |
For the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009: |
| Total sales decreased $44.1 million. |
| Gross margin decreased $6.8 million. |
| Selling, General & Administrative expenses decreased $6.7 million. |
| Interest and other income increased $2.4 million. |
| Income before income taxes increased $2.2 million. |
| Cash used in operations improved $11.0 million. |
18
Table of Contents
Critical Accounting Estimates and Policies
Our unaudited condensed consolidated financial statements are based on the selection of accounting
policies and the application of significant accounting estimates, some of which require management
to make significant assumptions. We believe that some of the more critical estimates and related
assumptions that affect our financial condition and results of operations pertain to revenue
recognition, financing receivables, valuation of inventory, capitalized internal use software,
estimated payables and income taxes. For more information on critical accounting estimates and
policies see the MD&A discussion included in our Annual Report on Form 10-K for the year ended
December 31, 2009. We have discussed the application of these critical accounting estimates and
policies with the Audit Committee of our Board of Directors.
Historical Results of Operations
The following table illustrates the unaudited percentage of sales represented by items in our
condensed consolidated statements of operations for the periods presented.
Three months ended | Nine months ended | |||||||||||||||
September | September | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales |
87.5 | % | 86.2 | % | 87.2 | % | 87.0 | % | ||||||||
Gross margin |
12.5 | % | 13.8 | % | 12.8 | % | 13.0 | % | ||||||||
Selling, general, and
administrative expenses |
8.7 | % | 11.4 | % | 13.6 | % | 13.7 | % | ||||||||
Income(Loss) from operations |
3.8 | % | 2.4 | % | (0.8 | )% | (0.7 | )% | ||||||||
Interest and other income, net |
0.9 | % | 0.9 | % | 1.2 | % | 0.6 | % | ||||||||
Income(Loss) before taxes |
4.7 | % | 3.3 | % | 0.4 | % | (0.1 | )% | ||||||||
Income tax expense |
(2.2 | )% | (1.5 | )% | (0.4 | )% | 0.0 | % | ||||||||
Net income(loss) |
2.5 | % | 1.8 | % | 0.0 | % | (0.1 | )% | ||||||||
The following tables indicate, for the periods indicated, the approximate sales by type and vendor
along with related percentages of total sales (in millions).
Three months ended | Nine months ended | |||||||||||||||||||||||||||||||
September | September | |||||||||||||||||||||||||||||||
Sales by Type | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||
Hardware |
$ | 144.3 | 60.8 | % | $ | 143.9 | 68.6 | % | $ | 312.1 | 65.8 | % | $ | 336.6 | 64.9 | % | ||||||||||||||||
Software |
64.5 | 27.2 | % | 45.3 | 21.6 | % | 106.3 | 22.4 | % | 130.3 | 25.1 | % | ||||||||||||||||||||
Service |
15.9 | 6.7 | % | 14.0 | 6.7 | % | 38.6 | 8.1 | % | 40.8 | 7.9 | % | ||||||||||||||||||||
Financing |
12.7 | 5.3 | % | 6.5 | 3.1 | % | 17.2 | 3.7 | % | 10.7 | 2.1 | % | ||||||||||||||||||||
Total |
$ | 237.4 | 100.0 | % | $ | 209.7 | 100.0 | % | $ | 474.2 | 100.0 | % | $ | 518.4 | 100.0 | % | ||||||||||||||||
Three months ended | Nine months ended | |||||||||||||||||||||||||||||||
Sales by Vendor (based on | September 30, | September 30, | ||||||||||||||||||||||||||||||
YTD 2010 sales) | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||
Cisco |
$ | 50.7 | 21.4 | % | $ | 36.6 | 17.5 | % | $ | 107.1 | 22.6 | % | $ | 72.7 | 14.0 | % | ||||||||||||||||
Dell |
22.1 | 9.3 | % | 29.6 | 14.1 | % | 48.8 | 10.3 | % | 51.6 | 10.0 | % | ||||||||||||||||||||
Oracle |
11.9 | 5.0 | % | 26.1 | 12.4 | % | 44.0 | 9.3 | % | 56.4 | 10.9 | % | ||||||||||||||||||||
Hewlett Packard |
12.8 | 5.4 | % | 14.2 | 6.8 | % | 36.1 | 7.6 | % | 37.0 | 7.1 | % | ||||||||||||||||||||
Microsoft |
11.6 | 4.9 | % | 20.9 | 10.0 | % | 21.2 | 4.5 | % | 63.2 | 12.2 | % | ||||||||||||||||||||
Others, net of reserves
and adjustments |
128.3 | 54.0 | % | 82.3 | 39.3 | % | 217.0 | 45.7 | % | 237.5 | 45.8 | % | ||||||||||||||||||||
Total |
$ | 237.4 | 100.0 | % | $ | 209.7 | 100.0 | % | $ | 474.2 | 100.0 | % | $ | 518.4 | 100.0 | % | ||||||||||||||||
19
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Three Months Ended September 30, 2010 Compared With the Three Months Ended September 30, 2009
Sales
Total sales, consisting of product, service and financing revenue, increased $27.7 million, or
13.2% from $209.7 million for the three months ended September 30, 2009 to $237.4 million for the
three months ended September 30, 2010. The sales activity of each of the three product lines are
discussed below.
Product revenue includes the sale of hardware, software and license maintenance on the related
software. Product sales increased $19.6 million, or 10.3%, from $189.2 million for the three months
ended September 30, 2009 to $208.8 million for the three months ended September 30, 2010. Product
revenue as a percent of total revenue decreased 2.2% from 90.2% for the three months ended
September 30, 2009 to 88.0% for the three months ended September 30, 2010. During the three months
ended September 30, 2010, the Companys hardware revenue was flat, with a shift in customers;
whereas the Companys software revenue increased due to several large software orders that closed
during the three months ended September 30, 2010. Hardware sales increased $0.4 million, from
$143.9 million for the three months ended September 30, 2009 to $144.3 million for the three months
ended September 30, 2010. In particular, hardware sales during the three months ended September 30,
2010 to our system integrators increased by approximately $30 million; whereas hardware sales to
the Army, Navy, and Department of Justice decreased by approximately $17 million, $2 million and $7
million, respectively. Software sales increased $19.2 million, from $45.3 million for the three
months ended September 30, 2009 to $64.5 million for the three months ended September 30, 2010,
partially due to increased software sales to the Department of Treasury of approximately $15
million during the three months ended September 30, 2010.
Service revenue includes the sale of professional services, resold third-party service products,
hardware warranties and maintenance on hardware; we net revenues where we are not the primary
obligor, we netted approximately $51.1 million and $31.8 million for the three months ended
September 30, 2009 and 2010, respectively. Service revenue increased $1.9 million, or 13.7% from
$14.0 million for the three months ended September 30, 2009 to $15.9 million for the three months
ended September 30, 2010. The increase in service revenue is a result of increased sales of
delivered services and integration. Delivered service revenue increased $1.8 million, from $9.5
million for the three months ended September 30, 2009 to $11.3 million for the three months ended
September 30, 2010. Service revenue as a percent of total revenue was 6.7% for the three months
ended September 30, 2010 and 2009, respectively.
Financing revenue consists of lease related transactions and includes the sale of leases that are
properly securitized having met the sale criteria under FASB ASC 860, Transfers and Servicing,
(ASC 860), the annuity streams of in-house leases and leases that are not securitized or have not
met the sale criteria under ASC 860 and the sale of previously leased equipment. Financing revenue
increased $6.2 million, or 95.9%, from $6.5 million for the three months ended September 30, 2009
to $12.7 million for the three months ended September 30, 2010 due to increased new lease sales of
$6.2 million that were properly securitized under ASC 860.
Although we offer our customers access to products from hundreds of vendors, 46.0% of our total
sales in the third quarter of 2010 were products from five vendors; Cisco was our top vendor in the
third quarter of 2010 with sales of $50.7 million. Sales from these five vendors decreased by $18.3
million, or 14.3% for the three months ended September 30, 2010, mainly due to decreased activity
with Oracle, Dell and Microsoft; partially offset by increased activity with Cisco. As a percent of
total sales the third quarter of 2010 top five vendors decreased 14.8 percentage points to 46.0%
for the three months ended September 30, 2010 from 60.8% for the three months ended September 30,
2009. Our top five vendors may fluctuate between periods because of the timing of certain large
contracts. In 2010, we consider Cisco, Microsoft, Oracle, Hewlett Packard, Panasonic, NetApp, Dell,
Citrix and Hitachi as our strategic partners.
Gross Margin
Total gross margin, consisting of product, service and financing revenue less their respective cost
of sales, increased $0.9 million, or 3.0%, from $28.9 million for the three months ended September
30, 2009 to $29.8 million for the three months ended September 30, 2010. As a percentage of total
sales, gross margin for the three months ended September 30, 2010 decreased 1.3% percentage points
from the three months ended September 30, 2009. The gross margin activity of each of the three
product lines are discussed below.
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Product gross margin was $19.7 million for the three months ended September 30, 2010 and 2009,
respectively. During the three months ended September 30, 2010, the Companys gross margin was
impacted by various government agencies spending trends, weak sales activity with two of our
largest Department of Defense customers and continued pricing pressures from Oracle and our other
partners. Product gross margin as a percentage of sales decreased 1.0 percentage points from 10.4%
for the three months ended September 30, 2009 to 9.4% for the three months ended September 30,
2010. The decrease in product gross margin was somewhat offset by $0.6 million higher gross margin
for the three months ended September 30, 2010 from strategic partner programs as compared to the
same period of 2009.
Service gross margin decreased $0.3 million, or 5.7%, from $5.2 million for the three months ended
September 30, 2009 to $4.9 million for the three months ended September 30, 2010. Service gross
margin as a percentage of sales decreased 6.4 percentage points from 37.5% for the three months
ended September 30, 2009 to 31.1% for the three months ended September 30, 2010. These gross margin
decreases were driven by lower revenue and a lower gross margin percentage in support services
partially offset by higher revenue and a higher gross margin percentage in delivered services for
the three months ended September 30, 2010 as compared to the same period in 2009.
Financing gross margin increased $1.2 million, or 28.9% from $4.0 million for the three months
ended September 30, 2009 to $5.1 million for the three months ended September 30, 2010 due to a
$0.7 million increase in the sale of leases that were properly securitized under ASC 860. Gross
margin as a percentage of sales decreased 21.1 percentage points from 61.7% for the three months
ended September 30, 2009 to 40.6% for the three months ended September 30, 2010, due to an increase
in new lease sales for the three months ended September 30, 2010, which generally have a lower
gross margin percentage than other financing activities.
Selling, General & Administrative Expenses (SG&A)
During the three months ended September 30, 2010, SG&A expenses decreased $3.2 million, or 13.6%
from the same period in 2009. SG&A as a percentage of sales decreased to 8.7% in the third quarter
of 2010 from 11.4% for the same period in 2009. The decrease in SG&A expenses was mainly due to
lower personnel related costs of $3.3 million attributed to lower salary and related costs of $2.1
million due to lower headcount in 2010 as compared to the prior year and lower incentive and
commission compensation expense of $0.8 million, along with lower travel expense of $0.2 million;
partially offset by $0.3 million higher consulting expense during the three months ended September
30, 2010.
Interest and Other Income, Net
Interest and other income, net, for the three months ended September 30, 2010 was $2.1 million as
compared $2.0 million for the same period in 2009. The improvement in interest and other income,
net, was due to higher equity income from affiliates. Equity income from affiliates related to our
equity investments in Eyak Technology, LLC increased by $0.2 million for the three months ended
September 30, 2010 as compared to the same period last year.
Income Taxes
GTSI had income of $11.3 million and $ 7.1 million before income taxes for the three months ended
September 30, 2010 and 2009, respectively.
The effective income tax rate was 47.3% and 45.9% for the three months ended September 30, 2010 and
2009, respectively. The increase in the tax rate from 2009 to 2010 was due to non-deductible stock
expense during the three months ended September 30, 2010 that did not occur in the same period in
2009.
For the three months ended September 30, 2010, an income tax benefit of less than $0.1 million was
recognized related to the accrual of interest and penalties for uncertain tax positions and payment
of state income tax notices which was fully offset by a decrease in accrued interest and penalties
due to the expiration of applicable statute of limitations. For the three months ended September
30, 2010, an income tax benefit of less than $0.2 million was recorded related to an adjustment to
a true-up for the filing of the 2009 tax returns.
For the three months ended September 30, 2009 an income tax expense of less than $0.1 million
related to the accrual of interest and penalties for uncertain tax positions and payment of state
income tax notices. Such benefit was fully offset by the decrease in accrued interest and penalties
due to the expiration of applicable statute of limitations. For the three months ended September
30, 2009, an income tax expense was recorded of less than $0.3 million related to an adjustment to
a true-up for the filing of the 2008 tax returns.
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Nine Months Ended September 30, 2010 Compared With the Nine Months Ended September 30, 2009
Sales
Total sales, consisting of product, service and financing revenue, decreased $44.1 million, or 8.5%
from $518.4 million for the nine months ended September 30, 2009 to $474.2 million for the nine
months ended September 30, 2010. The sales activity of each of the three product lines are
discussed below.
Product revenue includes the sale of hardware, software and license maintenance on the related
software. Product sales decreased $48.4 million, or 10.4%, from $466.8 million for the nine months
ended September 30, 2009 to $418.5 million for the nine months ended September 30, 2010. Product
revenue as a percent of total revenue decreased 1.8% from 90.0% for the nine months ended September
30, 2009 to 88.2% for the nine months ended September 30, 2010. During the nine months ended
September 30, 2010, the Company was impacted by an overall decrease in hardware and software
revenue due to various government agencies spending trends, the weak economy, weak sales activity
in certain pockets of the hardware and software commodity segments, and several large software
orders that closed during the first six months of 2009. The Company did see an improvement during
the three months ended September 30, 2010 as discussed under our discussion of three months ended
September 30, 2010 as compared with the three months ended September 30, 2009. Hardware sales
decreased $24.5 million, from $336.6 million for the nine months ended September 30, 2009 to $312.1
million for the nine months ended September 30, 2010. In particular, hardware sales during the nine
months ended September 30, 2010 to the Army, Navy and Department of Justice decreased by
approximately $41 million, $12 million and $20 million, respectively; whereas hardware sales to our
system integrators increased approximately $28 million. Software sales decreased $24.0 million,
from $130.3 million for the nine months ended September 30, 2009 to $106.3 million for the nine
months ended September 30, 2010, partially due to decreased software sales to the Marines of
approximately $16 million during the nine months ended September 30, 2010.
Service revenue includes the sale of professional services, resold third-party service products,
hardware warranties and maintenance on hardware; we net revenues where we are not the primary
obligor, we netted approximately $100.5 million and $84.5 million for the nine months ended
September 30, 2009 and 2010, respectively. Service revenue decreased $2.3 million, or 5.5% from
$40.8 million for the nine months ended September 30, 2009 to $38.6 million for the nine months
ended September 30, 2010. The decrease in service revenue is a result of decreased sales of
delivered services where we have experienced a more competitive market resulting in less overall
projects in 2010 along with reduced sales of support services. Delivered service revenue decreased
$1.6 million, from $29.6 million for the nine months ended September 30, 2009 to $28.0 million for
the nine months ended September 30, 2010. Service revenue as a percent of total revenue increased
0.2% from 7.9% for the nine months ended September 30, 2009 to 8.1% for the nine months ended
September 30, 2010.
Financing revenue consists of lease related transactions and includes the sale of leases that are
properly securitized having met the sale criteria under FASB ASC 860, Transfers and Servicing,
(ASC 860), the annuity streams of in-house leases and leases that are not securitized or have not
met the sale criteria under ASC 860 and the sale of previously leased equipment. Financing revenue
increased $6.5 million, or 60.7%, from $10.7 million for the nine months ended September 30, 2009
to $17.2 million for the nine months ended September 30, 2010; due to increased new lease sales of
$7.5 million that were properly securitized under ASC 860; partially offset by $0.6 million
decrease in lease residual sales and $0.4 million decrease in annuity streams of in-house leases.
Although we offer our customers access to products from hundreds of vendors, 54.3% of our total
sales in the first nine months of 2010 were products from five vendors; Cisco was our top vendor in
the first nine months of 2010 with sales of $107.1 million. Sales from these five vendors decreased
by $23.7 million, or 8.4%, for the first nine months of 2010, mainly due to decreased activity with
Microsoft; partially offset by increased activity with Cisco. As a percent of total sales the first
nine months of 2010 top five vendors increased 0.1 percentage points to 54.3% for the first nine
months 2010 from 54.2% for the first nine months of 2009.
Gross Margin
Total gross margin, consisting of product, service and financing revenue less their respective cost
of sales, decreased $6.8 million, or 10.1%, from $67.6 million for the nine months ended September
30, 2009 to $60.8 million for the nine months ended September 30, 2010. As a percentage of total
sales, gross margin for the nine months ended September 30, 2010 decreased 0.2% percentage points
from the nine months ended September 30, 2009. The gross margin activity of each of the three
product lines are discussed below.
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Table of Contents
Product gross margin decreased $5.6 million, or 12.4%, from $45.3 million for the nine months ended
September 30, 2009 to $39.6 million for the nine months ended September 30, 2010. During the nine
months ended September 30, 2010, the Companys gross margin was impacted by various government
agencies spending trends, an overall decrease in hardware and software revenue, weak sales activity
with two of our largest Department of Defense customers, continued pricing pressures from Oracle
and our other partners, and several large software orders that closed during the first six months
of 2009. The decrease in product gross margin was negatively impacted by $0.9 million lower gross
margin for the nine months ended September 30, 2010 from strategic partner programs as compared to
the same period of 2009. Product gross margin as a percentage of sales decreased 0.2 percentage
points from 9.7% for the nine months ended September 30, 2009 to 9.5% for the nine months ended
September 30, 2010.
Service gross margin decreased $2.2 million, or 14.2%, from $15.2 million for the nine months ended
September 30, 2009 to $13.0 million for the nine months ended September 30, 2010. Service gross
margin as a percentage of sales decreased 3.4 percentage points from 37.1% for the nine months
ended September 30, 2009 to 33.7% for the nine months ended September 30, 2010. These gross margin
decreases were driven by lower revenue and gross margin in delivery and support services for the
nine months ended September 30, 2010 as compared to the same period in 2009.
Financing gross margin increased $0.9 million, or 13.2% from $7.2 million for the nine months ended
September 30, 2009 to $8.1 million for the nine months ended September 30, 2010 due to an increase
in the sale of leases that were properly securitized; partially offset by decreased revenue on
lease residual sales and lower annuity streams of in-house leases during the nine months ended
September 30, 2010 as compared to the same period in 2009. Gross margin as a percentage of sales
decreased 19.8 percentage points from 67.1% for the nine months ended September 30, 2009 to 47.3%
for the nine months ended September 30, 2010, due to an increase in new lease sales for the nine
months ended September 30, 2010, which generally have a lower gross margin percentage than other
financing activities.
Selling, General & Administrative Expenses (SG&A)
During the nine months ended September 30, 2010, SG&A expenses decreased $6.7 million, or 9.4% from
the same period in 2009. SG&A as a percentage of sales decreased to 13.6% in the first nine months
of 2010 from 13.7% for the same period in 2009. The decrease in SG&A expenses was mainly due to
lower personnel related costs of $6.1 million attributed to lower margins resulting in a $2.9
million reduction of incentive and commission compensation expense and lower salary and related
costs of $2.9 million due to lower headcount in 2010 as compared to prior the year; partially
offset by $0.6 million of severance related costs during the nine months ended September 30, 2010.
Other changes in SG&A expenses included an increase of consulting expense of $0.7 million in the
first nine months of 2010 as compared to the same period in 2009; partially offset by a $0.4
million decrease in credit card processing fees during the nine months ended September 30, 2010.
Interest and Other Income, Net
Interest and other income, net, for the nine months ended September 30, 2010 was $5.6 million as
compared to $3.3 million for the same period in 2009. The improvement in interest and other income,
net, was due to deferred financing costs written off in 2009 and higher equity income from
affiliates in 2010; partially offset by a settlement of a legal matter in the second quarter of
2009. During the second quarter of 2009 the old Credit Facility was terminated and the related
unamortized deferred financing costs of $1.5 million were written-off to interest expense. Equity
income from affiliates related to our equity investments in Eyak Technology, LLC increased by $1.1
million in 2010 compared with prior year.
Income Taxes
GTSI had income of $1.9 million and a loss of $0.3 million before income taxes for the nine months
ended September 30, 2010 and 2009, respectively.
The effective income tax rate was 94.4% and 31.6% for the nine months ended September 30, 2010 and
2009, respectively. The increase in the tax rate from 2009 to 2010 was due to non-deductible stock
expense of $1.3 million during the nine months ended September 30, 2010 that did not occur in the
same period in 2009: partially offset by an income tax benefit of less than $0.2 million was
recorded related to an adjustment to a true-up for the filing of the 2009 tax returns. The
non-deductible stock expense related to 588,474 stock options that expired during the three months
ended September 30, 2010. Excluding the effects of non-deductible stock expense and the benefit
related to the true-up for the filing of the 2009 tax returns, the effective tax rate would have
been 36.5% for the nine months ended September 30, 2010.
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Table of Contents
For the nine months ended September 30, 2010, an income tax benefit was recognized of less than
$0.1 million for the decrease in accrued interest and penalties for uncertain tax positions due to
the expiration of applicable statute of limitations. For the nine months ended September 30, 2010,
an income tax benefit of less than $0.2 million was recorded related to an adjustment to a true-up
for the filing of the 2009 tax returns.
For the nine months ended September 30, 2009, an income tax benefit of $0.1million was recognized
as it is managements assessment under ASC 740 that there is sufficient evidence to record the tax
benefit on the year to date loss. The net income tax benefit includes an income tax expense of less
than $0.1 million related to the accrual of interest and penalties for uncertain tax positions and
payment of state income tax notices. Such benefit was fully offset by the decrease in accrued
interest and penalties due to the expiration of applicable statute of limitations. For the nine
months ended September 30, 2009, an income tax expense was
recorded of less than $0.3 million
related to an adjustment to a true-up for the filing of the 2008 tax returns.
Seasonal Fluctuations
Historically, over 90% of our annual sales have been earned from departments and agencies of the
U.S. Government, either directly or indirectly through system integrators for which GTSI is a sub
contractor. We have historically experienced, and expect to continue to experience, significant
seasonal fluctuations in our operations as a result of government buying and funding patterns,
which also affect the buying patterns of GTSIs prime contractor customers. These buying and
funding patterns historically have had a significant positive effect on our bookings in the third
quarter ended September 30 each year (the Federal governments fiscal year end), and consequently
on sales and net income in the third and fourth quarters of each year. Conversely, sales during the
first quarter of our fiscal year have traditionally been the weakest for GTSI, consisting of less
than 20% of our annual sales. Our SG&A expenses are more level throughout the year, although our
sales commissions programs generally result in marginally increased expenses in the fourth quarter
of our fiscal year.
Quarterly financial results are also affected by the timing of contract awards and the receipt of
products by our customers. The seasonality of our business, and the unpredictability of the factors
affecting such seasonality, makes GTSIs quarterly and annual financial results difficult to
predict and subject to significant fluctuation.
Liquidity and Capital Resources
Cash flows for the nine months ended September 30, (in millions) |
2010 | 2009 | Change | |||||||||
Cash used in operating activities |
$ | (9.1 | ) | $ | (20.1 | ) | $ | 11.0 | ||||
Cash used in investing activities |
$ | (0.3 | ) | $ | (1.0 | ) | $ | 0.7 | ||||
Cash provided by financing activities |
$ | 18.8 | $ | 36.5 | $ | (17.7 | ) |
During the nine months ended September 30, 2010, our cash balance increased $9.4 million from our
December 31, 2009 balance. The non-interest bearing advances under our Credit Agreement, which are
classified as Accounts Payable floor plan on our consolidated balance sheets, are included as a
financing activity on our Unaudited Condensed Consolidated Statements of Cash Flows.
Cash used in operating activities for the nine months ended September 30, 2010 was $9.1 million, an
improvement of $11.0 million compared to the same period last year. The improvement was primarily
due to a $13.8 million decrease in accounts receivable for the nine months ended September 30,
2010, as compared to a $25.3 million increase in accounts receivable for the same period in 2009;
partially offset by a $21.7 million decrease in accounts payable for the nine months ended
September 30, 2010, as compared to a $9.6 million increase in accounts payable for the same period
in 2009.
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Cash used in investing activities for the nine months ended September 30, 2010 was $0.3 million, a
decrease of $0.7 million as compared with the same period in 2009. This decrease was due to higher
purchases of assets in 2009 related to GTSIs Enterprise Management System.
Cash provided by financing activities for the nine months ended September 30, 2010 was $18.8
million, a decrease of $17.7 million as compared to $36.5 million for the same period in 2009. The
decrease was due to $60.3 million net of floor plan loans for the nine months ended September 30,
2010 as compared to $19.8 million net of floor plan loans for the same period in 2010, $22.4
million net repayments for the nine months ended September 30, 2009 under the Credit Facility that
was terminated in May 2009; partially offset by common stock purchases of $0.9 million during the
nine months ended September 30, 2010 as compared to $1.8 million of common stock purchases during
the nine months ended September 30, 2009.
Credit Agreement
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.
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.
As of September 30, 2010, borrowing capacity and availability under the Credit Agreement was as
follows (in thousands):
Total Credit Agreement |
$ | 135,000 | ||
Borrowing base limitation |
(9,670 | ) | ||
Total borrowing capacity |
125,330 | |||
Less: interest-bearing borrowings |
| |||
Less: non-interest bearing advances (floor plan loans) |
(54,694 | ) | ||
Less: letters of credit |
(2,432 | ) | ||
Total unused availability |
$ | 68,204 | ||
As of September 30, 2010, the Company had no outstanding loan balance (other than non-interest
bearing floor plan loans) under the Credit Agreement and as reflected above, unused available
credit there under of $68.2 million.
The Credit Agreement contains customary covenants that the Company is required to meet. The Company
was in compliance with all financial and informational covenants in the Credit Agreement as of
September 30, 2010. 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 covenant or other
provision of its Credit Agreement, it would be required to seek a waiver or amendment of covenants.
Liquidity
Our working capital as of September 30, 2010 decreased approximately $6.2 million from our working
capital at December 31, 2009. GTSIs current assets increased $1.1 million as of September 30, 2010
when compared to our December 31, 2009 balance. This increase is due to an increase in cash of $9.4
million and an increase in inventory of $5.7 million which was partially offset by a decrease in
accounts receivable of $13.8 million. The decrease in accounts receivable is due to better
collection efforts. The increase in cash is due to the use of the Credit Agreements non-interest
bearing floor plan arrangement along with better cash management and collection efforts. Current
liabilities decreased $5.1 million due to a decrease in accounts payable of $21.7 million partially
offset by an increase in accounts payable floor plan of $19.8 million.
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During the second quarter of 2009, the Company began using the extended channel financing
arrangement in the Credit Agreement for inventory financing and working capital requirements. Our
balance outstanding as of September 30, 2010 under this program was $54.7 million with additional
availability of $68.2 million. We also use vendor lines of credit to manage purchasing and maintain
a higher level of liquidity. As of September 30, 2010, the balance outstanding under these vendor
lines of credit, which represent pre-approved purchasing limits with normal payment terms, was
$30.4 million with additional availability of $50.3 million.
On June 8, 2009, our Board of Directors authorized a program for periodic purchases of GTSI common
stock through May 27, 2011 for an aggregate purchase price not to exceed $5 million (the
Program). During the three months ended September 30, 2010, 17,491 shares have been repurchased
under the Program at an average market price of $5.48 per share. Repurchasing of our common stock,
including under the Program, is disallowed under our Amended and Restated Credit Agreement entered
into with CPC on October 19, 2010.
The SBA Agreement could have a material adverse effect on our working capital in the future if the
Company is not able to generate additional sales and/or reduce operating costs to offset for lost
sales activity and added administrative costs related to the restrictions from the SBA Agreement.
Capital Requirements
Our ongoing capital requirements depend on a variety of factors, including the extent to which we
are able to fund the cash needs of our business from operations. Our amended and restated Credit
Agreement dated October 19, 2010 with CPC matures on May 27, 2011. With this latest modification to
our Credit Agreement, we believe we will be able to secure an extension of our Credit Agreement or
a new agreement with CPC with substantially similar terms and expect to have it in place prior to
its maturity in 2011. We anticipate that we will continue to rely primarily on operating cash flow,
vendor lines of credit and our Credit Agreement to finance our operating cash needs. We believe
that such funds should be sufficient to satisfy our anticipated cash requirements for operations
over the next 12 months.
However, if we are not able to renegotiate the terms or obtain a Credit Agreement on terms
satisfactory to us, or at all, we may ultimately be unable to meet our payment obligations under
our current Credit Agreement. While we believe that this eventually is unlikely, it is possible
that in this event, we may be forced to seek protection under bankruptcy laws, which could harm our
future operations and overall financial condition. Additionally, a default could significantly
diminish the market value and marketability of our common stock.
New Accounting Pronouncements
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
GTSI is exposed to interest rate risk through the investment of our cash and cash equivalents. We
invest our cash in short-term investments with maturities of three months or less with high credit
quality financial institutions. Changes in interest rates affect the interest income we earn, and
therefore impact our cash flows and results of operations. 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.
On May 27, 2009, GTSI entered into a $135 million credit agreement with Castle Pines Capital LLC
(CPC) and other lenders (the Credit Agreement). 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.
This Credit Agreement exposes us to market risk from changes in interest rates. For purposes of
specific risk analysis, we use sensitivity analysis to determine the effects that market risk
exposures may have.
Our results of operations may be affected by changes in interest rates due to the impact those
changes have on any borrowings under our Credit Agreement. If interest rates increase, our debt
service obligations on the variable rate indebtedness would increase even though the amount
borrowed remained the same, which would require more cash to service our indebtedness. As of
September 30, 2010 and December 31, 2009, the Company had no outstanding loan balance (other than
non-interest bearing floor plan loans) and an available credit of $68.2 million and $82.9 million,
respectively. We have not used derivative instruments to alter the interest rate characteristics of
our borrowings.
Long-term debt includes amounts related to lease transactions, which is disclosed in Note 7 as
long-term financed lease debt. These amounts will amortize over the period of the lease instruments
with no cash affect to the Company. A change in interest rates would result in no additional
interest expense related to financed lease debt. We had no long-term debt and long-term financed
lease debt as of September 30, 2010 and December 31, 2009.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of our management,
including our Acting Co-Chief Executive Officer, Senior Vice President
and Acting Co-Chief Executive Officer, Senior Vice President &
Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as of September
30, 2010. Based on this evaluation, our Acting Co-Chief Executive Officer, Senior Vice President
and Acting Co-Chief Executive Officer, Senior Vice President &
Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and to provide reasonable assurance that such information is
accumulated and communicated to our management, including our Acting
Co-Chief Executive Officer, Senior Vice President
and Acting Co-Chief Executive Officer, Senior Vice President &
Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving
their objectives as specified above. Management does not expect, however, that our disclosure
controls and procedures will prevent or detect all error and fraud. Any control system, no matter
how well designed and operated, is based upon certain assumptions and can provide only reasonable,
not absolute, assurance that its objectives will be met. Further, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the three months ended
September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 1, 2010, GTSI received a notice from the Small Business Administration (the SBA) that
the SBA was temporarily suspending GTSI from any future contract awards from the federal
government. The suspension notice cited that it was based on evidence of the commission of fraud
or a criminal offense in connection with GTSI obtaining, attempting to obtain and performing
certain subcontracts with small businesses in 2007 and a lack of business integrity or business
honesty that seriously or directly affects the present responsibility of GTSI as a government
contractor. On October 19, 2010, GTSI Corp entered into an administrative agreement with the U.S.
Small Business Administration (the SBA Agreement). Pursuant to the SBA Agreement, the SBA lifted
the temporary federal contract suspension it imposed on GTSI on October 1, 2010. As a result, GTSI
may, subject to the SBA Agreement, resume full business with most of its existing clients and
pursue new contracts with the federal government.
Pursuant to the SBA Agreement, GTSI agreed that it will not obtain or attempt to obtain any new
federal governmental contracts, subcontracts or any business, which in any capacity, whether
directly or indirectly is intended to benefit small businesses, including task orders and options
on existing contracts. This includes benefits in circumstances involving small businesses serving
as prime contractors and joint ventures with small businesses. GTSI will also discontinue
participating in the SBAs mentor-protégé program. GTSI further agreed to retain an SBA-approved
monitor to regularly report to the SBA on GTSIs compliance with the SBA Agreement and applicable
government contracting laws and regulations (the Monitor). On November 8, 2010, GTSI agreed to
retain Debarment Solutions Institute, LLC as the Monitor and the SBA has approved that Monitor.
The term of the SBA Agreement commenced on October 19, 2010 and will terminate on the earlier of
(a) October 19, 2013, (b) the 90th day after the SBAs Office of Inspector Generals
notification of the completion of its continuing investigation of GTSI, or (c) the notification
date of any proposed debarment of GTSI by the SBA.
In connection with the SBA Agreement, GTSI accepted the voluntary resignations of Scott Friedlander
as Chief Executive Officer, President and a Director of GTSI, and Charles DeLeon as a Senior Vice
President and General Counsel of GTSI, both effective as of October 26, 2010. In connection with
their voluntary resignations the Company has entered into separation agreements with Messrs.
Friedlander and DeLeon. GTSI also agreed to suspend three other employees for the term of the SBA
Agreement. GTSI committed to adopt, implement and maintain a self-governance program that includes
a business ethics program that covers all employees. As part of the business ethics program, GTSI
will create a position and designate an employee as GTSIs ethics officer, who will be responsible
for managing all aspects of the business ethics program. At least once each calendar year, GTSI
will conduct an internal audit of its business practices, procedures, policies and internal
controls for compliance with the SBA Agreement, GTSIs Code of Business Ethics and the special
requirements regarding government contracting and report the results of such audit to the SBA and
the Monitor. The Board of Directors approved the selection of the Ethics Officer on November 3,
2010.
The U.S. Attorneys Office for the Eastern District of Virginia is reviewing the same subject
matter that led to the SBA temporary federal contract suspension and the resulting SBA Agreement
and we are providing information in response to that inquiry.
GTSI will continue to cooperate with the continuing investigation of its conduct as a subcontractor
for certain small businesses. The continuing investigation of GTSI by the Government could result
in administrative, civil or criminal penalties, including a recommendation that may adversely
affect GTSIs ability to serve as a government contractor.
By letter dated May 24, 2010 the U.S. SBA advised 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.
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On September 14, 2010, GTSI filed a Complaint in the Chancery Court of Delaware against EyakTek;
two of EyakTeks three owner/membersThe Eyak Corporation (Eyak Corp.), which owns 51% of
EyakTek, and Global Technology LLC, which owns 12% of EyakTek, (collectively, the Member
Defendants); and several of EyakTeks directors and officers (the Individual Defendants). GTSI
is the third member of EyakTek (GTSI owns 37% of EyakTek). The Complaint alleges that EyakTek and
the Member Defendants have breached EyakTeks Operating Agreement by taking certain actions without
GTSIs approval, which is required under the Operating Agreement, including taking actions leading
to the making of an unsolicited offer to acquire GTSI and the continuation of the business
operations of EyakTek after its graduation from the SBAs 8(a) Business Development Program. The
Complaint further alleges that the Individual Defendants have breached their fiduciary duties and
the implied covenant of good faith and fair dealing by allowing EyakTek to take these actions. The
Complaint seeks declaratory and injunctive relief, plus attorneys fees, against all of the
Defendants. On November 3, 2010, GTSI filed an Amended Complaint in the Chancery Court, which
clarifies the nature of relief sought and adds an additional claim for breach of EyakTeks
Operating Agreement based upon EyakTeks refusal to recognize GTSIs designated director to
EyakTeks board of directors, among other matters.
On September 20, 2010, the Member Defendants and Individual Defendants filed an Arbitration Demand
with the American Arbitration Association asserting that GTSIs claims in the Delaware Chancery
Court are subject to arbitration. The Arbitration Demand also asserted that GTSIs filing of the
Delaware Complaint violated EyakTeks Operating Agreement and constituted a breach of fiduciary
duty and the implied covenant of good faith and fair dealing that GTSI allegedly owes to EyakTek as
a member of EyakTek. The Arbitration Demand seeks declaratory relief, damages, and attorneys fees
against GTSI.
GTSI, the Member Defendants and the Individual Defendants have filed motions in the Chancery Court
to dismiss and/or stay the others lawsuit/arbitration. The Delaware Chancery Court heard both
sets of motions on November 5, 2010. As of the date hereof, the Delaware Chancery Court has not
issued any decision in respect of the hearing on the motions. The parties have agreed that the
Amended Complaint does not change the nature of the pending motions to dismiss and/or stay.
By letter dated November 1, 2010, Eyak Corp., through the same counsel that represents EyakTek,
advised GTSI that Eyak Corp. was the owner of 100 shares of GTSIs common stock, and as a GTSI
stockholder Eyak Corp. was demanding that GTSI investigate and take actions on matters set forth in
the letter, including matters that are the subject of GTSIs claims before the Delaware Chancery
Court. Eyak Corp. alleges that GTSIs failure to approve the continuation of EyakTeks business
operations constitutes a breach of fiduciary duties by GTSIs directors and officers and demands
that they cure this breach by approving the continuation of EyakTeks business operations. Eyak
Corp. further demands, if the alleged breach is not cured, that GTSI investigate prior disclosure
related to the disputes and litigation with EyakTek, make appropriate disclosures, including to the
SBA and GTSIs lenders, and investigate GTSIs financial statements and account balances in respect
of GTSIs 37% interest in EyakTek. Further, EyakTek demands that GTSI bring action against GTSIs
employees, officers and directors responsible for the foregoing alleged actions to recover damages
for GTSI. GTSIs board of directors will take such action in connection with the asserted matters
as it deems necessary or appropriate and in the best interest of GTSI and its stockholders, in
accordance with Delaware law.
In addition to the matters discussed above, we have, in the normal course of business, certain
claims, including legal proceedings, against us and against other parties. Except as discussed
above, we believe the resolution of these claims will not have a material adverse effect on our
results of operations or financial position. However, the results of any legal proceedings cannot
be predicted with certainty. Further, from time-to-time, agencies of the U.S. Government,
including the SBA and the U.S. Attorneys Office as discussed above, investigate whether our
operations are being conducted in accordance with applicable regulatory requirements. U.S.
Government investigations of us, whether relating to government contracts or conducted for other
reasons, could result in administrative, civil or criminal liabilities, including repayments, fines
or penalties being imposed upon us, or could lead to suspension or debarment from future U.S.
Government contracting. U.S. Government investigations often take years to complete. We believe,
based upon current information, that, except as discussed above, the outcome of any such
government investigations will not have a material adverse effect on our financial position.
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Item 1A. Risk Factors
In addition to the other information set forth in this Form 10-Q and our 2009 Form 10-K, you should
carefully consider the risk factors associated with our business discussed under the heading Risk
Factors in Part I, Item 1A of our 2009 Form 10-K. Since the filing of our 2009 Form 10-K, the
Company has identified some additional important factors that may cause actual results to differ
materially from those in forward-looking statements and form historical trends.
Compliance with the SBA Agreement and the outcome of the Government investigations thereunder may
have a material adverse effect on the Company.
The Companys compliance with the SBA Agreement and the outcome of the continuing related
Government investigations of GTSI, which could result in administrative, civil and criminal
penalties, could have a material adverse effect on the Companys business, financial condition and
operating performance. Also, the Companys failure to generate additional sales or reduce
operating costs to offset for lost sales due to the restrictions in the SBA Agreement and the
administrative costs related to complying with the SBA Agreement could have a material adverse
effect on our working capital.
If
the Company is unable to attract a new Chief Executive Officer, or
unable to attract or retain other key management personnel, it might not be able to
find suitable replacements on a timely basis, and the Companys business could be
disrupted.
The Companys success is largely dependent upon the continued service of a relatively small group
of experienced and knowledgeable key executive and management personnel. The Company believes that
there is, and will continue to be, intense competition for qualified personnel in our industry, and
there is no assurance that the Company will be able to attract a new
Chief Executive Officer or there is no assurance the Company will be
able to attract or retain the personnel necessary
for the management and development of its business. Turnover, particularly among senior management,
can also create distractions as the Company searches for replacement personnel, which could result
in significant recruiting, relocation, training and other costs, and can cause operational
inefficiencies as replacement personnel become familiar with the Companys business and operations.
In addition, manpower in certain areas may be constrained, which could lead to disruptions over
time. The loss or unavailability of one or more of the Companys executive officers or the
inability to attract or retain key employees currently or in the future could have a material adverse effect on
the Companys business, financial condition and results of operations.
We may be adversely affected by increased governmental and regulatory scrutiny or negative
publicity.
Governmental scrutiny from regulators and law enforcement agencies with respect to our business
practices, our past actions and other matters has increased dramatically in the past year. The
current political and public sentiment regarding our involvement with small business has resulted
in a significant amount of adverse press coverage, as well as adverse statements or charges by
government officials. Press coverage and other public statements that assert some form of
wrongdoing, regardless of the factual basis for the assertions being made, often results in some
type of investigation by regulators, legislators and law enforcement officials or in lawsuits.
Responding to these investigations and lawsuits, regardless of the ultimate outcome of the
proceeding, is time consuming, expensive and can divert the time and effort of our senior
management from our business. Adverse publicity, governmental scrutiny and legal and enforcement
proceedings can also have a negative impact on our reputation and on the morale and performance of
our Company.
We believe that EyakTeks future financial performance may be adversely affected because of their
graduation from the SBAs Section 8(a) BD Program.
Because EyakTek graduated from the SBAs Section 8(a) BD Program earlier this year, we believe that
EyakTeks financial performance may be adversely affected in the near future. In addition, because
we have been unable to resolve our disputes with EyakTek and its other members, we may have to
consider seeking dissolution of EyakTek pursuant to its operating agreement.
The risks discussed in our 2009 Form 10-K and above are not the only risks we face. Additional
risks and uncertainties not currently known to us or that we currently believe to be immaterial
also may materially adversely affect our business, financial condition and/or results of operations
in the future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Recent Sales of Unregistered Sales
None.
(b) Use of Proceeds
None.
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(c) Issuer Purchases of Equity Securities
On December 19, 2008, the Companys Board of Directors (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 GTSI
common stock through May 27, 2011 for an aggregate purchase price not to exceed $5 million,
replacing GTSIs stock repurchase program announced in December 2008. The Amended and Restated
Agreement, entered into on October 19, 2010, prohibits GTSI from purchasing any of its common
stock. The following table sets forth the purchases of our common stock we made during the three
months ended September 30, 2010:
(a) | Total Number of | Maximum Dollar | ||||||||||||||
Total | Shares Purchased | Value of Shares | ||||||||||||||
Number | Average | as Part of | that May Yet Be | |||||||||||||
of Share | Price Paid | Publicly Announced | Purchased Under the | |||||||||||||
Period | Purchased | per Share | Plans or Programs | Plans or Programs | ||||||||||||
July 1 to July 31 |
14,146 | $ | 5.49 | 13,316 | $ | 1,766,736 | ||||||||||
August 1 to August 31 |
4,175 | $ | 5.44 | 4,175 | $ | 1,744,041 | ||||||||||
September 1 to
September 30 |
| $ | | | $ | 1,744,041 | ||||||||||
18,321 | $ | 5.48 | 17,491 | |||||||||||||
(a) | The July purchases include 830 shares surrendered to cover the tax withholding obligation with respect to the vesting of 2,310 restricted stock awards. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. RESERVED
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits set forth in the Exhibit Index are filed as part of this Quarterly Report on Form
10-Q.
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SIGNATURES
Pursuant to the requirements 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. |
||||
Date: November 15, 2010 | /s/ SANDRA B.GILLESPIE | |||
Sandra B. Gillespie | ||||
Acting Co-Chief Executive Officer, Senior Vice President | ||||
Date: November 15, 2010 | /s/ PETER WHITFIELD | |||
Peter Whitfield | ||||
Acting Co-Chief Executive Officer, Senior Vice
President and Chief Financial Officer |
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Exhibit Number |
Description | |||
4.01 | Rights Agreement, dated as of September 14, 2010, between GTSI Corp.
and American Stock Transfer & Trust Company, LLC, which includes the Form of Right Certificate as
Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (1) |
|||
10.1 | Employment Agreement dated August 4, 2010 between the Registrant and
Scott Friedlander * (2) |
|||
10.2 | Third Amendment to Credit Agreement dated as of September 15, 2010
among GTSI Corp., Castle Pines Capital LLC and Wells Fargo Foothill LLC (3) |
|||
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) |
* | Management contracts and compensatory plans and arrangements required to be filed pursuant to Item 15 (c). | |
(1) | Incorporated by reference to the Registrants current report on Form 8-K dated September 13, 2010. | |
(2) | Incorporated by reference to the Registrants current report on Form 8-K/A dated August 4, 2010. | |
(3) | Incorporated by reference to the Registrants current report on Form 8-K dated September 15, 2010. |
33