Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - GTSI CORPFinancial_Report.xls
EX-32 - EX-32 - GTSI CORPd294414dex32.htm
EX-31.2 - EX-31.2 - GTSI CORPd294414dex312.htm
EX-23.1 - EX-23.1 - GTSI CORPd294414dex231.htm
EX-23.2 - EX-23.2 - GTSI CORPd294414dex232.htm
EX-31.1 - EX-31.1 - GTSI CORPd294414dex311.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

Commission File Number: 001-34871

 

 

GTSI CORP.

(Exact name of registrant as specified in its charter)

 

Delaware   54-1248422

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2553 Dulles View Drive, Suite 100, Herndon, VA   20171-5219
(Address of principal executive offices)   (Zip Code)

703-502-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.005 par value   NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive DataFile required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  ¨    NO  x

The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of June 30, 2011 was $42, 361,175.

The number of shares outstanding of the registrant’s common stock on March 20, 2012 was 9,672,177.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K are incorporated by reference to GTSI’s proxy statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of GTSI’s Stockholders scheduled to be held on May 25, 2012.

 

 

 


Table of Contents

CONTENTS

 

     Page  

PART I

  

Item 1. Business

     3   

Item 1A. Risk Factors

     10   

Item 1B. Unresolved Staff Comments

     17   

Item 2. Properties

     17   

Item 3. Legal Proceedings

     17   

Item 4. Mine Safety Disclosures

     18   

PART II

  

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     18   

Item 6. Selected Financial Data

     20   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22   

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     37   

Item 8. Financial Statements and Supplementary Data

     38   

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     69   

Item 9A. Controls and Procedures

     69   

Item 9B. Other Information

     69   

PART III

  

Item 10. Directors, Executive Officers and Corporate Governance

     70   

Item 11. Executive Compensation

     70   

Item  12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     70   

Item 13. Certain Relationships and Related Transactions, and Director Independence

     70   

Item 14. Principal Accounting Fees and Services

     70   

PART IV

  

Item 15. Exhibits, Financial Statement and Schedules

     70   

Signatures

     71   

Exhibit Index

     72   


Table of Contents

Disclosure Regarding Forward-Looking Statements

Readers are cautioned that this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), relating to our operations that are based on our current expectations, estimates and projections. Words such as “expect,” “believe,” “anticipate,” “plan,” “intend” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from what is expressed or projected in these forward-looking statements. The reasons for this include the factors discussed in Item 1A, Risk Factors, of this Annual Report on Form 10-K. We specifically disclaim any obligation to update these forward-looking statements. These forward-looking statements should not be relied on as representing our estimates or views as of any subsequent date.

PART I

 

ITEM 1. BUSINESS

Company Overview

All references in this Annual Report on Form 10-K (this “Form 10-K”) to “GTSI,” “Company,” “we,” “us” and “our” refer to GTSI Corp. and its consolidated subsidiaries (unless the context otherwise indicates).

GTSI is a leading provider of technology solutions and services to the Federal government, state and local governments, and to prime contractors. Founded in 1983, the Company has helped meet the unique information technology (“IT”) needs of more than 1,700 governmental agencies nationwide. GTSI professionals draw on their deep customer knowledge, strategic partnerships, and more than 740 industry certifications to guide agencies in selecting the most cost-effective technology solutions and services available. GTSI has extensive capabilities and past performance in data center, networking, collaboration, security, custom Capability Maturity Model Integration (CMMI) Level 3 software development, and cloud computing solutions. In addition, GTSI's advanced engineering, integration, and financial services and broad portfolio of contracts ease the planning, purchasing, and deployment of solutions, and facilitates the management of mission-critical IT throughout the lifecycle.

We offer a competitive mix of logistical and procurement support to the Federal government, state and local governments, and prime contractors. Our total sales were $356.7 million, $666.7 million and $761.9 million for the years ended December 31, 2011, 2010 and 2009, respectively. The approximate percentage of our sales by customer type for the years ended December 31 2011, 2010, and 2009 was:

 

September 30, September 30, September 30,
       2011     2010     2009  

Federal Government

       72     67     72

Prime Contractors

       18     29     23

State and Local Governments

       10     4     5
    

 

 

   

 

 

   

 

 

 

Total

       100     100     100

On August 15, 2011, GTSI acquired Information Systems Consulting Group, Inc (“InSysCo”), a privately held Federal IT professional service provider. This acquisition expands GTSI's Services capabilities in the areas of software and database development and maintenance.

GTSI Solutions

GTSI leverages expertise in storage, computing, security, networking, and mobility technologies into packaged IT infrastructure solutions that include:

 

   

Data Center Consolidation and Optimization Solutions

 

   

Server and Desktop Virtualization Solutions

 

   

Cloud Computing Solutions

 

   

Network Modernization Solutions

 

3


Table of Contents
   

Unified Communications and Collaboration Solutions

 

   

Database and Software Development Solutions

 

   

Asset Management Solutions

 

   

Financial Services Solutions (TLM)

GTSI designs, deploys, manages and supports these solutions using:

 

   

Innovative COTS hardware and software from technology innovators

 

   

Professional and program management services from certified engineers and project managers

 

   

Proven, repeatable processes

 

   

Multiple contract vehicles

GTSI has evolved into the first government-focused IT infrastructure solutions provider offering a Technology Lifecycle Management (TLM) approach. Through disciplined and proactive planning, TLM provides the framework for agencies to effectively and efficiently address all stages of the technology lifecycle, from initial assessment to acquisition, implementation, refresh, and disposal. The GTSI Financial Services provides government agencies with a solution to overcome budget challenges while implementing mission-critical IT infrastructure solutions.

GTSI Services

GTSI Services provide our government customers with the resources to design, configure, implement and support state-of-the art IT products and solutions; and facilitates the Technology Lifecycle Management method of managing scalable, IT infrastructure as a service. Our services ensure that the products we deliver are interoperable, efficient, support the customer environment, and protect customers’ investments. The Services strategy supports our government contracts, company sales and partner efforts for growth in the market. We believe that providing these services along with industry-leading manufacturer products helps differentiate GTSI from its competitors.

GTSI also provides software development and information technology services through an award-winning, wholly owned subsidiary, InSysCo. InSysCo is comprised primarily of former Federal government business and IT personnel. InSysCo blends these skill-sets with industry experts who have extensive experience in IT development, using industry best practices. InSysCo's technical, business, and operations personnel average over 30 years of IT and business experience. InSysCo is appraised at CMMI Level 3, and is adept at understanding business requirements and developing systems within budget and on schedule.

Our project managers and certified engineers can design, deploy, manage, and support integrated IT infrastructure solutions in helping Federal clients with:

 

   

Software Development and Maintenance

 

   

Program and Project Management

 

   

Database Development and Maintenance

 

   

Legacy Systems Modernization

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

10-K.

Business Strategy

GTSI is committed to providing information technology solutions and services to government customers. We believe there are opportunities to increase profitability of our existing business by growing our financial and professional services revenue, and by expanding our relatively low market share within the growing government IT market.

 

4


Table of Contents

GTSI continues to evolve as a provider of value-added enterprise information technology solutions that include both professional services and products to government and prime contractor customers. We have successfully provided consulting and technical assistance in support of complex and multi-vendor solutions as a prime contractor as well as a subcontractor. While larger sales transactions represent a small percentage of our total transactions, they represent the majority of our margin and profits. We are continuing our strategy of increasing the focus on larger, more profitable transactions, while improving processes to make the delivery of the smaller transactions more profitable. Specifically, we plan to:

Continue Focusing on the Government IT Market

Because of our exclusive focus on government, GTSI has developed the expertise and established the partner and customer relationships necessary to be a leader in this market. As a result, our marketing activities combined with sales activity have been effective at reaching and servicing our government customers at all levels to include chief information officers, procurement and contracting officers, information resource managers, as well as systems integrators, value-added resellers and prime contractors.

Leverage Technology Lifecycle Management (“TLM”)

GTSI provides TLM services for our government customers. TLM involves most aspects of the technology management process, including assessing and identifying technology needs, acquisition of those technologies, integration and implementation, ongoing services, asset disposal and financial services. We believe this model represents a distinctive advantage to our customers. Coupled with support services, technology refresh, and asset disposal, we offer our customers cost effective methods to manage technology infrastructure.

Retain and Obtain Government Contracts and Utilize Flexible Contract Vehicles

GTSI holds a wide range of government contracts, including multimillion dollar, multiyear contract vehicles with the U.S. Department of Defense (“DoD”) and several Federal Civilian agencies, as well as multiple award schedules and blanket purchasing agreements with DoD, Federal Civilian agencies and state and local agencies. In addition, we also serve as a subcontractor, providing products and services to other companies holding government contracts. GTSI intends to continue identifying and pursuing contract vehicles that best leverage our broad selection of solutions, services, integration and distribution capabilities and partner relationships.

Continue to expand our Solutions and Services businesses through strategic acquisitions and organic growth

In August 2011, we executed on our strategy to expand professional services and completed the acquisition of InSysCo, a systems integrator, solutions and services provider to Federal, state and local governments. GTSI also continues to develop and deliver information technology solutions that include products from OEM partners in the areas of Client End-Points, Networking, Data Center and Security. GTSI will continue to enable said solutions through consulting, integration, delivery and support services.

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

In addition to offering a comprehensive line of computer hardware, software and peripheral products, GTSI offers pre- and post-sales technical support and assistance in the selection, configuration, installation and maintenance of the products and systems that we sell. We offer a wide range of IT solutions and products plus the convenience, flexibility and cost savings of obtaining infrastructure technology solutions from a centralized source. As we interact with our customers, we focus on providing high quality customer services associated with the order, delivery, installation and repair of the products we sell. In addition to our heritage product offerings, we also have capabilities to meet our customers’ needs with regard to data centers, networks, client devices and physical security.

 

5


Table of Contents

Customers

Federal government & Prime Contractors

GTSI has been dedicated to the Federal, state and local government marketplaces since our incorporation in 1983. Historically, at least 20% of our revenue comes from prime contractors. Our most significant subcontracts are with companies such as NCI, Lockheed Martin, Northrop Grumman, Raytheon, and Jacobs Engineering. Our top customer relationships include the U.S. Department of Army, U.S. Department of Veterans Affairs, Department of Homeland Security, Internal Revenue Service (“IRS”) and the Federal Bureau of Investigation. While GTSI derives the majority of its sales from DoD and Federal Civilian sectors; we are also focused on continuing to increase our positions in the state and local government and U.S. Intelligence marketplaces. The breakout of our Federal government sales is approximated below:

 

September 30, September 30, September 30,
       2011     2010     2009  

DoD

       37     30     38

Federal Civilian Agencies

       43     40     37

Prime Contractors

       20     30     25
    

 

 

   

 

 

   

 

 

 

Total

       100     100     100

State and Local

GTSI’s sales in state and local government markets are generated mostly from county and city agencies. Cities and counties are faced with maintaining government services, including urban security and safety, that improve the quality of life for constituents. With reduced budgets and workforce, agencies are forced to re-examine core competencies and outsource labor to maximize the efficiencies provided by advancing technology. Automating processes and achieving operational efficiency are essential to cutting costs and addressing budget constraints. The U.S. Communities Program provides a contract vehicle that enables GTSI to address customer requirements, offer a needs assessment, procure best-of-breed technologies and be responsible for the delivery.

Because Federal funds are available to state and local governments for protection against terrorist and criminal threats, we plan to increase our state and local business by focusing our Physical Security practice on education, city infrastructure, maritime ports and airports. In addition, our Mobile Evidence Capture (“MEC”) practice focuses on law enforcement and public safety. MEC enables digital in-car video evidence to be captured, transmitted, stored and retrieved without human manipulation to quickly and effectively comply with prosecution processes. Much like Physical Security solutions, MEC is moving from analog to digital, leveraging GTSI technical resources, competencies in security, wireless, networking and storage while using existing processes for project management and services implementation.

Contracts

GTSI achieves its sales through Federal, state and local government contracts and open market procurements. GTSI holds multiple contracts that include indefinite delivery/indefinite quantity (“IDIQ”) contracts, blanket purchase agreements (“BPAs”), and stand-alone contracts.

We typically pursue formal government Request For Quotes (RFQ’s) and Request For Proposals (RFP’s). The basis for award on many of these contracts is “best value” to the government, which can be a combination of price, management and technical expertise, past performance or other factors specified in the RFQ/RFP. We seek to use our professional services and other delivery capabilities, vendor relationships, purchasing power, supply chain management and procurement expertise to compete successfully on Federal government bid opportunities. These procurements may involve millions of dollars in total sales, span multiple years and provide a purchasing vehicle for many government agencies. Items offered under our contracts include IT hardware and software as well as program/project management services, technical/engineering services, life-cycle maintenance and training services.

Many of our contracts allow GTSI to deliver comprehensive, enterprise-wide solutions that include both products and professional services. GTSI has established a team of experienced program managers to increase the size and scope of our program/project portfolio and manage programs of increasing complexity.

Indefinite Delivery/Indefinite Quantity (“IDIQ”)

GTSI holds a number of IDIQ contracts pursuant to which the government establishes a purchasing vehicle without specifying purchase dates or quantity. There are three types of IDIQ contracts: government-wide acquisition contracts (“GWAC”), multiagency contracts and single agency contracts. A GWAC is a task-order or delivery-order contract for information technology established by a single Federal agency for government-wide use upon approval by the Office of Management and Budget, while MACs accept orders from the same agency, and from other agencies under the authority of the Economy Act.

 

6


Table of Contents

One of our largest IDIQ contracts is the GSA Schedule 70 contract for the sale of IT products and services. The schedule 70 contract is a GWAC contract and our current contract has valid pricing through March 20, 2016.

GSA contracts provide government agencies, and state and local governments with an efficient and cost-effective means for buying commercial IT products and services. GSA purchasers may place unlimited orders for products under GSA contracts.

Blanket Purchase Agreements (BPA)

Many Federal customers establish BPAs with multiple GSA contract holders. The main purpose/advantage for establishing a BPA is to streamline the ordering process by limiting the competition pool. Most BPA’s also allow the ordering agencies to obtain better pricing based on volume ordering, and specialized services to address specific agency needs or preferences.

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

State and Local

State and local contracting vehicles generally fall into two categories: individual competitive procurements for specific IT solutions or state and locally based IDIQ contracts. State and local procurements typically require formal responses from a prospective bidder. Compliance is required with each state’s code of procurement regulations to successfully market and sell to the state. GTSI currently maintains several state and local IT contracts, regularly submits written bids to state and local governments and is on a number of state and local government bid lists.

In 2009, GTSI was re-awarded the U.S. Communities (“USC”) contract for a four-year term with a two to three-year extension option. U.S. Communities is a pre-competed national cooperative purchasing agreement available to cities, counties, special districts (airport, water, etc.), state agencies, K-12 schools, higher education, and large non-profits such as hospitals and clinics in all 50 U.S. states. Our USC contract is our primary vehicle for the state and local sales organization. Entering our ninth year with the U.S. Communities Contract, we have established programmatic relationships with customers to offer the operational efficiencies that the U.S. Communities contract can allow, with GTSI providing professional services to ensure project delivery, enabling our customer to focus on their constituent business objectives.

In addition, state and local government agencies are also able to utilize GSA Schedules to satisfy their requirements. Multi-state contracts enable individual states to utilize the buying power of multiple states to reduce costs based on volume purchasing.

The solutions sold under the USC contract utilize competitive labor rates for professional services on a firm-fixed- price or time-and-material basis. Volume discounts are available to public agencies and are offered on a case-by-case basis depending on agency commitment and buying power. With solutions such as Physical Security, Data Center Virtualization and Modernization, and MEC as a focus, our USC contract allows us to maintain compliance with funding milestones, act as the project manager, and provide the delivery engineering and project management services to achieve customer acceptance and mission compliance.

Stand-Alone/Open Market

Some buying organizations also choose not to leverage existing contracts to compete their requirements. In these instances the buying organization issues an RFQ/RFP which results in a separate Stand-Alone contract. The pricing proposed under such vehicles is often referred to as “open market pricing” because it is not based on previously negotiated/established pricing/rates. We also sell enterprise products and services to government-serving prime contractors, including systems integrators through open market procurements. Certain contract vehicles also allow a small percentage of open market pricing to be included to supplement those products and services that are under contract. This amount is typically less than $2,500.

 

7


Table of Contents

Strategic Partner Relationships

GTSI maintains strong relationships with a core set of strategic partners. These partners are industry leaders and are established in the government market. Our strategic partners include: Cisco, Hewlett Packard, Crossmatch Technologies, Microsoft, Dell, Oracle, Net App, and Hitachi.

Additionally, we establish and enhance alliances with specialized technology companies that complement our core partners to address our customer needs for their solutions environment.

GTSI offers our partners several advantages in the government market by providing:

 

   

A superior ability to design, procure, install, operate, and refresh solutions through our infrastructure as a service business model

 

   

A gateway to the complex government market through a significant number of diverse contract vehicles

 

   

Access to government customers through GTSI’s proactive sales force providing solutions, services and products

 

   

Lower cost overhead associated with government contractor compliance and procurement regulations

Our vendor agreements vary, but typically they permit us to purchase products for combining with integration and professional services for transactions with government customers. Very few of our agreements require us to purchase any specified quantity of product. GTSI usually requires our partners to provide us with supply and price protection for the duration of specifically signed government contracts. Other than supply agreements under certain government contracts, our vendor agreements are typically terminable by GTSI or the vendor on short notice, at will or immediately upon default by either party, and may contain limitations on vendor liability. These vendor agreements also generally permit GTSI to return previous product purchases at no charge within certain time limits for a restocking fee or in exchange for the vendor’s other products.

Our strategic partners may provide us with various forms of marketing and sales financial assistance, including sales incentives, market development funds, cooperative advertising and sales events. Partners may also provide sell-through and other sales incentives in connection with certain product promotions.

Inventory Management

During 2011, we purchased approximately 70% of the products we sold directly from manufacturers and the remaining amount from distributors and resellers. Products are shipped to our customers both from our ISO 9001:2008 Integration and Distribution Center and directly by our suppliers. The receiving, inventory and shipping processes in our Integration and Distribution Center are highly automated. Products are systemically tracked while in the facility through the use of handheld scanners which capture product information and status triggered by receipt, transfer and shipment. Our shipping process captures product model numbers and serial numbers via bar code scan and ties them directly to order and carrier information. We ship products with a wide variety of carriers, using automation that selects the best carrier based on customer location, size of shipment, and desired service levels. We are able to negotiate favorable rates with many carriers, including FedEx and UPS.

We perform a comprehensive physical inventory each January and supplement inventory with regularly scheduled, system-controlled cycle counts throughout the year. Our cycle count schedule is constructed to result in complete inventory coverage approximately every two months.

We have a radio frequency identification (“RFID”) tagging solution that enables us to apply RFID labels to case and pallet-load shipments that satisfy DoD Gen-2 requirements.

 

8


Table of Contents

Marketing and Sales

GTSI’s strategic marketing initiatives continue to focus on positioning the Company’s value as a systems integrator, with substantial solutions and services capabilities. In 2011, GTSI used tradeshows, advertising, seminars and webinars as primary marketing tools to reach key audiences. In early 2010, GTSI launched a redesigned corporate website (www.gtsi.com), as a key positioning tool and a vehicle for educating government executives on the latest trends in IT. The website in particular focuses on the IT technology areas of Virtualization, Cloud Computing and Physical Security, where GTSI has deep expertise and capability.

GTSI continues to utilize its technology-centric Customer Briefing Center and Solutions Lab to demonstrate the Company’s growing capabilities and best practices for addressing the key challenges faced by government IT decision makers. The marketing and branding efforts reaffirm the Company’s belief that it has the resources and expertise to deliver best business practices, engineering skills and financial options that combine myriad benefits into a single delivery source of leading-edge information technology to governments.

Our sales organization is focused on understanding the current and emerging requirements of our customers, and demonstrating how the Company delivers comprehensive solutions that encompass the products and services that meet those needs. The efforts continue to provide coverage that supports existing customers, while at the same time advancing initiatives that focus on new accounts and new solution offerings to potential customers.

Competition

The government IT market is highly competitive with a wide variety of technology and service players. As the Federal, state and local governments continue to face budget shortfalls, competition will be more intense. GTSI’s competitors include traditional hardware and software manufacturers and resellers, mid-tier systems integrators, and IT infrastructure solutions and service providers.

We believe that the principal competitive factors in the government IT market include:

 

  Past performance within the government market

 

  Expertise in government procurement processes where standardized contracts exist and where recommended changes will be implemented

 

  Existing customer and partner relationships for which there is traditionally a high barrier to entry

 

  Technical expertise

 

  Logistical capability

 

  Customer service and support

The growing trend in government to consolidate and reduce operational costs as well as the current economic environment is likely to increase the needs of government agencies to extend the lifecycle of their existing legacy systems to deliver mission-critical services. Flexible styles of IT infrastructure service, such as infrastructure as a service (“IaaS”), software as a service (“SaaS”) and cloud computing will become more and more established. An emphasis on data center consolidation and use of “green” IT will contribute to the competitive nature of this market. Government agencies need guidance developing migration strategies and technology solution maps to extract more from their existing infrastructure while working toward managed services environments.

With our agility and deep IT infrastructure expertise, as well as our long-term customer relationships, we are well-positioned to help our customers migrate, implement and operate new infrastructure environments. To enhance our strategic position in the government infrastructure services market, we are investing in our services and solutions offerings as well as training and certification programs for our engineering and technical staff.

 

9


Table of Contents

Backlog

We identify an order as backlog as soon as we receive and accept a written customer purchase order. Backlog fluctuates significantly from quarter to quarter because of the seasonality of the Federal government ordering patterns and changes in inventory availability of various products. Our backlog includes hardware and software orders that have not shipped or delivered (“unshipped backlog”) as well as orders that have shipped or delivered but cannot be recognized as revenue at the end of the reporting period, because title passes normally to our customers when the orders reach the destination. Backlog also includes services that have not been performed. Total backlog, as of December 31, 2011, excluding leasing revenue, was $86.6 million compared to $123.2 million as of December 31, 2010. Unshipped backlog as of December 31, 2011 was approximately $77.7 million, compared to $104.3 million as of December 31, 2010.

Employees

As of December 31, 2011 we had 455 employees, including 267 in sales, marketing and professional services; 52 in operations; and 136 in finance, IT, contracts and legal and other support functions. Of the 455 employees, 135 are employees from InSysCo.

None of our employees are represented by a labor union and we have not experienced any labor-related work stoppages.

Available Information

GTSI is traded on the NASDAQ Global Market under the symbol GTSI (See Item 5 of this Form 10-K). Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements for our annual stockholders’ meeting, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on our web site at www.GTSI.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). You may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. Information on our website is not incorporated by reference into this report and does not otherwise form a part of this report.

 

ITEM 1A. RISK FACTORS

There are many factors that affect our business and results of operations, some of which are beyond our control. The following is a description of some important factors that may cause actual results to differ materially from those in forward-looking statements and from historical trends.

Compliance with GTSI’s administrative agreement with the U.S. Small Business Administration (the “SBA Agreement”) and the outcome of the Federal government investigations thereunder may have a material adverse effect on the Company.

The Company’s compliance with the SBA Agreement, which is addressed in Item 3, and the outcome of related Federal government investigations of GTSI, which could result in administrative, civil and criminal penalties, may have a material adverse effect on the Company’s business, financial condition and operating performance. The Company’s failure to generate additional sales or reduce operating costs to offset for lost sales due to the restrictions in the SBA Agreement and the costs of complying with the SBA Agreement may have a material adverse effect on our financial performance.

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 over the past year. The current political and public sentiment over the past year regarding our involvement with small businesses has resulted in a significant amount of adverse press coverage. Press coverage and other public statements that assert some form of wrongdoing, regardless of any factual basis, may result in 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 may divert our senior management’s time and effort 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.

 

10


Table of Contents

We depend heavily on Federal government contracts. A delay in the Federal budget process or a Federal government shutdown may adversely affect our sales and gross margins, operating results and cash flows.

For the year ended December 31, 2011, we derived approximately 90% of our sales from the Federal government or from prime contractors under Federal government contracts. We expect to continue to derive most of our sales from work performed under Federal government contracts. Those contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds on a fiscal year basis even though contract performance may extend over many years.

The programs in which we participate must compete with other Federal government programs and policies for consideration during the budget and appropriation process. Concerns about increased deficit spending, along with continued economic weakness place pressure on Federal customer budgets. While we believe that our programs are well aligned with national defense and other priorities, shifts in domestic spending and tax policy, changes in security, defense, and intelligence priorities, the affordability of our products and services, general economic conditions and developments, and other factors may affect a decision to fund or the level of funding for existing or proposed programs.

In years when the Federal government does not complete its budget process before the end of its fiscal year (September 30), Federal government operations typically are funded through a continuing resolution (CR) that authorizes Federal government agencies to continue to operate, but does not authorize new spending initiatives. When the Federal government operates under a continuing resolution, delays can occur in the procurement of products and services. While this has not yet had a material effect on our business, a continuing resolution that is further prolonged or extended through the entire government fiscal year or a Federal government shutdown may have a material adverse effect on our financial performance. The Federal government 2012 budget was covered partly by continuing resolutions that ran from October to December and is currently operating under an omnibus spending bill through October 1, 2012.

We rely on a small number of large transactions for significant portions of our sales and gross margins, and our operating results and cash flows may decline significantly if we fail to secure additional large transactions.

We rely on the Federal government to provide a substantial portion of our sales either directly or through prime contractors with which we work. We have derived, and believe that we will continue to derive, a significant portion of our sales from a limited number of projects and transactions with the Federal government. For the year ended December 31, 2011 approximately 90% of our sales came from the Federal government or from prime contractors under Federal government contracts. The completion or cancellation of a large project or a significant reduction in scope may significantly reduce our sales and gross margins. In addition, if we fail to secure an equal number of large transactions in the future, our results may be negatively impacted. Any dispute, failure to exercise an extension, or contract not renewed as a result of a re-compete may have a material adverse impact on our future operating results and gross margins.

If the Company is unable to attract and retain key management and sales personnel, it might not be able to find suitable replacements on a timely basis, and the Company’s business may be disrupted.

The Company’s success is largely dependent upon the continued service of a relatively small group of experienced and knowledgeable key executive, management and sales personnel. In addition, 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 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 may result in significant recruiting, relocation, training and other costs, and can cause operational inefficiencies as replacement personnel become familiar with the Company’s business and operations. In addition, manpower in certain areas may be constrained, which may lead to disruptions over time. The loss or unavailability of one or more of the Company’s executive officers or the inability to attract or retain key management and sales employees currently or in the future may have a material adverse effect on the Company’s business, financial condition and results of operations.

 

11


Table of Contents

We continue to shift our business model from a reseller of products to a high-end solutions provider and this new model has certain risks, including increased competition, which may impact future results.

We continue to evolve from a reseller of commodity IT products to a provider of value-added solutions to our government customers. A number of risks are inherent in this strategy. We may not be able to maintain a workforce that has the technical skills to provide more complex technology to customers. Services and solutions require different internal accounting, tracking, and project management procedures, and there is no assurance we will be able to implement and maintain those necessary procedures. We are now competing against organizations which have greater experience and past performance in selling solutions to government customers. Some of these competitors also have significantly greater financial, technical and marketing resources, generate greater sales and have greater name recognition than we do. Additionally, our efforts spent on evolving to a high-end solutions business model may detract from operating results.

We believe our ability to continue to compete also depends in part on a number of competitive factors, including:

 

  Expertise in government procurement processes where standardized contracts exist

 

  Existing customer and vendor relationships (for which there is traditionally a high barrier to entry)

 

  Technical expertise

 

  Logistical capability

 

  The ability of our clients or competitors to hire and retain project managers and other senior technical staff

 

  The price at which others offer comparable technical solutions

 

  The extent of our competitors’ responsiveness to client needs

If we are unable to compete effectively we may experience operating losses and our market share may decline, adversely affecting our results of operations and financial condition. We also will need to continue to develop additional internal technical capabilities to identify, develop, market and sell more complex solutions, and there is no assurance we will be successful in these endeavors.

Any issue that compromises our relationship with the Federal government would cause serious harm to our business.

Our sales are highly dependent on the Federal government’s demand for IT products. Direct and indirect sales to numerous Federal government agencies and departments accounted for 90%, 96% and 95% of our sales in 2011, 2010 and 2009, respectively. We believe that Federal government contracts will continue to be a source of the majority of our sales for the foreseeable future. For this reason, any issue that compromises our relationship with Federal government agencies would cause serious harm to our business. A material decline in overall sales to the Federal government as a whole, or to certain key agencies thereof, may have a materially adverse effect on our results of operations. Among the key factors in maintaining our relationships with Federal government agencies are:

 

  Our performance on individual contracts and delivery orders

 

  The strength of our professional reputation

 

  The relationships of our key executives with customer personnel

 

  Our compliance with complex procurement laws and regulations related to the formation, administration and performance of Federal government contracts

 

12


Table of Contents

To the extent that our performance does not meet customer expectations, or our reputation or relationships deteriorate, this would cause a negative effect on our sales, profitability and cash flow. Noncompliance with government procurement regulations or contract provisions may result in substantial monetary fines or damages, suspension or debarment from doing business with the Federal government, and civil or criminal liability.

Substantially, all of our government contracts are terminable at any time at the government’s convenience or upon default. If a government customer terminates one of our contracts for convenience, we may recover, at most, only our incurred or committed costs, settlement expense, and profit on work completed prior to the termination. Upon termination of a government contract for default, the government reserves the right to recover the excess costs of procuring the specified goods and services from a different contractor although GTSI would reserve the right to appeal. The effect of unexpected contract terminations would negatively impact our financial results.

Adverse changes in Federal government fiscal spending may have a negative effect on our sales, gross margin, and cash flow.

Changes in Federal government spending policies or budget priorities may directly affect our financial performance. Among the factors that may materially harm our business are:

 

  A significant decline in spending by the Federal government in general or by specific departments or agencies in particular

 

  Changes in the structure, composition and/or buying patterns of the Federal government

 

  The adoption of new laws or regulations changing procurement practices

 

  Delays in the payment of our invoices by government payment offices

These or other factors may cause Federal government agencies and departments to reduce their purchases under contracts, to exercise their right to terminate contracts, or not to exercise options to renew contracts, any of which would cause us to lose future revenue.

If we fail to comply with our Second Amended Credit Agreement, we may not be able to continue to operate our business.

The affirmative, negative and financial covenants of our Second Amended and Restated Credit Agreement (“Second Amended Credit Agreement”) impose certain operating restrictions and financial and reporting covenants on us. These restrictions and conditions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The financial covenants require us, among other things, 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 (i) 1.20 to 1.00 as of the last business day of January, February, March, April, May, June, October, November and December and (ii) 1.15 to 1.00 as of the last business day of July, August and September

 

  Maintain a minimum Total Debt Service Coverage Ratio of 1.25 to 1.00 as of the end of each fiscal month

The Company was in compliance with all financial covenants in the Second Amended Credit Agreement as of December 31, 2011.

While the Company believes that we will remain in compliance with all of the financial and reporting covenants in the Second Amended Credit Agreement, there can be no assurance that we will continue to do so. A breach of any of the covenants or restrictions in the Second Amended Credit Agreement may constitute an event of default resulting in our lenders discontinuing lending or declaring all outstanding borrowings, including our inventory financing, to be due and payable. In such event, we would need to find additional or alternative financing, if available, to refinance any such accelerated obligations. There can be no assurance that such financing would be available.

 

13


Table of Contents

Our business may be negatively affected by current global economic and credit conditions.

Our Second Amended Credit Agreement is provided by several financial institutions that share the committed financing under the credit agreement. Economic and credit market conditions have presented banks and financial institutions with significant challenges, which has led a number of such entities to seek capital from the Federal government. Although we monitor the ability of our lenders to fulfill their responsibilities, future market conditions may affect the ability of one or more of these financial institutions to provide the financing that has been committed under the Second Amended Credit Agreement. The inability to access our Second Amended Credit Agreement could have a material, adverse effect on our business, results of operations, and liquidity.

Infrastructure failures may have a material adverse effect on our business.

We are highly dependent on our infrastructure to process orders, track inventory, ship products in a timely manner, prepare invoices to our customers, recognize revenue and otherwise carry on our business in the ordinary course. In 2008, GTSI launched a large upgrade to the enterprise systems to gain advantage of features provided by the software vendor as well as utilize new architecture tools for supply chain fulfillment. As of December 31, 2011, GTSI continued to enjoy stabilized systems, but we cannot be assured that possible failures will not occur in the future. GTSI continues to plan for risk mitigation should a minor infrastructure disruption occur and as such will enforce operational continuity plans which are from time to time updated as needed.

Any material weaknesses in our internal control over financial reporting may have a material adverse effect on our business and a negative impact on our stock price.

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Any evaluation of the effectiveness of controls is subject to risks that those internal controls may become inadequate in future periods because of changes in business conditions, changes in accounting practice or policy, or that the degree of compliance with the revised policies or procedures deteriorates. Our ability to maintain effective internal controls over all processes depends on our continued success at hiring and preserving adequate resources for ensuring that the accounting for all areas of the business complies with U.S. generally accepted accounting principles.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters may significantly affect our financial results.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including revenue recognition, stock-based compensation, receivables, inventories, self-insurance, income taxes and litigation, are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management may significantly change our reported or expected financial performance.

If we fail to align costs with our sales levels, net losses may result in future years.

Our profitability is a function of our ability to generate sales, improve our efficiency, and control costs. We plan our operating expense levels based primarily on forecasted sales levels. These expenses and the impact of long-term commitments are relatively fixed in the short-term. A short fall in sales may lead to operating results being below expectations because we may not be able to quickly reduce our fixed expenses in response to short term business changes. In addition any reductions in workforce may have significant risks, including decreases in employee morale and the failure to meet operational targets due to the loss of employees.

If we are unable to control our costs or generate sales to cover the costs required to run our business, net losses may continue in future years and our business may be adversely affected.

 

14


Table of Contents

Our quarterly sales, operating results and cash flows are volatile, which makes our future financial results difficult to forecast.

Our sales, operating results and cash flows have been, and are expected to continue to be, subject to significant fluctuations from quarter to quarter due to a number of factors including:

 

  The seasonality of our business due to the Federal government’s buying and funding patterns

 

  Fluctuations in our gross margins due to variations in the mix of products sold

 

  The number, size and scope of orders from our customers

 

  Demand for our services generated by strategic partnerships and certain prime contractors

 

  Availability of price protection, purchase discounts and rebate programs from vendors

 

  Contractual terms and degree of completion of projects

 

  Changes in our sales cycles as we move towards solution selling

Our recent level of product gross margins may not be sustainable. In addition, changes in services gross margin may result from various factors such as changes in the mix between technical support services and advanced services, as well as the timing of service contract initiations and renewals. As a consequence, sales volumes and operating results for future periods are difficult to predict and, therefore, prior results are not necessarily indicative of results to be expected in future periods.

Because we sometimes work with third parties, any failure by these third parties to satisfactorily perform their obligations may hurt our reputation, operating results and competitiveness.

We offer certain of our services to our customers through various third-party service providers engaged to perform these services on our behalf. In addition, we outsource parts of our operations to third-parties and may continue to explore opportunities to outsource others. In these engagements, we may engage subcontractors or we may act as subcontractor to the prime contractor of an engagement. If these third parties fail to maintain adequate levels of support, do not provide high quality services or cease or reduce operations, our business, operations, customer relations and sales may be negatively impacted and we may be required to pursue replacement third-party relationships, which we may not be able to obtain on as favorable terms or at all. In addition, the inability to negotiate terms of a contract with a third party, the refusal or inability of these third parties to permit continued use of their services by us, or the termination by the client or prime contractor of our services or the services of a key subcontractor would harm our operating results.

Our dependence on certain strategic partners (vendors) makes us vulnerable to the extent we rely on them.

We rely on a concentrated number of strategic partners for the majority of our hardware, software and related services needs. The terms of agreements with our vendors vary, but typically permit us to purchase products and services, that may be combined with integration and professional services for transactions with our government customers. Our vendor agreements are typically terminable by GTSI or the vendor on short notice, at will or immediately upon default by either party. If we can no longer obtain our hardware and software needs from our major suppliers due to mergers, acquisitions or consolidation within the marketplace, material changes in their partner programs, their refusal to continue to supply to us on reasonable terms or at all, and we cannot find suitable replacement suppliers, it may have a material adverse impact on our future operating results and gross margins.

Any recent or potential future acquisitions, strategic investments or mergers may subject us to significant risks that may harm our business.

Our long-term strategy includes identifying and acquiring, investing in or merging with providers of product offerings that complement our business. Currently, our financing agreement prohibits any acquisitions without our lender’s prior consent. Acquisitions would involve a number of risks and present financial, managerial and operational challenges, including:

 

  Diversion of management attention from running our existing business

 

  Possible additional material weaknesses in internal control over financial reporting

 

15


Table of Contents
  Increased expenses including legal, administrative and compensation expenses related to newly hired employees

 

  Increased costs to integrate the technology, personnel, customer base and business practices of the acquired company with our own

 

  Potential exposure to material liabilities not discovered in the due diligence process

 

  Potential adverse effects on our reported operating results due to possible write-down of goodwill and other intangible assets associated with acquisitions

 

  Acquisition financing may not be available on reasonable terms or at all

Any acquired business, technology, service or product may significantly under-perform relative to our expectations, and we may not achieve the benefits we expect from our acquisitions. For all these reasons, our pursuit of an acquisition, investment or merger may cause our actual results to differ materially from those anticipated.

Any potential future new lines of business may subject us to significant risks, any of which may harm our business.

Our long-term strategy may include new lines of business within the Federal and commercial business arena. Any new lines of business would involve risks and may present financial, managerial and operational challenges. The results may significantly under-perform relative to our expectations, and we may not achieve the benefits we expect, which may have a material short term adverse impact on our future operating results and gross margins.

The risks discussed 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.

Impairment of our goodwill or intangible assets may adversely impact our results of operations.

Our acquisition of InSysCo resulted in goodwill valued at approximately $9.4 million and other purchased intangible assets valued at approximately $4.1 million as of December 31, 2011. This represents 8.2% of the assets recorded on our balance sheet. Goodwill and indefinite-lived intangible assets are reviewed periodically for impairment. Other intangible assets that are deemed to have finite useful lives will continue to be amortized over their useful lives but are also reviewed for impairment when events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.

Charges to operations may occur in the event of a future impairment. In addition, a decrease in the price of our stock may occur in the future and may also affect whether we experience any impairments in future periods. If an impairment is deemed to exist in the future, we would be required to write down the recorded value of these intangible assets to their then-current estimated fair values. If a write down were to occur, it could have a materially adverse impact on our results of operations and our stock price.

Potential impacts to reputation and business operations if harmed as a result of cyber security incident or other risks of data or system compromise

As a government contractor and a public company, it cannot be ignored that we are potential targets of malicious cyber security threats or compromise. We process credit card payments as well as store customer and partner data which if compromised, could harm our reputation or our operational functions as a result of the attack. While GTSI takes measures to minimize potential threats through external third party vulnerability scans and penetration testing, the climate of threats are ever evolving and gaining in abundance and methods. As a company that relies on the supply chain integrations with our vendors and customers, any risk or attack to those systems could harm GTSI due to outages or undue burdens resultant from those cyber risks of attack events. As a result, our business information, customer, supplier, and other business partner data may be lost, disclosed, accessed or taken without their consent.

 

16


Table of Contents

Any such loss, disclosure or misappropriation of, or access to, customers’ or business partners’ information or other breach of our information security can result in legal claims or legal proceedings, including regulatory investigations and actions, may have a serious impact on our reputation and may adversely affect our businesses, operating results and financial condition. Furthermore, the loss, disclosure or misappropriation of our business information may adversely impact our business, operating results and financial condition.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

Item 2. PROPERTIES

GTSI’s primary business is conducted from its corporate headquarters complex and distribution center located in Northern Virginia. We do not own any real property. GTSI executed a new 10-year lease for a new corporate headquarters in Herndon, Virginia in 2007 and moved into the approximately 104,000 square-foot facility in 2008. GTSI has a number of lease options for current and future space commitments under its 10-year term lease. In 2008, GTSI relocated its datacenter to a separate location owned and operated by a third party. The 42-month agreement, which includes options for additional years, calls for the hosting and providing power services for a company installed datacenter. GTSI’s primary distribution and integration operations are located in a facility in Chantilly, Virginia. In June 2011, GTSI extended the Chantilly, Virginia lease for an additional five years expiring in December 2016 and reduced its leased footage from approximately 142,000 square feet to approximately 96,000 square feet.

Our corporate headquarters is a multi-tenant facility located in Herndon, Virginia, approximately five miles from our distribution and integration center on the Route 28 corridor, across from Dulles International Airport. The facility has an efficient space plan that incorporates a number of resources that enhances our business development such as a Client Solutions Center, upgraded testing labs and meeting spaces to enable our employees to take advantage of amenities that are provided to the tenants of the facility.

We believe the facilities we are retaining are in good condition and suitable to meet our current needs for the conduct of our business. For additional information regarding our obligations under leases, see Note 17 of the consolidated financial statements in Part II, Item 8 of this Form 10-K.

 

ITEM 3. LEGAL PROCEEDINGS

On October 1, 2010, the U.S. Small Business Administration (“SBA”) notified GTSI that GTSI was temporarily suspended from any future Federal government contracting based on alleged 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 affected the responsibility of GTSI as a government contractor. On October 19, 2010, the SBA lifted its temporary Federal contract suspension on GTSI pursuant to an administrative agreement with GTSI (the “SBA Agreement”).

Pursuant to the SBA Agreement, GTSI agreed that it will not obtain or attempt to obtain any new Federal government contract, subcontract or any business that is intended to benefit small businesses, including task orders and options on existing contracts. As also required by the SBA Agreement, GTSI retains a SBA-approved monitor who reports regularly to the SBA on GTSI’s compliance with the SBA Agreement and applicable Federal government contracting laws and regulations. The SBA Agreement will terminate on the earlier of (a) October 19, 2013, (b) the 90th day after the SBA’s Office of Inspector General’s notification of the completion of its continuing investigation of GTSI, or (c) the notification date of any proposed debarment of GTSI by the SBA.

The U.S. Attorney’s Office is reviewing the same subject matter that led to the SBA’s temporary suspension of GTSI from Federal government contracting and the resulting SBA Agreement. GTSI has provided information in response to that inquiry.

GTSI will continue to cooperate with the continuing investigations of its conduct as a subcontractor for certain small businesses. The continuing investigations of GTSI by the Federal government may result in administrative, civil or criminal penalties, including a recommendation that may adversely affect or terminate GTSI’s ability to serve as a government contractor.

 

17


Table of Contents

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. We believe the resolution of these other claims that we have in the normal course of our business 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, Federal government agencies, including the SBA and the U.S. Attorney’s Office as discussed above, investigate whether our operations are being conducted in accordance with applicable regulatory requirements. Federal government investigations of us, whether relating to government contracts or conducted for other reasons, may result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or may lead to suspension or debarment from future Federal government contracting. Federal government investigations often take years to complete.

 

ITEM 4. MINE SAFETY DISCLOSURES

None

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The annual meeting of GTSI’s stockholders is scheduled to be held at 11:00 a.m. on May 25, 2012, at the Company’s headquarters located at 2553 Dulles View Drive, Suite 100, Herndon, VA.

Price Range of Common Stock

GTSI’s common stock is traded on the NASDAQ Global Market under the symbol GTSI. As of Feb XXX, 2012, there were XXX holders of record of the Company’s common stock. The following stock prices are the high and low sales prices of GTSI’s common stock during the calendar quarters indicated.

 

September 30, September 30, September 30, September 30,

Quarter

     2011        2010  
       High        Low        High        Low  

First

     $ 4.84         $ 4.42         $ 6.28         $ 5.05   

Second

     $ 5.52         $ 4.17         $ 6.67         $ 5.46   

Third

     $ 5.41         $ 4.23         $ 7.05         $ 5.04   

Fourth

     $ 4.53         $ 3.99         $ 7.25         $ 3.55   

GTSI’s transfer agent is American Stock Transfer & Trust Company, 59 Maiden Lane Plaza Level, New York, NY 10038; telephone 1-800-937-5449.

Dividends

The Company has never paid any cash dividends and currently has no plans to pay cash dividends on its common stock. Also, as discussed in Note 10 to GTSI’s consolidated financial statements, included in Part II, Item 8 of this Form 10-K, the Second Amended Credit Agreement prohibits GTSI from paying any cash dividends without the consent of the lenders.

Issuer Purchases of Equity Securities

On June 8, 2009, GTSI’s 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, replacing GTSI’s stock repurchase program announced in December 2008. In October, 2010 GTSI Corp. entered into the Amended Credit Agreement which among other things, prohibits GTSI from purchasing any of its common stock.

 

18


Table of Contents

On August 30, 2011, GTSI entered into a Second Amendment to Second Amended Credit Agreement which permits GTSI to purchase its common stock subject to certain terms and conditions, including that such purchases cannot exceed an aggregate purchase price of $5 million. On August 31, 2011, the Board of Directors authorized a share repurchase program pursuant to Rules 10b5-1 and 10b-18 of the Exchange Act permitting the Company to repurchase its common stock up to an aggregate purchase price of $5 million.

The following table sets forth the purchases of our common stock we made each month during the quarter ended December 31, 2011.

 

September 30, September 30, September 30, September 30,
                         Total Number of Shares        Maximum Dollar Value  
       (a)        Average        Purchased as Part of        of Shares that May Yet  
       Total Number of        Price Paid        Publicly Announced        Be Purchased Under the  

Month

     Shares Purchased        per Share        Plans or Programs        Plans or Programs  

October

       4,155         $ 4.62           3,807         $ 1,740,234   

November

       671         $ 4.53           —           $ 1,740,234   

December

       —           $ —             —           $ 1,740,234   
    

 

 

      

 

 

      

 

 

      
       4,826         $ 4.61           3,807        
    

 

 

      

 

 

      

 

 

      

 

(a) 1,019 shares purchased in the fourth quarter of 2011 were surrendered to cover the tax withholdings obligation with respect to the vesting of $3,162 restricted stock awards.

Equity Compensation Plans

The following table summarizes information regarding GTSI’s equity compensation plans as of December 31, 2011 (GTSI does not have any equity compensation plans that have not been approved by its stockholders).

 

September 30, September 30, September 30,
       (a)        Weighted        Number of Shares Available  
       Number of Shares to be        Average Exercise        for Future Issuance Under  
       Issued upon Exercise /Lapse        Price of        Equity Compensation Plans  
       of Outstanding Options /        Outstanding        (excluding shares reflected in  

Plan Category

     Restricted Stock Awards        Options        column (a))  

Equity compensation plans approved by stockholders

       925,226         $ 7.39           1,608,423   

 

19


Table of Contents

PERFORMANCE GRAPH—UPDATE

The following graph is furnished pursuant to SEC Exchange Act regulations. It compares the annual percentage change in the cumulative total return on GTSI’s common stock with the cumulative total return of the NASDAQ Composite Index and a Peer Index of companies with the same four-digit standard industrial classification (SIC) code as the Company (SIC Code 5045 — Computers and Peripheral Equipment and Software)1 for the period commencing December 31, 2006 and ending December 31, 2011. The stock price performance shown on the graph below is not necessarily indicative of future price performance.

 

September 30, September 30, September 30, September 30, September 30, September 30,
       12/31/2006        12/31/2007        12/31/2008        12/31/2009        12/31/2010        12/31/2011  

GTSI

       100.00           106.81           64.98           53.71           51.00           45.02   

NASDAQ Composite-Total Returns

       100.00           110.66           66.41           96.54           114.06           113.16   

SIC Code Index

       100.00           84.67           55.08           84.24           91.82           85.11   

 

LOGO

The 13 companies listed in SIC Code 5045 are: APPLIED VISUAL; DIGITAL RIVER, INC.; GTSI; INGRAM MICRO, INC.; INFONOW CORP.; NAVARRE CORPORATION; EPLUS INC.; SCANSOURCE INC.; SMART CARD MKTG;TECH DATA CORP.;TRANSET CORP.;WAYSIDE TECH GP

 

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data is qualified in its entirety by reference to, and should be read in conjunction with, the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K. The statement of operations data set forth below for the three years ended December 31, 2011, 2010 and 2009 and the balance sheet data as of December 31, 2011 and 2010 has been derived from GTSI’s audited consolidated financial statements that are included in Part II, Item 8 of this Form 10-K. The statement of operations data for the year ended December 31, 2008 and 2007 and the balance sheet data as of December 31, 2009, 2008 and 2007 is derived from audited consolidated financial statements of GTSI that are not included herein.

 

20


Table of Contents
September 30, September 30, September 30, September 30, September 30,
       For the years ended December 31,  

Statement of Operations Data:

     2011 (a)      2010      2009        2008      2007  
       (in thousands, except per share data)  

SALES

     $ 356,666       $ 666,711       $ 761,870         $ 821,165       $ 723,465   

COST OF SALES (b)

       294,302         586,371         660,418           713,812         618,745   
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

GROSS MARGIN

       62,364         80,340         101,452           107,353         104,720   

SELLING, GENERAL & ADMINISTRATIVE EXPENSES (c)

       70,875         87,636         98,107           103,848         106,335   
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

(LOSS) INCOME FROM OPERATIONS

       (8,511      (7,296      3,345           3,505         (1,615

INTEREST AND OTHER INCOME, NET

       9,861         7,466         6,320           2,524         416   
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

INCOME (LOSS) BEFORE TAXES

       1,350         170         9,665           6,029         (1,199
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

INCOME TAX EXPENSE (BENEFIT) (d)

       844         1,100         4,209           (1,806      568   
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

NET INCOME (LOSS)

     $ 506       $ (930    $ 5,456         $ 7,835       $ (1,767
    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

EARNINGS (LOSS) PER SHARE

                  

Basic

     $ 0.05       $ (0.10    $ 0.56         $ 0.80       $ (0.18

Diluted

     $ 0.05       $ (0.10    $ 0.56         $ 0.79       $ (0.18

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

                  

Basic

       9,654         9,604         9,706           9,760         9,571   

Diluted

       9,679         9,604         9,762           9,865         9,571   

 

September 30, September 30, September 30, September 30, September 30,
Balance Sheet Data:      As of December 31,  

(in thousands)

     2011        2010        2009        2008        2007  

Working capital

     $ 79,638         $ 77,511         $ 62,167         $ 67,473         $ 69,985   

Total assets

       163,840           203,844           288,631           247,629           226,667   

Borrowings under credit facility

       —             —             —             22,387           18,031   

Long-term liabilities, including debt

       3,779           3,044           17,598           5,101           20,432   

Total liabilities

       66,882           107,634           192,344           157,515           148,954   

Stockholders’ equity

       96,958           96,210           96,287           90,114           77,713   

 

(a) 2011 includes the acquistion of InSysCo as of August 16, 2011.

 

(b) Cost of sales for the year ended December 31, 2010 included a charge of $4.6 million for the write-off of a financing receivable related to the SBA Agreement.

 

(c) Selling, General and Administrative for the year ended December 31, 2010 included a charge of $3.0 million related to the legal and accounting fees related to the SBA Agreement.

 

(d) Income tax benefit for the year ended December 31, 2008 included the reversal of the tax valuation allowance of $4.6 million.

 

21


Table of Contents

All notes referenced are in Item 8 of this Form 10-K. Our historical results are not necessarily indicative of our results for any future period.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our audited consolidated financial statements and notes included in Part II, Item 8 of this Form 10-K. Historical results and percentage relationships among any amounts in the consolidated financial statements are not necessarily indicative of trends in operating results for any future period. We use the terms “GTSI,” “Company,” “we,” “our,” and “us” to refer to GTSI Corp. and its consolidated subsidiaries (unless the context otherwise requires).

Overview

GTSI has more than 25 years of experience in selling information technology (“IT”) products and solutions to Federal, state and local governments and to prime contractors that are working directly on government contracts. During this period, our customers have come to rely on GTSI to translate business and mission requirements into practical technology solutions for today’s government. We believe our key differentiators to be our strong brand among government customers, extensive contract portfolio, close relationships with a wide variety of vendors, and a technology lifecycle management framework approach.

The IT solutions we offer to our customers are enterprise product-based, with many including a service component. Enterprise product-based components are identified and purchased by government procurement officers under standard government contracts, ranging from single agency contracts to those that are available to the entire U.S. Federal government or state government contracts such as U.S. Communities. In March 2011, GTSI was awarded by the General Services Administration a GSA IT Schedule 70 Contract for the sale of IT products and services. GTSI is classified as a “large business” on this schedule which covers the base period of March 21, 2011 through March 20, 2016, plus, if exercised by GSA, one five-year extension period.

We connect leading information technology vendors, products and services inside the core technology areas critical to government success by partnering with global IT leaders such as Cisco, Hewlett Packard, Crossmatch Technologies, Microsoft, Dell, Oracle, Net App, and Hitachi. GTSI has strong strategic relationships with hardware and software industry leading OEMs and includes these products in the solutions provided to our customers.

We continue to align our solutions with the IT infrastructure needs and requirements of our customers in the areas of Client End-Points, Networking, Data Center and Security. GTSI has expertise in emerging government requirements in IT Infrastructure such as collaboration, virtualization and security and developed innovative approaches to Desktop & Server Virtualization, Unified Communications and Physical Security.

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 financial services provides flexible financing options for the entire technology lifecycle and such options may be a better fit for an agency’s operating and maintenance budget than a capital expenditure. We believe this model represents a distinctive advantage to our customers.

The ramifications of the SBA Agreement continued to impact our sales and operating expenses during 2011. If the Company fails to generate additional sales, mitigate impacted opportunities and reduce operating costs to offset reduced sales and added administrative costs related to our obligations and restrictions under the SBA Agreement it may have a material adverse effect on the Company’s business, results of operations and financial condition in future periods

On August 15, 2011, GTSI acquired InSysCo, a privately held Federal IT professional service provider. This acquisition expands GTSI’s professional services capabilities in the areas of software and database development and maintenance.

 

22


Table of Contents

Summarized below are some of the possible material trends, demands, commitments, events and uncertainties currently facing the Company:

 

  We depend heavily on Federal government contracts. A delay in the Federal government budget process or a Federal government shutdown may adversely affect our sales and gross margins, operating results and cash flows. The Federal government 2012 budget was covered partly by continuing resolutions that ran from October to December and the Federal government is currently operating under an omnibus spending bill through October 1, 2012.

 

  In the near term, we face uncertainties due to the current business environment. We have continued to experience a longer contracting process with DOD agencies, which is one of our traditionally stronger markets. This delay, along with an overall decrease in Federal government IT spending may have a negative impact on our financial condition, operating performance, revenue, income or liquidity.

 

  A shift of expenditures away from programs that we support may 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 our recent acquisition of InSysCo, we have recorded goodwill and intangible assets. The Company will be required to do impairment testing annually or when events dictate. An impairment of our goodwill or intangible assets may adversely impact our results of operations.

The Company’s financial results for the year ended December 31, 2011 were negatively impacted by effects of the SBA Agreement, delays in the passage of the Federal government’s budget for 2011, various government agencies spending trends, competitive pricing pressures and weak sales activity in certain pockets of the hardware business especially within DoD.

As a result of declining revenues, during the years ended December 31, 2011 and December 31, 2010, the Company reviewed its various divisions and departments and reduced the workforce by 81 employees and 78 employees, respectively, to adjust staffing levels to support the ongoing operations. The Company recorded severance related costs, which are included in SG&A expenses, of $1.3 million and $2.3 million for the years ended December 31, 2011 and 2010, respectively.

As discussed in more detail below:

 

  Our sales decreased approximately $310.0 million, or 46.5%, from 2010 to 2011;

 

  Gross margin decreased $17.9 million but gross margin as a percentage of sales increased 5.4 percentage points from 2010 to 2011;

 

  In 2011, SG&A expenses decreased approximately $16.7 million and increased as a percentage of sales by 6.7 percentage points from 2010 to 2011;

 

  Our net income for the year ended December 31, 2011was $0.5 million;

 

  Cash provided by operations activities totaled $64.7 million for the year ended December 31, 2011;

We continue to evolve as a provider of value-added infrastructure solutions that include both products and services to our government and system integrator customers. We continue to identify and eliminate certain redundancies within the Company and have terminated activities that have failed to yield adequate profitability. While the larger IT infrastructure solutions sales transactions represent a small percentage of our total transactions, they represent the majority of our margin and profits. Going forward, we will continue to focus on these larger, more profitable transactions, and drive processes and changes to make the delivery of the smaller transactions more profitable. In addition, we will continue to take other actions to become a profitable company, including continuing to execute our strategy to expand our professional services capability through acquisition.

 

23


Table of Contents

Critical Accounting Estimates and Policies

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We have included below our policies that are both important to our financial condition and operating results, and require management’s most subjective and complex judgments in determining the underlying estimates and assumptions.

The following list of critical accounting estimates and policies is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements in Item 8 of this Form 10-K. Accounting policies and estimates that management believes are most important to our financial condition and require management’s significant judgments and estimates pertain to revenue recognition, financing receivables, stock-based compensation, accounts payable, bids and proposals, valuation of purchased intangible assets, impairment of identifiable intangible and other long-lived assets and goodwill and income taxes. We have discussed the application of these critical accounting estimates and policies with the Audit Committee of our Board of Directors.

Revenue Recognition

We recognize revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. The majority of our sales relates to physical products and is generally recognized when title and risk of loss to the products sold passes to the customer. Based on our standard shipping terms, title generally passes upon the customer’s receipt of the products. This requires us to analyze sales near the end of reporting periods to estimate the amount of products in transit to the customer that cannot be recognized as revenue. Many of our sales of physical products are shipped to our customers directly from our vendor partners. The accurate recording of revenue for these transactions relies upon the accuracy of shipment dates we receive from our vendors and is subject to additional estimates and judgments by management.

In accordance with FASB ASC 985-25, Software Revenue Recognition, the Company recognizes software related revenue from re-selling third party software licenses that do not require significant production, modification or customization, when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured.

As discussed in Note 1 “New Accounting Pronouncements,” in Item 8, effective January 1, 2011 the Company adopted on a prospective basis for all new or materially modified arrangements entered into on or after January 1, 2011, the new accounting guidance for multiple-deliverable revenue arrangements and the new guidance related to the scope of existing software revenue recognition guidance. The guidance does not generally change the units of accounting for the Company’s revenue transactions. Most of the Company’s products and services qualify as separate units of accounting. The Company is still evaluating the impact from this adoption and does not expect that it will have a material impact on our consolidated financial statements.

The Company enters into revenue arrangements that may consist of multiple deliverables of its products and services based on the needs of its clients. These arrangements may include any combination of hardware, software, services and/or financing.

When a customer order contains multiple items such as hardware, software and services which are delivered at varying times, the Company determines whether the delivered items can be considered separate units of accounting as prescribed under FASB ASC 605-25, Revenue Recognition, Multiple-Element Arrangements (“ASC 605-25”). ASC 605-25 states that delivered items should be considered separate units of accounting if delivered items have value to the customer on a standalone basis and if delivery of undelivered items is probable and substantially in GTSI’s control.

 

24


Table of Contents

Generally, the Company is able to establish fair value for all elements of the arrangement. In these instances, revenue is recognized on each element separately. However, if the delivered items do not have stand alone value to the customer without additional services provided, the Company recognizes revenue on the contract as a single unit of accounting, based on either the completed-contract or proportional-performance methods as described below. The Company has allocated revenue from multiple-element arrangements to the multiple elements based on the relative fair value of each element, which was generally based on the relative sales price of each element when sold separately.

We also offer lease and other financing arrangements to customers to acquire technology. These arrangements typically have terms from two to four years and are generally accounted for as sales-type leases under FASB ASC 840, Leases.

Certain of our service and solution agreements require the evaluation of pattern of performance. Revenues on professional service contracts are generally recognized using the proportional-performance basis of accounting. For some professional services engagements the completed-performance method is used when there are customer-specified subjective acceptance criteria.

At the time of sale, we record an estimate for product returns based on historical experience. Management reviews the assumptions regarding the lag time and volume of sales returns at least on a quarterly basis, and changes in the estimates are recorded in the period in which they occur.

In accordance with FASB ASC 605-50, Revenue Recognition, Customer Payments and Incentives, we record vendor rebates received under our vendor incentive programs pursuant to a binding arrangement as a reduction of cost of sales based on a systematic and rational allocation that results in progress by the Company toward earning the rebate provided the amounts are probable and reasonably estimable. If the rebate is not probable and reasonably estimable, it is recognized as the milestones are achieved.

Financing Receivables

We enter into complex agreements with our customers to provide IT solutions with payment terms generally spread over a two to four-year period. Usually we monetize these future revenue streams by selling such receivables to third party financial institutions. We have master service agreements with multiple lenders each with varying terms. These agreements, as well as the individual transaction agreements, require significant analysis to determine whether the transfer of the receivable should be accounted for as a sale or a secured borrowing with pledge of collateral based on FASB ASC 860, Transfers and Servicing, criteria that require GTSI to effectively surrender control over the asset. The technical accounting and legal requirements involved are complex and subject to interpretation. Significant judgment is required to determine if we have effectively surrendered control over the asset. If certain criteria are met and control is surrendered, the transaction is recorded as financing revenue and associated expenses as cost of sales. If the transfer does not meet the criteria for a sale, the transaction is reported as a secured borrowing with pledge of collateral. The collateral remains on our balance sheet and revenues and cost of sales are recognized over the term of the agreement.

Stock-Based Compensation

The Company accounts for stock based compensation in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires that the cost of awards of equity instruments offered in exchange for employee services, including employee stock options, restricted stock awards, and employee stock purchases under the Company’s Employee Stock Purchase Plan (“ESPP”), are measured based on the fair value of the award on the measurement date of grant. The Company determines the fair value of options granted using the Black-Scholes-Merton option pricing model and recognizes the cost over the period during which an employee is required to provide service in exchange for the award, generally the vesting period. Under our ESPP, employees may make semiannual purchases of shares at a discount through regular payroll deductions for up to 15% of their compensation. These shares are at 85% of the closing price per share on the last day of the offering period. Compensation expense related to our ESPP represents the difference between the fair value on the date of purchase and the price paid. The fair value of restricted stock awards is based on the closing price of the Company’s common stock on the date of grant and is recognized as expense over the requisite service period of the awards.

 

25


Table of Contents

Accounts Payable

We purchase significant amounts of inventory each year and record an estimate of the payable based on the purchases as of the balance sheet date. For products shipped directly from our vendors to our customers, management makes estimates regarding the payable for shipped goods. As invoices are received, we record adjustments for actual prices paid. Changes in our estimate of the payable balance may be caused by changes in price between the order date and the receipt date related to volume discounts, changes in market rates, or special pricing promotions offered by our vendors.

Bids and Proposals

We amortize costs that are directly related to the acquisition of a long-term contract and that would have not been incurred but for the acquisition of that contract (incremental direct acquisition costs). As long-term contracts are awarded the related up-front incentive costs, which are specific incremental costs associated with the acquisition of long-term contracts, are recorded as prepaid/deferred assets and amortized over the term of the contract or five years, whichever is shorter.

Valuation of Purchased Intangible Assets

The Company allocates the purchase price paid in a purchase business combination to the assets acquired, including intangible assets and liabilities assumed at their estimated fair values. The excess of purchase price over these fair values is recorded as goodwill. Valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include the projected growth factors; future expected cash flows, discount rates, potential competitive developments and changes in the market. Additionally, estimates associated with the accounting for acquisitions may change as new information becomes available regarding the assets acquired and the liabilities assumed.

The Company amortizes its definite — lived intangible assets using an accelerated method that best approximates the proportion of the future cash flows estimated to be generated in each period over the estimated useful life of the applicable asset and evaluated on an annual basis to ensure continued appropriateness.

Impairment of Identifiable Intangible and Other Long-Lived Assets and Goodwill

In accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”), goodwill is not amortized, but instead tested for impairment at least annually. The Company will perform its annual impairment test as of July 31 of each year.

In accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), the Company reviews its long-lived assets, including property and equipment and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset.

Income Taxes

Determining our effective tax rate, provision for tax expense, deferred tax assets and liabilities and the related valuation allowance involves judgments and estimates. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in our consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Valuation allowances are provided against assets, including net operating losses, if it is anticipated that the asset is more likely than not to be unrealized through future taxable earnings or implementation of tax planning strategies. We record reserves for uncertain tax positions, which management believes are adequate. There was no valuation allowance at December 31, 2011 or December 31, 2010. Our effective tax rate in a given period may be impacted if we determine the allowance is or is not required, or if we were required to pay amounts in excess of established reserves. See Note 15 of the consolidated financial statements in Item 8 of this Form 10-K.

 

26


Table of Contents

Historical Results of Operations

The following table sets forth our historical statements of operations including dollar and percentage change from the prior periods indicated as well as the percentage of total sales for each period presented:

Summary

 

     2011     2010     2009     2011 vs 2010 change     2010 vs 2009 change  
     $     % of
Sales
    $     % of
Sales
    $     % of
Sales
    $     %     $      %  
     (dollars in millions)  

Sales

   $ 356.7        100.0      $ 666.7        100.0      $ 761.9        100.0        (310.0     (46.5 %)    $ (95.2      (12.5 %) 

Cost of sales

     294.3        82.5        586.4        87.9        660.4        86.7        (292.1     (49.8 %)      (74.0      (11.2 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross margin

     62.4        17.5        80.3        12.1        101.5        13.3        (17.9     (22.4 %)      (21.2      (20.9 %) 

SG&A

     70.9        20.0        87.6        13.2        98.1        12.9        (16.7     (19.1 %)      (10.5      (10.7 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

(Loss) income from operations

     (8.5     (2.5     (7.3     (1.1     3.4        0.4        (1.2     16.7     (10.7      (318.1 %) 

Interest and other income

     9.8        2.7        7.5        1.1        6.3        0.9        2.3        32.1     1.2         18.1

Income tax provision

     (0.8     (0.2     (1.1     (0.1     (4.2     (0.6     0.3        (23.3 %)      3.1         (73.9 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net Income

   $ 0.5        0.0      $ (0.9     (0.1   $ 5.5        0.7      $ 1.4        (154.4 %)    $ (6.4      (117.0 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Sales

 

     2011      2010      2009      2011 vs 2010 change     2010 vs 2009 change  
     $      % of
Sales
     $      % of
Sales
     $      % of
Sales
     $     %     $      %  
     (dollars in millions)  

Hardware

   $ 221.0         62.1       $ 463.1         69.5       $ 495.6         65.1       $ (242.1     (52.3 %)    $ (32.5      (6.6 %) 

Software

     73.3         20.5         130.2         19.5         182.4         23.9         (56.9     (43.7 %)      (52.2      (28.6 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Product

     294.3         82.6         593.3         89.0         678.0         89.0         (299.0     (50.4 %)      (84.7      (12.5 %) 

Integration

     2.0         0.5         3.9         0.6         3.6         0.5         (1.9     (50.0 %)      0.3         8.6
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Professional

     33.9         9.5         35.1         5.3         39.5         5.2         (1.2     (3.3 %)      (4.4      (11.0 %) 

Support

     11.9         3.3         12.1         1.8         12.5         1.6         (0.2     (1.6 %)      (0.4      (3.7 %) 

Total Services

     47.8         13.3         51.1         7.7         55.6         7.3         (3.3     (6.5 %)      (4.5      (8.1 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Financing

     14.6         4.1         22.3         3.3         28.3         3.7         (7.7     (34.4 %)      (6.0      (21.3 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Sales

   $ 356.7         100.0       $ 666.7         100.0       $ 761.9         100.0       $ (310.0     (46.5 %)    $ (95.2      (12.5 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total sales, consisting of product, services and financing revenue, decreased $310.0 million, or 46.5% from $666.7 million for the year ended December 31, 2010 to $356.7 million for the year ended December 31, 2011 and decreased $95.2 million or 12.5% from $761.9 million for the year ended December 31, 2009.

Product revenue as a percent of total revenue was 82.6% in 2011 and 89.0% in 2010, a decline of 6.4 percentage points. While overall revenue is down in all segments, there is a shift in the dollars as a percentage of sales to services which is consistent with our business strategy to focus on services which is a higher gross margin business. Service revenue, as a percentage of total revenue, increased by 5.6 percentage points, from 7.7% in 2010 to 13.3% in 2011. This increase is driven primarily by the acquisition of InSysCo which contributed $9.6 million dollars of services revenue from August 16, 2011 to December 31, 2011 and accounted for 2.7 percentage points of the increase.

Product revenue as a percent of total revenue was 89.0% in 2009 and 2010.

A more detailed discussion of each of GTSI’s sales categories follows.

Product

GTSI has strategic relationships with hardware and software industry-leading OEMs including Cisco, Microsoft, Hewlett Packard, Oracle, and Dell. GTSI packages their hardware, software and related license maintenance in the solutions provided to our customers.

 

27


Table of Contents

During the year ended December 31, 2011, product revenue decreased $299.0 million or 50.4% from $593.3 million in 2010 to $294.3 million in 2011. The declines in product sales for the year ended December 31, 2011 were driven by the continuing effects on our sales organization as a result of the temporary SBA suspension in October 2010, the delay in the Federal government’s passage of the budget for 2011, which delayed spending in various organizations, as well as an overall decrease in spending trends among various government agencies due to the weak economy. Hardware sales declined $242.1 million or 52.3% from $463.1 million in 2010. The decline is primarily volume related and can be seen across multiple sectors throughout the government including intelligence agencies, Department of Justice, Department of Treasury, Army, and other independent agencies of approximately $39 million, $24 million, $20 million, $15 million, and $14 million, respectively as well as system integrators and resellers of approximately $80 million and $18 million, respectively. Software revenue declined $56.9 million, or 43.7%, from $130.2 million. The decline in software sales is volume related and primarily attributable to the Department of Treasury, resellers, the Department of Justice, Department of Veterans Affairs, intelligence agencies, and other independent agencies of approximately $27 million, $9 million, $7 million, $6 million, $4 million, and $4 million respectively, offset by an increase in the Army and Marines of approximately $13 million and $7 million, respectively.

During the year ended December 31, 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 during 2009. The Company was also impacted during the three months ended December 31, 2010, by the temporary suspension and the SBA Agreement, which resulted in lost product sales the Company believed, would have been awarded to GTSI. Overall product revenue was down 12.5%, with hardware revenue declining 6.6% and software revenue decreasing 28.6% for 2010 as compared to 2009. Hardware sales decreased $32.5 million, from $495.6 million for the year ended December 31, 2009 to $463.1 million for the year ended December 31, 2010. In particular, hardware sales during the year ended December 31, 2010 to the Army, Department of Justice and Navy decreased by approximately $47 million, $17 million and $14 million, respectively; whereas hardware sales to our system integrators increased approximately $39 million. Software sales decreased $52.2 million, from $182.4 million for the year ended December 31, 2009 to $130.2 million for the year ended December 31, 2010, partially due to decreased software sales to the Marines and intelligence agencies of approximately $16 million and $11 million, respectively, during the year ended December 31, 2010.

Services

Services revenue includes the sale of professional services, resold third-party service products, hardware warranties and hardware maintenance. As detailed in Note 1, we net revenues where we are not the primary obligor and netted approximately $96.9 million in 2011, $131.7 million in 2010 and $160.5 million in 2009.

Services revenue decreased $3.3 million, or 6.5%, from $51.1 million in 2010 to $47.8 million in 2011. Of the decrease, $1.9 million, or 50.0%, was attributable to integration services due to the overall decline in government spending. Professional services, decreased $1.2 million or 3.3%, from $35.1 million in 2010 to $33.9 million in 2011. $9.6 million of professional services revenue includes InSysCo from August 16, 2011 through December 31, 2011, offset by a decline of $10.8 million in the base business which is directly correlated to the volume declines in hardware sales discussed above. The decrease in support services of $0.2 million, or 1.6%, to $11.9 million for the year ended December 31, 2011 from $12.1 million in 2010 is due to the a decline in gross sales of $35.0 million offset by decreased netting of $34.8 million. The gross sales decline is attributable to a reduction in sales to systems integrators, independent agencies, and resellers of approximately $20 million, $17 million, and $14 million, respectively offset by an increase in sales to Department of Homeland Security of approximately $17 million and Department of Treasury of approximately $5 million.

Services revenue decreased $4.5 million, or 8.1%, from $55.6 million in 2009 to $51.1 million in 2010. The majority of the sales decrease is attributable to the decline in professional services of $4.4 million, or 11.0%, from $39.5 million in 2009 to $35.1 million in 2011 due to a reduction of projects in 2010.

Financing

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.

 

28


Table of Contents

Financing revenue decreased $7.7 million, or 34.4%, from $22.3 million in 2010 to $14.6 million in 2011. The majority of the decline is due to the impact of lower sales across the organization resulting in fewer leases available to sell. Leases sold declined $8.8 million and annuity streams from in-house leases declined $1.3 million offset by an increase in the sale of previously leased equipment of $2.4 million.

Financing revenue decreased $6.0 million, or 21.3%, from $28.3 million in 2009 to $22.3 million in 2010; due to lower sales of new leases that were properly securitized under ASC 860. Leases sold that were properly securitized decreased $4.3 million, from $22.3 million in 2009 to $18.0 million in 2010.

Gross Margin

 

     2011      2010      2009      2011 vs 2010 change     2010 vs 2009 change  
     $      % of
Sales
     $      % of
Sales
     $      % of
Sales
     $     %     $      %  
     (dollars in millions)  

Hardware

   $ 24.8         7.1       $ 47.3         7.1       $ 55.6         7.3       $ (22.5     (47.6 %)    $ (8.3      (14.8 %) 

Software

     11.1         3.1         10.2         1.5         11.1         1.4         0.9        8.7     (0.9      (8.3 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Product

     35.9         10.2         57.5         8.6         66.7         8.7         (21.6     (37.7 %)      (9.2      (13.8 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Integration

     1.1         0.2         2.4         0.4         2.0         0.2         (1.3     (55.3 %)      0.4         23.0

Professional

     7.1         2.0         6.2         1.0         7.3         1.0         0.9        14.5     (1.1      (14.7 %) 

Support

     8.4         2.3         8.6         1.3         13.1         1.7         (0.2     (2.3 %)      (4.5      (34.4 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Services

     16.6         4.5         17.2         2.7         22.4         3.0         (0.6     (3.6 %)      (5.2      (23.2 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Financing

     9.9         2.8         5.6         0.8         12.4         1.6         4.3        76.6     (6.8      (54.8 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Gross Margin

   $ 62.4         17.5       $ 80.3         12.1       $ 101.5         13.3       $ (17.9     (22.4 %)    $ (21.2      (20.9 %) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total gross margin decreased $17.9 million, or 22.4%, from $80.3 million in 2010 to $62.4 million in 2011. As a percentage of total sales, gross margin increased 5.4 percentage points from 12.1% in 2010 to 17.5% in 2011.

Total gross margin decreased $21.2 million, or 20.9%, from $101.5 million in 2009 to $80.3 million in 2010. As a percentage of total sales, gross margin decreased 1.2 percentage points from 13.3% in 2009 to 12.1% in 2010.

Product

Product gross margin decreased $21.6 million, or 37.7%, from $57.5 million in 2010 to $35.9 million during the year ended December 31, 2011. Although product revenue dollars declined by 50.4% as previously discussed, the impact to gross margin was mitigated by a strategic decision to shift the efforts of the sales force toward deals with higher profitability rather than deal volume. Hardware gross margin declined $22.5 million to $24.8 million and 7.1% of total sales. Software gross margin increased $0.9 million and 1.6 percentage points, from $10.2 million and 1.5% of total sales in 2010 to $11.1 million and 3.1% of total sales in 2011. Software gross margin percentage increased 7.3 percentage points from 7.8% in 2010 to 15.1% in 2011 of which 2.7 percentage points, or 36.4% of total increase, is due to an increase in gross sales, while 4.7 percentage points, or 63.6% of total increase, is due to netting of $56.8 million in 2011 compared to $43.1 million in 2010.

Product gross margin decreased $9.2 million, or 13.8%, from $66.7 million in 2009 to $57.5 million in 2010. During the year ended December 31, 2010, the Company’s 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 DOD 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 Company was also impacted during the three months ended December 31, 2010, by the temporary suspension and the SBA Agreement, which resulted in lost product sales the Company believed would have been awarded to GTSI. Product gross margin as a percentage of sales decreased 0.1 of a percentage point from 8.7% in 2009 to 8.6% in 2010, as the Company continued to see pricing pressures from our partners.

 

29


Table of Contents

Services

Services gross margin dollars decreased $0.6 million, or 3.6%, from $17.2 million in 2010 to $16.6 million in 2011, while the services gross margin percentage increased 1.1 percentage points over the same period. Professional services increased $0.9 million or 14.5% from $6.2 million in 2010. $2.3 million of the increase is due to the gross margin contribution from InSysCo for the period August 16, 2011 to December 31, 2011 offset by a decrease of $1.4 million in the base business. Although gross margin dollars were down, the gross margin percentage increased 3.3 percentage points from 17.7% to 21.0% from 2010 to 2011. Integration gross margin was also down $1.3 million in 2011 from $2.4 million in 2010 to $1.1 million in 2011. Although integration revenue declined by 49.9%, the gross margin percentage impact was limited to a 6.6 percentage point reduction from 61.0% in 2010 to 54.4% in 2011 as the majority of the costs are variable and were managed effectively through the revenue decline. Support services gross margin is down $0.2 million, or 2.3%, from $8.6 million in 2010 to $8.4 million in 2011. Gross margin percentage is also down 0.4 percentage points to 70.9% from 71.3% in 2010.

Services gross margin decreased $5.2 million, or 23.2%, from $22.4 million in 2009 to $17.2 million in 2010, due to the decreases in margin for professional and third party services. Service gross margin as a percentage of sales decreased 6.5 percentage points to 33.7% for 2010 from 40.2% in 2009. These gross margin decreases were driven by lower revenue and gross margin in delivery and support services during the year ended 2010 as compared to 2009.

Financing

Gross margin from financing activities increased $4.3 million, or 76.6%, from $5.6 million in 2010 to $9.9 million in 2011. The majority of the increase in gross margin dollars is attributable to the $4.6 million financing receivable write-off in 2010 of certain multiyear financing agreements as a result of the SBA Agreement. Excluding the write-off, gross margin in 2010 was $10.3 million from financing activities resulting in a decrease of $0.4 million, or 26.0%, to $9.9 million in 2011. Lower overall company revenue is driving the gross margin dollar decline; however gross margin percentage is up 42.7% due to an increase in the proportion of revenue attributable to the sale of residual lease equipment, which has a 100% margin.

Gross margin from financing activities decreased $6.8 million, or 54.8%, from $12.4 million in 2009 to $5.6 million in 2010, due to the write-off of financing receivables, a decrease in the sale of leases that are properly securitized and lower annuity streams of in-house leases. As a result of the SBA Agreement certain multiyear financing agreements were exited which resulted in a $4.6 million write-off of financing receivables. Financing gross margin as a percentage of sales decreased 18.7 percentage points from 43.9% in 2009 to 25.2% in 2010 because of the write-off of financing receivables in 2010.

Selling, General & Administrative Expenses (“SG&A”)

 

00000 00000 00000 00000 00000 00000 00000 00000 00000 00000
       2011        2010        2009        2011 vs 2010 change     2010 vs 2009 change  
       $        % of
Sales
       $        % of
Sales
       $        % of
Sales
       $      %     $      %  
       (dollars in millions)  

Total SG&A

     $ 70.9           20.0         $ 87.6           13.2         $ 98.1           12.9         $ (16.7      (19.1 %)    $ (10.5      (10.7 %) 

SG&A expenses for 2011 decreased $16.7, million or 19.1%, as compared to the prior year. SG&A expenses as a percentage of sales increased to 20.0% on a revenue decline of $310.0 million or 46.5%. Personnel and incentive cost declined $11.5 million and $4.4 million, respectively, and are the biggest drivers of the decrease from 2010. $10.0 million of the $11.5 decline is due to lower salary and fringe benefit expense in 2011 related to the reduction in average annual headcount between 2010 and 2011 of approximately 160 employees, offset by the partial year impact of 135 additional employees from the InSysCo acquisition. The decrease in headcount was the result of management’s action to properly size the Company to address the revenue decline as well as attrition we attribute to the uncertainty created by the SBA temporary suspension in October 2010 and the ongoing SBA monitoring. The remaining $1.5 million reduction in personnel expense is due to $1.1 million of lower stock option expense in 2011 compared to 2010 due to fewer company-wide awards other than those contractually required and a $0.4 million reduction to expense for a change in estimate. The reduction in incentive expense is due to a decline in sales commissions of $2.1 million which is in line with the decline in revenue as well as $3.1 million from the discontinuation of the incentive bonus plan in 2011, offset by a one-time retention bonus payout of $0.5 million to InSysCo employees following the acquisition.

 

30


Table of Contents

SG&A expenses for 2010 decreased $10.5 million, or 10.7%, as compared to the prior year. SG&A expenses as a percentage of sales increased to 13.2% for 2010 from 12.9% in 2009. The decrease in SG&A expenses was mainly due to lower personnel related costs of $9.9 million attributed to lower margins resulting in a $5.1 million reduction of incentive and commission compensation expense and lower salary and related costs of $6.5 million due to lower headcount in 2010 as compared to prior the year; partially offset by $1.7 million higher severance related costs during the year ended December 31, 2010. Other changes in SG&A expenses included an increase of consulting expense of $1.0 million, an increase of legal fees of $0.7 million and a decrease of travel expenses of $0.6 million during the year ended December 31, 2010. During the three months ended December 31, 2010, the Company incurred additional SG&A expenses of approximately $1.4 million, $0.7 million and $0.9 million related to severance, legal and monitoring and other expenses in connection with the SBA Agreement. In addition, during the year ended December 31, 2010, the Company incurred approximately $0.7 million of legal expenses in connection with the various legal matters involving its equity investment in Eyak Technology, LLC.

Interest and Other Income, Net

 

       2011      2010      2009      2011 vs 2010 change     2010 vs 2009 change  
       $      % of
Sales
     $      % of
Sales
     $      % of
Sales
     $      %     $      %  
       (dollars in millions)  

Interest and other income

     $ 0.1         —         $ 0.2         —         $ 0.9         0.1       $ (0.1      (20.9 %)    $ (0.7      (82.3 %) 

Equity income from EyakTek, including gain on sale

       10.3         2.9         7.9         1.2         8.3         1.1         2.4         30.2     (0.4      (4.1 %) 

Interest expense

       (0.6      (0.2      (0.6      (0.1      (2.9      (0.3      —           (5.3 %)      2.3         (78.4 %) 
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Interest & Other Income

     $ 9.8         2.7       $ 7.5         1.1       $ 6.3         0.9       $ 2.3         32.1   $ 1.2         18.1
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Interest and other income, net, for 2011 was $9.8 million as compared to $7.5 million for the same period in 2010. The $2.3 million increase in interest and other income, net, was due to primarily to an $7.3 million gain on the sale of our EyakTek equity interest, offset by the discontinuation of equity earnings as result of the sale.

Interest and other income, net, for 2010 was $7.5 million as compared to $6.3 million in the prior year, an increase of $1.2 million. The improvement in interest and other income, net, was due to lower expenses related to the Company’s credit agreements along with deferred financing costs written off in 2009; partially offset by a $0.3 million reduction in equity income. During the second quarter of 2009 the Company’s then 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 investment in EyakTek decreased by $0.3 million in 2010 compared with prior year. There were no borrowings under the Company’s credit agreements since March 2009.

Income Taxes

 

       2011      2010      2009      2011 vs 2010 change     2010 vs 2009 change  
       $     % of
Sales
     $     % of
Sales
     $     % of
Sales
     $      %     $      %  
       (dollars in millions)  

Income before income taxes

     $ 1.3        0.2       $ 0.2        0.0       $ 9.7        1.3       $ 1.1         694.1   $ (9.5      (98.2 %) 

Income tax expense

       (0.8     (0.2      (1.1     (0.1      (4.2     (0.6      0.3         (23.3 %)      3.1         (73.9 %) 

Effective Tax Rate

       62.5        647.1        43.5             

For the years ended December 31, 2011 and 2010, GTSI had income before income taxes of $1.3 million and $0.2 million, respectively.

The effective income tax rate was 62.5% and 647.1% for the year ended December 31, 2011 and 2010, respectively. The higher tax rate in 2010 versus 2011 is due to a reduction in the write-off of deferred tax assets on expired or cancelled stock options of $1.3 million in 2010 versus $0.2 million in 2011. 2010 was partially offset by an income tax benefit of less than $0.3 million that was recorded related to an adjustment to a true-up for the filing of the 2009 tax returns. Excluding the effects of the write-off of the deferred tax assets on stock options and the benefit related to the true-up for the filing of the 2009 tax returns, the effective tax rate would have been 36.6% for the year ended December 31, 2010. Excluding the effects of the write-off of the deferred tax assets on stock options and non-deductible acquisition and disposal costs of $0.1 million, the effective tax rate would have been 41.4% for the year ended December 31, 2011.

 

31


Table of Contents

For the years ended December 31, 2010 and 2009, GTSI had income before income taxes of $0.2 million and $9.7 million, respectively.

The effective income tax rate was 647.1% and 43.5% for the year ended December 31, 2010 and 2009, respectively. The increase in the tax rate from 2009 to 2010 was due to write-off of deferred tax on stock options in 2010 of $1.3 million that did not occur in the same period of 2009, partially offset by an income tax benefit of less than $0.3 million that was recorded related to an adjustment to a true-up for the filing of the 2009 tax returns. Excluding the effects of the write-off of deferred tax on stock options and the benefit related to the true-up for the filing of the 2009 tax returns, the effective tax rate would have been 36.6% for the year ended December 31, 2010.

Seasonal Fluctuations

We have historically experienced and expect to continue to experience significant seasonal fluctuations in our operations as a result of the Federal government buying and funding patterns. The unpredictability of the factors affecting such seasonality makes our annual and quarterly financial results difficult to predict and subject to significant fluctuation. While sales to the Federal government are usually weaker in the first and second quarter and stronger in the third and fourth quarter, our SG&A expenses are more level throughout the year. As such, first and second quarter earnings are typically well below those of the third and fourth quarters. Our stock price may be adversely affected if any such financial results fail to meet the financial community’s expectations.

The following tables show our results of operations on a quarterly basis. We believe that this information includes all adjustments necessary for a fair presentation of such quarterly information when read in conjunction with the notes to consolidated financial statements included in Item 8 of this Form 10-K. The operating results for any quarter are not necessarily indicative of the results for any future period. This information has been included to provide additional insight into the seasonal nature of our business.

 

September 30, September 30, September 30, September 30, September 30,
       2011 (unaudited)  
       (in millions except per share data)  
       Q1      Q2      Q3      Q4      Total  

Sales

     $ 70.3       $ 81.3       $ 95.8       $ 109.3       $ 356.7   

Cost of sales

       57.3         67.1         78.5         91.4         294.3   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     $ 13.0       $ 14.2       $ 17.3       $ 17.9       $ 62.4   

Selling, general & administrative expenses

       18.3         17.7         17.7         17.2         70.9   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations

     $ (5.3    $ (3.5    $ (0.4    $ 0.7       $ (8.5

Interest and other income, net

       0.9         1.1         7.8         (0.0      9.8   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before taxes

     $ (4.4    $ (2.4    $ 7.4       $ 0.6       $ 1.2   

Income tax benefit (provision)

       1.7         0.9         (3.1      (0.2      (0.7
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) income

     $ (2.7    $ (1.5    $ 4.3       $ 0.4       $ 0.5   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic (loss) earnings per share

     $ (0.28    $ (0.15    $ 0.44       $ 0.04       $ 0.05   

Diluted (loss) earnings per share

     $ (0.28    $ (0.15    $ 0.44       $ 0.04       $ 0.05   

 

32


Table of Contents
September 30, September 30, September 30, September 30, September 30,
       2010 (unaudited)  
       (in millions except per share data)  
       Q1      Q2      Q3      Q4 (a)      Total  

Sales

     $ 101.8       $ 135.0       $ 237.4       $ 192.5       $ 666.7   

Cost of sales

       88.3         117.6         207.6         172.9         586.4   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     $ 13.5       $ 17.4       $ 29.8       $ 19.6       $ 80.3   

Selling, general & administrative expenses

       22.2         21.6         20.6         23.2         87.6   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations

     $ (8.7    $ (4.2    $ 9.2       $ (3.6    $ (7.3

Interest and other income, net

       1.4         2.1         2.0         1.9         7.4   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before taxes

     $ (7.3    $ (2.1    $ 11.2       $ (1.7    $ 0.1   

Income tax benefit (provision)

       2.7         0.9         (5.3      0.7         (1.0
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss) income

     $ (4.6    $ (1.2    $ 5.9       $ (1.0    $ (0.9
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic (loss) earnings per share

     $ (0.48    $ (0.13    $ 0.62       $ (0.11    $ (0.10

Diluted (loss) earnings per share

     $ (0.48    $ (0.13    $ 0.62       $ (0.11    $ (0.10

 

(a) Pre-tax income for the quarter ended December 31, 2010 was negatively impacted by a $4.6 million write-off of net financing receivables and $3.0 million in additional SG&A expenses related to severance, legal and monitoring and other expenses in connection with the SBA Agreement.

The Company’s tax benefit (provision) was determined on a quarterly basis for the years ended December 31, 2011 and 2010 using the overall annual effective rate pursuant to FASB ASC 270, Interim Reporting.

Liquidity and Capital Resources

 

September 30, September 30, September 30,

(in millions)

     2011      2010      Change  

Cash provided (used in) by operating activities

     $ 64.7       $ (3.2    $ 67.9   

Cash provided by (used in) investing activities

     $ 7.8       $ (0.3    $ 8.1   

Cash used in financing activities

     $ (21.7    $ (0.4    $ (21.3
    

 

 

    

 

 

    

 

 

 

Net Cash provided

       50.8         (3.9      54.7   

During 2011, net cash increased by $50.8 million compared to a net cash decrease of approximately $3.9 million in 2010. Cash provided by operating activities increased $67.9 million in 2011 compared to cash used by operating activities in 2010 of $3.2 million. The main drivers of the increase in cash are accounts payable and accounts receivable of $36.8 million and $27.7 million, respectively. The increase in cash from accounts payable is due to the decline in sales volume and the associated reduced cost of sales and SG&A expenses. The change in trade and financing receivables is approximately $32.3 million offset by $4.6 million due to a 2010 write-off of financing receivables as a result of the SBA agreement. Other increases in cash generated from operations include a decrease between comparable periods in inventory of $5.3 million, offset by the net gain from the sale of our equity investment in EyakTek of $7.3 million and a decrease of $1.2 million from the net equity earnings from EyakTek.

Cash provided by investing activities for 2011 was $8.1 million improved over 2010, due to the sale of our EyakTek equity for $20.0 million offset by our acquisition of InSysCo for $12.0 million and a decline of $0.1 million in purchases of depreciable assets.

Cash used in financing activities for 2011 increased by $21.3 million as compared to 2010. For the comparable periods, net payments on the floor plan loans were $21.1 million compared to $0.3 million in net borrowings for 2010. This increase was driven by the repayment of AP floor plan vendors at a greater rate than borrowings which is directly related to the sales decline in the business as well as a shift from floor plan vendors to non floor plan vendors, primarily due to higher percentage of purchases from Microsoft. In addition, the Company incurred $0.5 million of deferred financing costs related to the Second Amended Credit Agreement, offset by less stock repurchases of $0.8 million.

 

33


Table of Contents

Credit Agreements

In May 2009, we entered into a $135 million credit agreement with Castle Pines Capital LLC (“CPC”) and other lenders (the “Credit Agreement”), which also provided a “vendor and distributor program” under which we received financing for inventory purchases from several of our largest vendors with extended payment terms.

On October 19, 2010, GTSI entered into an Amended and Restated Credit Agreement with its lenders to amend the Credit Agreement by reducing the total facility limit from $135 million to $100 million and the revolving loan facility limit from $60 million to $45 million (“Amended Credit Agreement”). The Amended Credit Agreement carried 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 was limited to the lesser of (a) $100 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 credit.

On February 24, 2011, GTSI entered into an agreement with CPC and Wells Fargo Capital Finance, LLC, extending from May 27, 2011 to May 27, 2012 the maturity date of CPC’s 74.08% pro-rata share of the total loan commitment under the Amended Credit Agreement and allowing the acquisition of GTSI’s common stock related to net share settlements.

On May 31, 2011, GTSI entered into a Second Amended and Restated Credit Agreement with its lenders, which amended and restated the Amended Credit Agreement (the “Second Amended Credit Agreement”). The Second Amended Credit Agreement extended the maturity date of the $100 million facility to May 31, 2014 and carries an interest rate indexed at 1-Month LIBOR plus 300 basis points for revolving loan advances and 1-Month LIBOR plus 275 basis points for floor plan loans. Borrowing is limited to the lesser of (a) $100 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 credit.

On August 12, 2011, GTSI entered into a First Amendment to the Second Amended and Restated Credit Agreement with its lenders. The First Amendment amends, among other provisions, the definition of (a) “Borrowing Base” to include a “Liquidity Reserve” as a deduction there from and (b) “Total Debt Service Coverage Ratio” to include the accrual during the respective 12-month period of fees payable by GTSI as debt service expenses of GTSI in determining if it is in compliance with the Total Debt Service Coverage Ratio covenant. In addition, the First Amendment also provided the lenders’ consent to GTSI’s previously announced acquisition of InSysCo.

On August 30, 2011, GTSI entered into a Second Amendment to the Second Amended and Restated Credit Agreement with its lenders. The Second Amendment permits GTSI to purchase its common stock subject to certain conditions, including that such purchases cannot exceed an aggregate purchase price of $5 million.

As of December 31, 2011, borrowing capacity and availability under the Amended Credit Agreement was as follows (in thousands):

 

September 30,

Total Amended and Restated Agreement

     $ 100,000   

Borrowing base limitation

       (55,395
    

 

 

 

Total borrowing capacity

       44,605   

Less: interest-bearing borrowings

       —     

Less: non-interest bearing advances (floor plan loans)

       (14,049

Less: letters of credit

       (10,248
    

 

 

 

Total unused availability

     $ 20,308   
    

 

 

 

As of December 31, 2011, the Company had no outstanding loan balance (other than non-interest bearing floor plan loans) under the Second Amended Credit Agreement and as reflected above, unused available credit there under of $20.3 million.

The Second Amended 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 make investments; (e) enter into transactions with affiliates; (f) dissolve, change GTSI’s name, merge or enter into certain other material agreement regarding changes to the corporate entities; (g) acquire real estate; and (h) enter into sales and leaseback transactions.

 

34


Table of Contents

The financial covenants of the Second Amended Credit Agreement require us, among other things, to:

 

  maintain a Tangible Net Worth of not less than or equal to $45 million as of the end of each month

 

  maintain a Ratio of Total Liabilities to Tangible Net Worth of not greater than 5.25 to 1.00 as of the end of each month

 

  maintain Current Ratio not less than (i) 1.20 to 1.00 as of the last business day of January, February, March, April, May, June, October, November and December and (ii) 1.15 to 1.00 as of the last business day of July, August and September

 

  maintain a minimum Total Debt Service Coverage Ratio of 1.25 to 1.00 as of the end of each month

The Second Amended Credit Agreement provides that the existence of a material proceeding against the Company or the Company’s failure to be in compliance with all material laws constitutes an event of default under the agreement. The Second Amended Credit Agreement also requires the Company to provide the lenders with certain information. The Company was in compliance with all financial and informational covenants in the Second Amended Credit Agreement as of December 31, 2011.

The Company uses the Second Amended Credit Agreement to finance inventory purchases from approved vendors. Inventory purchases under the Second Amended Credit Agreement usually have 60-day terms. Balances that are paid within the 60-day period do not accrue interest and are classified as floor plan financing in our balance sheet.

To the extent that we have credit availability under the Second Amended Credit Agreement, we are able to extend the payment terms past the 60-day period. Amounts extended past the no interest period accrue interest and are classified as notes payable on our balance sheet, for which there was no balance outstanding at December 31, 2011 or December 31, 2010. These extended payment balances under the Second Amended Credit Agreement accrue interest at the 1-Month LIBOR plus 275 basis points.

The Company defers loan financing costs and recognizes these costs throughout the term of the loans. The Company deferred $0.5 million of loan financing costs related to the Second Amended Credit Agreement in May 2011. Deferred financing costs were $0.4 million and less than $0.1 million as of December 31, 2011 and December 31, 2010, respectively.

Capital Resources and 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. During 2011 and 2010, we relied upon our cash provided by operating activities, vendor credit, inventory financing and the availability under our credit agreements to fund our operations. We anticipate continuing to rely upon these sources to finance our operating cash needs and we believe that such funds should be sufficient to satisfy our anticipated cash requirements throughout 2012.

While the Company believes that we will remain in compliance with all of the financial and reporting covenants under the Second Amended Credit Agreement, there can be no assurance that we will do so. A breach of any of the covenants or restrictions in the Second Amended Credit Agreement may constitute an event of default resulting in the lenders discontinuing lending or declaring all outstanding borrowings to be due and payable. In such event we would need to find additional or alternative financing, if available, to refinance any such accelerated obligations. There can be no assurance that such financing would be available.

As of December 31, 2011 and 2010, GTSI had no outstanding finance lease debt.

During 2011 and 2010, we made capital expenditures of $0.2 million and $0.3 million, respectively.

 

35


Table of Contents

Contractual Obligations

 

September 30, September 30, September 30, September 30, September 30, September 30,
                Less                          More           
                Than 1        1-3        3-5        than 5           

In millions of dollars

     Total        Year        Years        Years        Years        Other  

Operating lease obligations

     $ 34.7         $ 4.6         $ 9.4         $ 9.9         $ 10.8         $ —     

Tax Liability for unrecognized tax benefits (a)

       0.1           —             —             —             —             0.1   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total contractual obligations

     $ 34.8         $ 4.6         $ 9.4         $ 9.9         $ 10.8         $ 0.1   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

(a) This amount includes current liabilities on the consolidated balance sheet for FASB ASC 840, Income Taxes. The Company is not able to reasonably estimate the timing of the future payments.

Letters of Credit

As of December 31, 2011 and 2010, the Company provided a letter of credit in the amount of $2.4 million for the office space lease signed in 2007.

As of December 31, 2011 and 2010, the Company had outstanding letters of credit in the amount of $7.8 million and $2.7 million, respectively, to guaranty the performance by the Company of its obligations under customer contracts.

Change in Control and Severance Agreements

At December 31, 2011, GTSI has change in control agreements with eight executives and key employees and severance agreements with six executives. These arrangements provide for payments of as much as 12 months of total target compensation and continuation of benefits upon the occurrence of specified events. As of December 31, 2011, no accruals have been recorded for these agreements.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements (as defined in SEC Regulations S-K, Item 303, paragraph (a)(4)(ii)) that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

36


Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In May 2009, the Company terminated its credit facility and entered into the $135 million 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 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.

On October 19, 2010, GTSI entered into the Amended Credit Agreement to amend the Credit Agreement by reducing the total facility limit from an aggregate principal amount of $135 million to $100 million and the aggregate revolving loan facility limit from $60 million to $45 million.

On February 24, 2011, GTSI entered into an agreement with CPC and Wells Fargo Capital Finance, LLC, extending from May 27, 2011 to May 27, 2012 the maturity date of CPC’s 74.08% pro-rata share of the total loan commitment under the Amended Credit Agreement and allowing the acquisition of GTSI’s common stock related to net share settlements.

On May 31, 2011, GTSI entered into the Second Amended Credit Agreement, which extended the maturity date of the $100 million facility to May 31, 2014 and carries an interest rate indexed at 1-Month LIBOR plus 300 basis points for revolving loan advances and 1-Month LIBOR plus 275 basis points for floor plan loans.

This Second Amended Credit Agreement exposes us to market risk from changes in interest rates. For purposes of specific risk analysis, we use sensitivity analyses 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 may have on borrowings under our Amended 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 December 31, 2011, the Company had no outstanding loan balance (other than non-interest bearing floor plan loans) and an available credit of $20.3 million. As of December 31, 2010, the Company had no outstanding loan balance (other than non-interest bearing floor plan loans) and an available credit of $49.9 million.

 

37


Table of Contents
ITEM 8. FINANCIAL STATEMENTS & SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To Board of Directors and Stockholders

  of GTSI Corp.:

In our opinion, based on our audits and the report of other auditors with respect to the consolidated statements of operations, of changes in stockholders' equity and of cash flows for the year ended December 31, 2011 and the consolidated financial statements as of and for the years ended 2010 and 2009, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders’ equity, and of cash flows present fairly, in all material respects, the financial position of GTSI Corp. and its subsidiaries at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Eyak Technology, LLC, an investment accounted for under the equity method, which GTSI Corp. reflected in other assets of $10.6 million as of December 31, 2010, and income from affiliates of $10.3 million, $7.9 million, and $8.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. The financial statements of Eyak Technology, LLC as of and for the period ended August 19, 2011 and the years ended December 31, 2010 and 2009 were audited by other auditors whose report thereon has been furnished to us, and our opinion on the financial statements expressed herein, insofar as it relates to the amounts included for Eyak Technology, LLC, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

McLean, Virginia

March 29, 2012

 

38


Table of Contents

Report of Independent Registered Public Accounting Firm

Board of Directors

Eyak Technology, LLC

Dulles, Virginia

We have audited the accompanying Consolidated Balance Sheets of Eyak Technology, LLC and Subsidiary as of August 19, 2011 and December 2010, and the related Consolidated Statements of Income, Members’ Equity and Cash Flows, for each of the period January 1, 2011 to August 19, 2011 and the years ended December 31, 2010 and 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of Internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position, of Eyak Technology, LLC and Subsidiary as of August 19, 2011 and December 31, 2010, and the consolidated results of their operations and their cash flows for each of the period January 1, 2011 to August 19, 2011 and the years ended December 31, 2010 and 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/ Aronson LLC

Rockville, Maryland

February 6, 2012

 

39


Table of Contents

GTSI CORP.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

September 30, September 30,
       December 31,  
       2011      2010  

ASSETS

       

Current assets:

       

Cash and cash equivalents

     $ 54,872       $ 4,049   

Accounts receivable, net of allowance of $522 and $713 at December 31, 2011 and December 31, 2010, respectively

       76,014         154,891   

Inventory, net of reserve of $112 and $104 at December 31, 2011 and December 31, 2010, respectively

       8,623         13,708   

Deferred costs

       1,587         6,991   

Other current assets

       1,645         2,462   
    

 

 

    

 

 

 

Total current assets

       142,741         182,101   

Depreciable assets, net of accumulated depreciation of $23,239 and $ 20,349 at December 31, 2011 and December 31, 2010, respectively

       4,482         7,452   

Long-term receivables and other assets

       3,126         14,291   

Intangible assets, net of accumulated amortization of $414 and $0 at December 31, 2011 and December 31, 2010, respectively

       4,076         —     

Goodwill

       9,415         —     
    

 

 

    

 

 

 

Total assets

     $ 163,840       $ 203,844   
    

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

       

Current liabilities:

       

Borrowings under credit facility

     $ —         $ —     

Accounts payable

       33,598         50,870   

Accounts payable—floor plan

       14,049         35,172   

Accrued liabilities

       11,351         14,887   

Deferred revenue

       4,105         3,661   
    

 

 

    

 

 

 

Total current liablilites

       63,103         104,590   

Other liabilities

       3,779         3,044   
    

 

 

    

 

 

 

Total liabilities

       66,882         107,634   
    

 

 

    

 

 

 

Commitments and contingencies (See Note 12)

       

Stockholders’ equity

       

Preferred stock—$0.25 par value, 680,850 shares authorized; none issued oroutstanding

       —           —     

Common stock—$0.005 par value, 20,000,000 shares authorized; 10,049,618issued and 9,667,439 outstanding at December 31, 2011; and 10,056,650issued and 9,625,728 outstanding at December 31, 2010

       50         50   

Capital in excess of par value

       54,160         53,985   

Retained earnings

       44,501         43,995   

Treasury stock, 337,891 shares at December 31, 2011 and 346,119 shares at December 31, 2010, at cost

       (1,753      (1,820
    

 

 

    

 

 

 

Total stockholders’ equity

       96,958         96,210   
    

 

 

    

 

 

 

Total liabilities and stockholders’ equity

     $ 163,840       $ 203,844   
    

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

40


Table of Contents

GTSI CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

September 30, September 30, September 30,
       For the Years Ended December 31,  
       2011      2010      2009  

SALES

          

Product

     $ 294,266       $ 593,319       $ 677,966   

Service

       47,806         51,140         55,625   

Financing

       14,594         22,252         28,279   
    

 

 

    

 

 

    

 

 

 
       356,666         666,711         761,870   
    

 

 

    

 

 

    

 

 

 

COST OF SALES

          

Product

       258,432         535,835         611,310   

Service

       31,183         33,895         33,236   

Financing

       4,687         16,641         15,872   
    

 

 

    

 

 

    

 

 

 
       294,302         586,371         660,418   
    

 

 

    

 

 

    

 

 

 

GROSS MARGIN

       62,364         80,340         101,452   

SELLING, GENERAL & ADMINISTRATIVE EXPENSES

       70,875         87,636         98,107   
    

 

 

    

 

 

    

 

 

 

(LOSS) INCOME FROM OPERATIONS

       (8,511      (7,296      3,345   

INTEREST AND OTHER INCOME, NET

          

Interest and other income

       129         163         923   

Equity income from EyakTek, including gain on sale

       10,317         7,921         8,261   

Interest expense

       (585      (618      (2,864
    

 

 

    

 

 

    

 

 

 

Interest and other income, net

       9,861         7,466         6,320   
    

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

       1,350         170         9,665   

INCOME TAX EXPENSE

       844         1,100         4,209   
    

 

 

    

 

 

    

 

 

 

NET INCOME (LOSS)

     $ 506       $ (930    $ 5,456   
    

 

 

    

 

 

    

 

 

 

EARNINGS (LOSS) PER SHARE

          

Basic

     $ 0.05       $ (0.10    $ 0.56   
    

 

 

    

 

 

    

 

 

 

Diluted

     $ 0.05       $ (0.10    $ 0.56   
    

 

 

    

 

 

    

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

          

Basic

       9,654         9,604         9,706   
    

 

 

    

 

 

    

 

 

 

Diluted

       9,679         9,604         9,762   
    

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

41


Table of Contents

GTSI CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2011, 2010 and 2009

(In thousands)

 

       Common Stock                 Capital in                   Total  
       Shares               Preferred        Excess of      Retained      Treasury     Stockholders’  
       Outstanding      Amount        Stock        Par Value      Earnings      Stock     Equity  

Balance, December 31, 2008

       9,867       $ 50         $ —           $ 50,722       $ 39,469       $ (127   $ 90,114   

Common stock issued

       156         —             —             —           —           717        717   

Common stock purchased

       (466      —             —             —           —           (2,251     (2,251

Stock-based compensation

       —           —             —             2,387         —           —          2,387   

Restricted stock issued

       81         —             —             (275      —           275        —     

Preferred stock issued

       —           —             —             —           —           —          —     

Tax provision from stock-based compensation

       —           —             —             (136      —           —          (136

Net income

       —           —             —             —           5,456         —          5,456   
    

 

 

    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

   

 

 

 

Balance, December 31, 2009

       9,638       $ 50         $ —           $ 52,698       $ 44,925       $ (1,386   $ 96,287   
    

 

 

    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

   

 

 

 

Common stock issued

       91         —             —             (119      —           482        363   

Common stock purchased

       (154      —             —             —           —           (1,006     (1,006

Stock-based compensation

       —           —             —             1,750         —           —          1,750   

Restricted stock issued

       51         —             —             (90      —           90        —     

Preferred stock issued

       —           —             —             —           —           —          —     

Tax provision from stock-based compensation

       —           —             —             (254      —           —          (254

Net loss

       —           —             —             —           (930      —          (930
    

 

 

    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

   

 

 

 

Balance, December 31, 2010

       9,626       $ 50         $ —           $ 53,985       $ 43,995       $ (1,820   $ 96,210   
    

 

 

    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

   

 

 

 

Common stock issued

       32         —             —             (36      —           167        131   

Common stock purchased

       (30      —             —             —           —           (132     (132

Stock-based compensation

       —           —             —             274         —           —          274   

Restricted stock issued

       39         —             —             (63      —           32        (31

Preferred stock issued

       —           —             —             —           —           —          —     

Net income

       —           —             —             —           506         —          506   
    

 

 

    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

   

 

 

 

Balance, December 31, 2011

       9,667       $ 50         $ —           $ 54,160       $ 44,501       $ (1,753   $ 96,958   
    

 

 

    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

42


Table of Contents

GTSI CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

September 30, September 30, September 30,
       For the Years Ended December 31,  
       2011      2010      2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

          

Net income (loss)

     $ 506       $ (930    $ 5,456   

Adjustments to reconcile net income to net cash provided by (used in)

          

Depreciation and amortization

       3,800         3,772         3,826   

Amortization of deferred financing costs

       131         77         30   

Loss on disposal of equipment

       —           36         137   

Stock-based compensation

       274         1,750         2,387   

Bad debt expense

       215         68         12   

Tax impact from stock-based compensation

       —           (254      (11

Equity income, net of distributions in 2011, 2010 and 2009 of $1,555, $5,262 and $5,566, respectively

       (1,484      (2,659      (2,694

Gain on sale of equity investment in EyakTek, net of transaction costs in 2011 of $ 640

       (7,278      —           —     

Changes in net deferred tax assets (liabilities)

       633         1,221         1,663   

Changes in operating assets and liabilities, net of acquisition:

          

Accounts receivable

       81,526         53,805         (27,103

Inventory

       5,085         (231      14   

Other assets

       6,899         24,321         (16,885

Accounts payable

       (22,007      (58,852      6,169   

Accrued liabilities

       (3,990      (11,240      8,134   

Other liabilities

       373         (14,068      17,143   
    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) operating activities

       64,683         (3,184      (1,722
    

 

 

    

 

 

    

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Purchases of depreciable assets

       (193      (300      (1,259

Sale of Equity Investment in Eyak

       20,000         —           —     

Purchase of Investment in InSysCo, net of cash acquired

       (12,004      —           —     
    

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) investing activities

       7,803         (300      (1,259
    

 

 

    

 

 

    

 

 

 

CASH FLOWS FROM FINANCING ACTIVITES:

          

Payments under Credit Facility

       —           —           (22,387

(Payments) Borrowings under non-interest bearing floor plan financing, net

       (21,123      282         34,889   

Payments of deferred financing costs

       (509      —           (104

Proceeds from exercise of Stock Options

       —           121         363   

Proceeds from issuance of stock from ESPP plan

       132         242         354   

Shares withheld from minimum tax withholding on vested restricted stock awards

       (31      (114      (152

Repurchase of common stock

       (132      (892      (2,099

Excess tax benefit from stock awards

       —           —           11   
    

 

 

    

 

 

    

 

 

 

Net cash (used in) provided by financing activities

       (21,663      (361      10,875   
    

 

 

    

 

 

    

 

 

 

NET INCREASE (DECREASE) IN CASH

       50,823         (3,845      7,894   
    

 

 

    

 

 

    

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

       4,049         7,894         —     
    

 

 

    

 

 

    

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

     $ 54,872       $ 4,049       $ 7,894   
    

 

 

    

 

 

    

 

 

 

CASH PAID DURING THE YEAR FOR:

          

Interest

     $ —         $ —         $ 56   

Income taxes

     $ 260       $ 2,997       $ 353   

The accompanying notes are an integral part of these consolidated financial statements.

 

43


Table of Contents

GTSI CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2011, 2010 and 2009

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Nature of Business

GTSI Corp. (collectively with its subsidiaries, “GTSI” or the “Company”) is an IT hardware and solutions provider to Federal, state, and local government customers and prime contractors which are working directly on government contracts. GTSI addresses government technology challenges by providing IT products and solutions, a powerful collection of contracts, dedicated teams of certified professionals, flexible financing options, and ISO 9001:2008 registered global integration and distribution.

To help customers acquire, manage and refresh their technology in a strategic and application-appropriate manner, GTSI has created a mix of hardware, professional and financial services capable of managing and funding the entire technology lifecycle. The Company offers leasing arrangements to allow government agencies to acquire access to technology on an evenly distributed operating expense basis, rather than on the more budget-sensitive and discontinuous capital expense basis. Additionally, GTSI markets and sells products, primarily computer hardware and software, and solutions through its website, www.GTSI.com, providing a convenient, customized shopping experience to meet the unique and changing needs of its customers.

B. Risks and Uncertainties

There are many factors that affect the Company’s business and results of operations and many of such factors are beyond our control, including reliance on a small number of transactions for a significant portion of our sales and gross margins, increased competition, adverse changes in U.S. Federal government spending, and infrastructure failures that may adversely affect our ability to process orders, track inventory and ship products in a timely manner.

The Company’s compliance with the administrative agreement entered into with the U.S. Small Business Administration (the “SBA Agreement”) and the outcome of the continuing related Federal government investigations of GTSI, which may result in administrative, civil and criminal penalties, may have a material adverse effect on the Company’s business, financial condition and operating performance. Also, the Company’s 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 may have a material adverse effect on our financial performance.

In 2009 the Company terminated it’s credit facility and entered into a new $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. On October 19, 2010, GTSI entered into an Amended Credit Agreement with CPC and other lenders to amend and restate the Credit Agreement (the “Amended Credit Agreement”). On May 31, 2011, GTSI entered into a Second Amended and Restated Credit Agreement with its lenders, which amended and restated the Amended Credit Agreement (the “Second Amended Credit Agreement”). The Second Amended Credit Agreement extended the maturity date of the $100 million facility to May 31, 2014 and carries an interest rate indexed at 1-Month LIBOR plus 300 basis points for revolving loan advances and 1-Month LIBOR plus 275 basis points for floor plan loans. The Company relies on the Second Amended Credit Agreement as the primary vehicle to finance operations. The Company was in compliance with all financial and informational covenants as set forth in the Second Amended Credit Agreement as of December 31, 2011.

While the Company believes that we will remain in compliance with all of the financial and information covenants under the Second Amended Credit Agreement, there can be no assurance that we will do so. A breach of any of the covenants or restrictions in the Second Amended Credit Agreement may constitute an event of default resulting in the lenders discontinuing lending or declaring all outstanding borrowings, including inventory financing, to be due and payable. In such events we would need to find additional or alternative financing, if available, to refinance any such accelerated obligations. There can be no assurance that such financing would be available.

 

44


Table of Contents

C. Principles of Consolidation

The consolidated financial statements include the accounts of GTSI and its wholly owned subsidiaries, GTSI Financial Services, Inc., GTSI Professional Services, Inc., Technology Logistics, Inc and Information Systems Consulting Group, Inc. All intercompany accounts and transactions have been eliminated. Investments in entities which the Company does not control but has the ability to exercise significant influence over are accounted for using the equity method of accounting.

D. Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year end, and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. Management’s estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, current conditions and available information. Significant items subject to such estimates and assumptions include revenue recognition, financing receivables, stock-based compensation, accounts payable, bids and proposals, valuation of purchased intangible assets, impairment of identifiable intangible and other long-lived assets and goodwill and income taxes. Cost of sales in the accompanying Consolidated Statements of Operations is based on the direct cost method.

E. 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 product’s 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 entity’s 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.

Effective January 1, 2011 the Company adopted on a prospective basis for all new or materially modified arrangements entered into on or after January 1, 2011, the new accounting guidance for multiple-deliverable revenue arrangements and the new guidance related to the scope of existing software revenue recognition guidance. The guidance does not generally change the units of accounting for the Company’s revenue transactions. Most of the Company’s products and services qualify as separate units of accounting. The new guidance changes the level of evidence of stand-alone selling price required to separate deliverables in a multiple deliverable revenue arrangement by allowing a company to make its best estimate of the selling price of deliverables when more objective evidence of selling price is not available and eliminates the use of the residual method. The guidance applies to multiple deliverable revenue arrangements that are not accounted for under other accounting pronouncements and retains the use of vendor specific objective evidence of selling price if available and third-party evidence of selling price, when vendor specific objective evidence is unavailable. Under the new guidance, the Company uses the margin approach to determine the best estimate of selling price. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. ASU 2010-29 requires public entities to disclose certain pro forma information about the revenue and earnings of the combined entity within the notes to the financial statements when a material business combination occurs. The pro forma revenue and earnings of the combined entity must be presented as though the business combination had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 also requires that this disclosure include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings. This adoption did not affect our consolidated financial statements as the business combination of InSysCo is not material to our financial statements.

 

45


Table of Contents

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income which changes the manner in which comprehensive income is presented in the financial statements. The guidance in ASU 2011-05 removes the current option to report other comprehensive income (“OCI”) and its components in the statement of changes in equity and requires entities to report this information in one of two options. The first option is to present this information in a single continuous statement of comprehensive income starting with the components of net income and total net income followed by the components of OCI, total OCI, and total comprehensive income. The second option is to report two consecutive statements; the first statement would report the components of net income and total net income in a statement of income followed by a statement of OCI that includes the components of OCI, total OCI and total comprehensive income. The statement of OCI would begin with net income. The ASU does not change what is required to be reported in other comprehensive income or impact the computation of earnings per share. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with the application of the ASU applied retrospectively for all periods presented in the financial statements. The Company has no items of other comprehensive income in any period presented. Therefore, net income as presented in the Company’s Statement of Operations equals comprehensive income.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, or ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for interim and annual periods beginning after December 15, 2011. Early adoption of this update is permitted. The Company did not adopt this guidance in 2011 and we do not anticipate this having a material effect on our financial statements.

F. Revenue Recognition

GTSI recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured in accordance with FASB ASC 605-10, Revenue Recognition, Overall (“ASC 605-10”).

The Company recognizes software revenue pursuant to the requirements of FASB ASC 985-25, Software Revenue Recognition (“ASC 985-25”). In accordance with ASC 985-25, the Company recognizes software related revenue from re-selling third party software licenses that do not require significant production, modification or customization, when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured.

The Company enters into revenue arrangements that may consist of multiple deliverables of its products and services based on the needs of its clients. These arrangements may include any combination of hardware, software, services and/or financing.

The new accounting guidance for multiple-deliverable revenue arrangements changes the level of evidence of standalone selling price required to separate deliverables in a multiple deliverable revenue arrangement by allowing a company to make its best estimate of the selling price (“ESP”) of deliverables when more objective evidence of selling price is not available and eliminates the use of the residual method. The guidance applies to multiple deliverable revenue arrangements that are not accounted for under other accounting pronouncements and retains the use of vendor specific objective evidence of selling price (“VSOE”) if available and third-party evidence of selling price, when VSOE is unavailable.

When a customer order contains multiple items such as hardware, software and services which are delivered at varying times, the Company determines whether the delivered items can be considered separate units of accounting as prescribed under FASB ASC 605-25, Revenue Recognition, Multiple-Element Arrangements (“ASC 605-25”). ASC 605-25 states that delivered items should be considered separate units of accounting if delivered items have value to the customer on a standalone basis and if delivery of undelivered items is probable and substantially in GTSI’s control.

 

46


Table of Contents

Generally, the Company is able to establish fair value for all elements of the arrangement. In these instances, revenue is recognized on each element separately. However, if the delivered items do not have stand alone value to the customer without additional services provided, the Company recognizes revenue on the contract as a single unit of accounting, based on either the completed-contract or proportional-performance methods as described below. The Company allocated revenue from multiple-element arrangements to the multiple elements based on the relative fair value of each element, which was generally based on the relative sales price of each element when sold separately.

In most cases, revenue from hardware and software product sales is recognized when title passes to the customer. Based upon the Company’s standard shipping terms, FOB destination, title passes upon delivery of the products to the customer. However, occasionally GTSI’s customers will request bill-and-hold transactions in situations where the customer does not have space available to receive products or is not able to immediately take possession of products for other reasons, in which case GTSI will store the purchased equipment in its distribution center. Under ASC 605-10, the Company only recognizes revenue for bill-and-hold transactions when the goods are complete and ready for shipment, title and risk of loss have passed to the customer, management receives a written request from the customer for bill-and-hold treatment, and the ordered goods are segregated in GTSI’s warehouse from other inventory and cannot be used to fulfill other customer orders.

Revenue is recognized on service contracts using either the completed-performance or proportional-performance method depending on the terms of the service agreement. When there are acceptance provisions based on customer-specified subjective criteria, the completed-performance method is used. For contracts where the services performed in the last series of acts is very significant, in relation to the entire contract, performance is not deemed to have occurred until the final act is completed. Once customer acceptance has been received, or the last significant act is performed, revenue is recognized. The Company uses the proportional-performance method when a service contract specifies a number of acts to be performed and the Company has the ability to determine the pattern in which service is provided to the customer.

In many contracts, billing terms are agreed upon based on performance milestones such as the execution of a contract, the customer’s acceptance of the equipment and/or vendor for products, the partial or complete delivery of products and/or the completion of specified services. Payments received before delivery has occurred or services have been rendered are recorded as deferred revenue until the revenue recognition criteria are met. Deferred revenue from extended warranty contracts is recognized over the terms of the extended warranty.

The Company sells products to certain customers under sales-type lease arrangements for terms typically ranging from two to four years. The Company accounts for its sales-type leases according to the provisions of FASB ASC 840, Leases (“ASC 840”), and, accordingly, recognizes current and long-term lease receivables, net of unearned income, on the accompanying balance sheets. The present value of all payments is recorded as sales and the related cost of the equipment is charged to cost of sales. The associated interest is recorded over the term of the lease using the effective interest method.

In many cases, GTSI transfers these receivables to various unrelated financing companies and accounts for the transfers in accordance with FASB ASC 860, Transfers and Servicing (“ASC 860”). The transfer of receivables in which GTSI surrenders control is accounted for as a sale. To surrender control, the assets must be isolated from the Company, the transferee has the right to pledge or exchange the receivables and GTSI must not have an agreement that entitles and obligates the Company to repurchase the receivables or the ability to unilaterally cause the holder to return specific assets. If the transfer of receivables does not meet the criteria for a sale under ASC 860, the transfer is accounted for as a secured borrowing with a pledge of collateral.

The Company may also enter into sales arrangements with customers where the Company performs as an agent or broker without assuming the risks and rewards of ownership of the goods and services. The Company recognizes revenue from these transactions on a net basis in accordance with FASB ASC 605-45, Revenue Recognition, Principal Agent Considerations (“ASC 605-45”). The Company sells services performed by third parties, such as maintenance contracts, and recognizes revenue on a net basis at the time of sale.

 

47


Table of Contents

GTSI offers rights of return to its customers on the products it sells. In accordance with FASB ASC 605-15, Revenue Recognition, Product (“ASC 605-15”), the Company records a sales return allowance based on historical trends in product return rates. The allowance for future sales returns as of December 31, 2011 and December 31, 2010 was $0.5 million and $0.6 million, respectively, and was recorded as a reduction of accounts receivable, net. The estimated cost of sales of $0.5 million and $0.6 million related to these sales were also deferred and recorded on the consolidated balance sheet as of December 31, 2011 and December 31, 2010, respectively, as deferred costs.

In accordance with FASB ASC 605-50, Revenue Recognition, Customer Payments and Incentives (“ASC 605-50”), the Company records cash received from a vendor as a reduction of inventory and a subsequent reduction in cost of sales, unless the cash is a reimbursement of a specific, identifiable, incremental cost related to selling the vendor’s product or the vendor receives, or will receive, an identifiable benefit in exchange for the cash.

We record vendor rebates received under vendor incentive programs pursuant to a binding arrangement as a reduction of cost of sales based on a systematic and rational allocation that results in progress by the Company toward earning the rebate provided the amounts are probable and reasonably estimable. If the rebate is not probable and reasonably estimable, it is recognized as the milestones are achieved. In accordance with FASB ASC 605-45, Revenue Recognition, Principal Agent Considerations (“ASC 605-45”), the Company records freight billed to customers as sales and the related shipping costs as cost of sales.

In accordance with ASC 605-45, the Company collects and remits sales and property taxes on products and services that it purchases and sells under its contracts with customers, and reports such amounts under the net method in its consolidated statements of operations.

We capitalize and amortize costs that are directly related to the acquisition of a long-term contract and that would have not been incurred but for the acquisition of that contract (incremental direct acquisition costs). As long-term contracts are awarded the related up-front incentive costs, which are specific incremental costs associated with the acquisition of long-term contracts, are recorded as prepaid/deferred assets and amortized over the term of the contract or five years, whichever is shorter as a component of selling, general and administrative expenses.

G. Cash

Cash consists of all cash balances held in bank accounts at the end of the year. The Company places its temporary cash investments with high credit quality financial institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. Management monitors balances in excess of insured limits and believes they do not represent a significant credit risk to the Company.

H. Concentration of Credit Risk

Accounts receivable principally represents amounts collectible from the U.S. Federal, state and local governments and prime contractors that are working directly on government contracts. The Company periodically performs credit evaluations of its non-governmental customers and generally does not require collateral. As of December 31, 2011 and 2010, trade accounts receivable from the U.S. Federal government were $42.2 million, or 77.7%, and $64.3 million, or 61.6%, respectively. The Department of Defense accounted for 39.0% and 29.8% of total trade accounts receivable as of December 31, 2011 and 2010, respectively. One Federal agency accounted for 32.6% of total trade accounts receivable as of December 31, 2011 and one Federal agency and one prime contractor accounted for 12.2% and 10.7%, respectively, of total trade accounts receivable as of December 31, 2010. No other single U.S. Federal government department, agency or prime contractor accounted for 10% or more of accounts receivable as of December 31, 2011. Credit losses have been insignificant.

I. Allowance for Doubtful Accounts

The Company’s accounts receivable balances are net of an estimated allowance for doubtful accounts. The allowance for doubtful accounts is based on a specific identification of probable losses and an analysis of historical trade receivable write-offs. These estimates may differ from actual collection experience and are subject to adjustment. Therefore, the valuation reserve is re-evaluated quarterly and adjusted as information about the ultimate collectability of accounts receivable becomes available. The allowance for doubtful accounts as of December 31, 2011 and December 31, 2010 was less than $0.1 million and $0.1 million, respectively, and was recorded as a reduction of accounts receivable, net.

 

48


Table of Contents

J. Software Development Costs

The Company capitalizes the cost of internally developed software that has a useful life in excess of one year in accordance with FASB ASC 350-40, Intangibles-Goodwill and Other Internal-Use Software (“ASC 350-40”). These costs consist of the fees paid to consultants and the salaries of employees working on such software development to customize it to the Company’s needs as well as any third party hardware/software purchases specific to development. Costs incurred in connection with the development of upgrades or enhancements that result in additional functionality are also capitalized and amortized over the useful life of the software once the enhancements are implemented. Software maintenance and training costs are expensed in the period in which they are incurred.

K. Impairment of Long-Lived Assets

Long-lived assets, consisting primarily of furniture, equipment and capitalized internal use software costs, are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable in accordance with FASB ASC 360, Property, Plant, and Equipment, (“ASC 360”). Recoverability of long-lived assets is assessed by a comparison of the carrying amount to the estimated future net cash flows expected to result from the use of the assets and their eventual disposition. If estimated undiscounted future net cash flows are less than the carrying amount, the asset is considered impaired and a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the asset.

L. Accounts Payable

The Company purchases significant amounts of inventory each year and records an estimate of the payable based on the purchases as of the balance sheet date. As invoices are received, the Company records adjustments for actual prices paid.

M. Stock-based Compensation

The Company accounts for stock-based compensation according to FASB ASC 718, Compensation-Stock Compensation, (“ASC 718”), using the modified-prospective transition method. Stock -based compensation expense for the years ended December 31, 2011, 2010, 2009 was $0.3 million, $1.7 million and $2.4 million, respectively. ASC 718 requires the cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those share based awards (“tax windfalls”) to be classified as financing cash flows. For the years ended December 31, 2011, 2010 and 2009, the tax impact from stock based compensation was a tax benefit of $0.1 million, $0.7 million and $0.8 million, respectively.

N. Income Taxes

The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. ASC 740 requires that a valuation allowance be established when it is more likely than not that some portion or all of a deferred tax asset will not be realized. For the years ended December 31, 2011, 2010 and 2009, a tax provision of $0.8 million, $1.1 million and $4.2 million, respectively, was recorded.

O. Advertising

The costs of advertising are expensed as incurred.

P. Fair Value of Financial Instruments

At December 31, 2011 and 2010, the recorded values of financial instruments such as trade receivables, accounts payable and credit agreement borrowings approximated their fair values based on the short-term maturities of these instruments. As of December 31, 2011 and 2010, the carrying amount of current and long-term lease receivables and financed lease debt approximate their fair value.

 

49


Table of Contents

Q. Equity Investments

Investments in joint ventures and entities over which the Company exercises significant influence but not control are accounted for using the equity method as prescribed by FASB ASC 323-30, Investments — Equity Method and Joint Ventures, Partnerships, Joint Ventures, and Limited Liability Entities, (“ASC 323-30”). Under this method of accounting, which generally applies to investments that represent a 20% to 50% ownership of the equity securities of the entities, the Company’s share of the net earnings or losses of the affiliated entities is included in other income and expenses.

R. Comprehensive Income

For the years ended December 31, 2011, 2010 and 2009, respectively, the Company had no components to adjust Net Income to reportable Comprehensive Income.

2. Acquisition

On August 15, 2011, the Company acquired 100% of the outstanding stock of InSysCo. InSysCo provides mission critical IT, software development and business analysis support services to its customers. The business combination provides multiple benefits for both companies and is a significant step in executing our strategy of growing the professional services component of our business. InSysCo’s results have been included in the Company’s consolidated financial statements from August 16, 2011 to December 31, 2011. Pro forma results are not provided because InSysCo’s results of operations are not material to GTSI.

The aggregate purchase price that the Company paid for InSysCo is as follows (in thousands):

 

September 30,

Cash paid

     $ 14,168   

Working capital deficit adjustment

       (130
    

 

 

 
       14,038   

Less: Cash acquired

       (2,034
    

 

 

 

Total purchase price

     $ 12,004   
    

 

 

 

The working capital deficit adjustment represents the difference between the actual working capital and the target net working capital. In addition, approximately $0.4 million was incurred for acquisition-related costs and integration costs which are included in “Selling, General and Administrative” expenses in the accompanying consolidated statement of operations.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

September 30,

Accounts receivable

     $ 2,846   

Prepaid expenses and other assets

       818   

Property and equipment

       224   

Intangible Assets

       4,490   

Goodwill

       9,415   

Accounts payable and accrued expenses

       (4,092

Deferred tax liability

       (1,697
    

 

 

 

Total purchase price

     $ 12,004   
    

 

 

 

 

50


Table of Contents

Included in prepaid assets is $0.6 million for retention bonuses which the seller funded into an escrow bonus account. As of December 31, 2011, the Company recorded $0.5 million of expense related to these retention bonus programs.

The components and the initial estimated useful lives of the intangible assets listed in the above table as of the acquisition date are as follows (in thousands):

 

September 30, September 30,
       Amount        Life  

Customer relationships

     $ 4,490           10-12 years   

Goodwill is primarily attributable to the benefits and synergies GTSI and InSysCo are expected to receive as a result of the business combination. The goodwill recorded in this transaction is not deductible for tax purposes.

3. Accounts Receivable

Accounts receivable consists of the following as of December 31 (in thousands):

 

September 30, September 30,
       2011      2010  

Trade accounts receivable

     $ 56,036       $ 103,800   

Unbilled trade accounts receivable

       11,545         21,948   

Lease receivables, net of deferred interest income of $ 223 and $ 236 at December 31, 2011 and December 31, 2010, respectively

       5,853         2,478   

Finance receivables, net of deferred interest income of $ 628 and $691 at December 31, 2011 and December 31, 2010, respectively

       2,531         23,351   

Vendor and other receivables

       571         4,027   
    

 

 

    

 

 

 

Total accounts receivable

     $ 76,536       $ 155,604   

Less: Allowance for doubtful accounts

       (5      (98

Sales return allowance

       (517      (615
    

 

 

    

 

 

 

Accounts receivable, net

     $ 76,014       $ 154,891   
    

 

 

    

 

 

 

 

51


Table of Contents

4. Long-term receivables and other assets

The Company’s long-term receivables and other assets were as follows as of December 31 (in thousands):

 

September 30, September 30,
       2011        2010  

Lease receivables, net of deferred interest income of $25 and $82 at December 31, 2011 and December 31, 2010, respectively

     $ 555         $ 1,062   

Finance receivables, net of deferred interest income of $160 and $216 at December 31, 2011 and December 31, 2010, respectively

       1,627           1,123   

Equity Investment in EyakTek

       0           10,615   

Other Assets

       944           1,491   
    

 

 

      

 

 

 

Long-term receivables and other assets

     $ 3,126         $ 14,291   
    

 

 

      

 

 

 

5. Lease and Finance Receivables

The Company leases computer hardware to customers generally under sales-type leases, which are classified as lease receivables in the accompanying 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 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 $44.8 million, $68.2 million and $99.5 million for the years ended December 31, 2011, 2010 and 2009, respectively, from sales-type leases and related transactions. As of December 31, 2011, the Company had current and long-term outstanding gross lease and finance receivables of $11.6 million, compared with $29.1 million as of December 31, 2010.

In 2010, as a result of the SBA Agreement, certain multiyear financing agreements were modified or terminated, which resulted in a $4.6 million write-off of net financing receivables. In addition, some other multiyear financing agreements were restructured to become due within the next 12 months, resulting in a $22.0 million decrease in accounts receivable and long-term receivables along with a corresponding $22.0 million decrease in accrued liabilities and other liabilities.

Future minimum payments for lease and finance receivables were as follows as of December 31, 2011 (in thousands):

 

September 30,

2012

     $ 8,900   

2013

       1,497   

2014

       626   

2015

       366   

Thereafter

       213   
    

 

 

 

Future minimum payments

     $ 11,602   
    

 

 

 

The Company’s investments in lease receivables were as follows as of December 31 (in thousands):

 

September 30, September 30,
       2011      2010  

Future minimum lease payments receivable

     $ 6,656       $ 3,673   

Unearned income

       (248      (133
    

 

 

    

 

 

 
     $ 6,408       $ 3,540   
    

 

 

    

 

 

 

 

52


Table of Contents

The Company’s investment in finance receivables were as follows as of (in thousands):

 

September 30, September 30,
       2011      2010  

Future minimum finance payments receivable

     $ 4,946       $ 25,382   

Unearned income

       (788      (908
    

 

 

    

 

 

 
     $ 4,158       $ 24,474   
    

 

 

    

 

 

 

6. Transferred Receivables and Financed Lease Debt

The Company transferred gross financing receivables of $46.1 million and $58.1 million for the years ended December 31, 2011 and 2010, respectively, to third parties that meet the sale criteria under FASB ASC 860, Transfers and Servicing. In exchange, for the years ended December 31, 2011 and 2010, the Company received cash of $41.7 million and $55.1 million and recorded a profit on the sales of $4.4 million and $5.5 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. Inventory

Inventory (composed entirely of finished goods) is valued at the lower of cost or market. Cost is determined using the average cost method. The Company writes down its inventory for obsolete or excess inventory based on assumptions about future demand and market conditions. For the years ended December 31, 2011, 2010 and 2009, there were no significant charges recorded for obsolete or excess inventory.

8. Depreciable Assets

Depreciable assets are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over estimated useful lives. Furniture and equipment useful lives range from three to ten years. Purchased and developed computer software for internal use, including the GTSI Enterprise Resource Management System (“GEMS”), are amortized over expected lives ranging from three to seven years. The useful life for leasehold improvements is the lesser of the term of the lease or the life of the improvement, which range from three to ten years. Costs for maintenance and repairs are charged to expense when incurred. Depreciable assets consist of the following as of December 31 (in thousands):

 

September 30, September 30,
       2011      2010  

Office furniture and equipment

     $ 7,371       $ 7,469   

Purchased software for internal use

       2,469         2,262   

Internally developed software

       16,494         16,693   

Leasehold improvements

       1,387         1,377   
    

 

 

    

 

 

 
       27,721         27,801   

Less: accumulated depreciation and amortization

       (23,239      (20,349
    

 

 

    

 

 

 

Depreciable assets, net

     $ 4,482       $ 7,452   
    

 

 

    

 

 

 

Depreciation expense, including amortization of capitalized software development costs, was $3.4 million, $3.8 million and $3.9 million for the years ended 2011, 2010 and 2009 respectively. Amortization of software costs was $2.5 million in 2011, $2.9 million in 2010 and $2.8 million in 2009. During 2011 and 2010, the Company capitalized less than $0.1 million and $0.3 million, respectively, of development costs related to GEMS. In addition, during 2011 and 2010, the Company capitalized $0.2 million and less than $0.1 million, respectively, of purchased software for internal use. The total net book value of capitalized software development costs was $2.6 million and $4.8 million as of December 31, 2011 and 2010, respectively.

For year ended December 31, 2010, the Company had an impairment loss, related to internally developed software, of $0.2 million under FASB ASC 360, Property, Plant & Equipment. There were no indicators of impairment under FASB ASC 360 during 2011 or 2009.

 

53


Table of Contents

During 2011, the Company retired or disposed of a total of $0.5 million of depreciable assets and $0.5 million of related accumulated depreciation. There were no significant retirements or disposals of fully depreciated assets and related accumulated depreciation during 2010.

9. Goodwill and Other Intangible Assets

The Company allocates the purchase price paid in a purchase business combination to the assets acquired, including intangible assets and liabilities assumed at their estimated fair values. The excess of purchase price over these fair values is recorded as goodwill. Valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include but are not limited to the projected growth factors; future expected cash flows, discount rates, potential competitive developments and changes in the market.

The Company amortizes its definite—lived intangible assets using an accelerated method that best approximates the proportion of the future cash flows estimated to be generated in each period over the estimated useful life of the applicable asset and evaluated on an annual basis to ensure continued appropriateness.

In accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”), goodwill is not amortized, but instead tested for impairment at least annually. The Company will perform its annual impairment tests as of July 31 of each year.

In accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), the Company reviews its long-lived assets, including property and equipment and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. If the total of the expected undiscounted future net cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying amount of the asset.

Goodwill

The following table represents the balance and changes in goodwill for the year ended December 31, 2011 (in thousands):

 

September 30,

Balance as of January 1, 2011

       —     

InSysCo acquisition (see Note 2)

       9,415   
    

 

 

 

Balance as of December 31, 2011

       9,415   
    

 

 

 

The value of goodwill is derived from the Company’s acquisition of InSysCo. There have been no events or changes in circumstances that have occurred since the acquisition date of August 15, 2011, that would indicate that there has been an impairment of goodwill.

Other Intangible Assets – Customer Relationships

The following tables set forth information for intangible assets subject to amortization (in thousands):

 

September 30,

Balance as of January 1, 2011

       —     

Customer Relationships from InSysCo acquisition (see Note 3)

       4,490   

Amortization of Customer Relationships

       (414
    

 

 

 

Balance as of December 31, 2011

       4,076   
    

 

 

 

 

54


Table of Contents

The following table summarizes the estimated future amortization expense related to the customer relationships for 2012 and years thereafter (in thousands):

 

September 30,

Years Ending December 31,

        

2012

       915   

2013

       692   

2014

       584   

2015

       504   

Thereafter

       1,381   
    

 

 

 

Total

       4,076   
    

 

 

 

The weighted average amortization period for the customer relationships is 11.9 years. The Company uses an accelerated amortization method that reflects the pattern in which the economic benefits of the intangible asset is consumed. There have been no impairment charges on long-lived assets for the year ended December 31, 2011.

10. Credit Agreements

On May 27, 2009, we entered into a $135 million credit agreement with Castle Pines Capital LLC (“CPC”) and other lenders (the “Credit Agreement”). The Credit Agreement provided a “vendor and distributor program” under which we received financing for inventory purchases from several of our largest vendors with extended payment terms.

On October 19, 2010, GTSI entered into an Amended and Restated Credit Agreement with its lenders to amend the Credit Agreement by reducing the total facility limit from $135 million to $100 million and the revolving loan facility limit from $60 million to $45 million (“Amended Credit Agreement”). The Amended Credit Agreement carried 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 was limited to the lesser of (a) $100 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 credit.

On February 24, 2011, GTSI entered into an agreement with CPC and Wells Fargo Capital Finance, LLC, extending from May 27, 2011 to May 27, 2012 the maturity date of CPC’s 74.08% pro-rata share of the total loan commitment under the Amended Credit Agreement and allowing the acquisition of GTSI’s common stock related to net share settlements.

On May 31, 2011, GTSI entered into a Second Amended and Restated Credit Agreement with its lenders, which amended and restated the Amended Credit Agreement (the “Second Amended Credit Agreement”). The Second Amended Credit Agreement extended the maturity date of the $100 million facility to May 31, 2014 and carries an interest rate indexed at 1-Month LIBOR plus 300 basis points for revolving loan advances and 1-Month LIBOR plus 275 basis points for floor plan loans. Borrowing is limited to the lesser of (a) $100 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 credit.

On August 12, 2011, GTSI entered into a First Amendment to the Second Amended and Restated Credit Agreement with its lenders. The First Amendment amends, among other provisions, the definition of (a) “Borrowing Base” to include a “Liquidity Reserve” as a deduction there from and (b) “Total Debt Service Coverage Ratio” to include the accrual during the respective 12-month period of fees payable by GTSI as debt service expenses of GTSI in determining if it is in compliance with the Total Debt Service Coverage Ratio covenant. In addition, the First Amendment also provided the lenders’ consent to GTSI’s acquisition of InSysCo.

On August 30, 2011, GTSI entered into a Second Amendment to the Second Amended and Restated Credit Agreement with its lenders. The Second Amendment permits GTSI to purchase its common stock subject to certain terms and conditions, including that such purchases cannot exceed an aggregate purchase price of $5 million.

 

55


Table of Contents

As of December 31, 2011, borrowing capacity and availability under the Amended Credit Agreement was as follows (in thousands):

 

September 30,

Total Amended and Restated Agreement

     $ 100,000   

Borrowing base limitation

       (55,395
    

 

 

 

Total borrowing capacity

       44,605   

Less: interest-bearing borrowings

       —     

Less: non-interest bearing advances (floor plan loans)

       (14,049

Less: letters of credit

       (10,248
    

 

 

 

Total unused availability

     $ 20,308   
    

 

 

 

As of December 31, 2011, the Company had no outstanding loan balance (other than non-interest bearing floor plan loans) under the Second Amended Credit Agreement and as reflected above, unused available credit there under of $20.3 million.

The Second Amended 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 make investments; (e) enter into transactions with affiliates; (f) dissolve, change GTSI’s name, merge or enter into certain other material agreement regarding changes to the corporate entities; (g) acquire real estate; and (h) enter into sales and leaseback transactions.

The financial covenants of the Second Amended Credit Agreement require us, among other things, to:

 

   

maintain a Tangible Net Worth of not less than or equal to $45 million as of the end of each month

 

   

maintain a Ratio of Total Liabilities to Tangible Net Worth of not greater than 5.25 to 1.00 as of the end of each month

 

   

maintain Current Ratio not less than (i) 1.20 to 1.00 as of the last business day of January, February, March, April, May, June, October, November and December and (ii) 1.15 to 1.00 as of the last business day of July, August and September

 

   

maintain a minimum Total Debt Service Coverage Ratio of 1.25 to 1.00 as of the end of each month

The Second Amended Credit Agreement provides that the existence of a material proceeding against the Company or the Company’s failure to be in compliance with all material laws constitutes an event of default under the agreement. The Second Amended Credit Agreement also requires the Company to provide the lenders with certain information. The Company was in compliance with all financial and informational covenants in the Second Amended Credit Agreement as of December 31, 2011.

The Company uses the Second Amended Credit Agreement to finance inventory purchases from approved vendors. Inventory purchases under the Second Amended Credit Agreement usually have 60-day terms. Balances that are paid within the 60-day period do not accrue interest and are classified as floor plan financing in our balance sheet.

To the extent that we have credit availability under the Second Amended Credit Agreement, we are able to extend the payment terms past the 60-day period. Amounts extended past the no interest period accrue interest and are classified as notes payable on our balance sheet, for which there was no balance outstanding at December 31, 2011 or December 31, 2010. These extended payment balances under the Second Amended Credit Agreement accrue interest at the 1-Month LIBOR plus 275 basis points.

The Company defers loan financing costs and recognizes these costs throughout the term of the loans. The Company deferred $0.5 million of loan financing costs related to the Second Amended Credit Agreement in May 2011. Deferred financing costs were $0.4 million and less than $0.1 million as of December 31, 2011 and December 31, 2010, respectively.

 

56


Table of Contents

11. Accrued Liabilities

Accrued liabilities consist of the following as of December 31 (in thousands):

 

September 30, September 30,
       2011        2010  

Accrued lease obligations

     $ 1,985           4,733   

Accrued PTO

       1,654           1,158   

Accrued commissions and bonuses

       1,391           3,805   

Accrued Benefits

       1,373           167   

Accrued Salaries

       1,193           999   

Accrued Professional Fees

       498           650   

Deferred Income Taxes

       455           0   

Accrued income taxes

       383           254   

Accrued Insurance

       319           536   

Other Accrued Liabilities

       2,101           2,585   
    

 

 

      

 

 

 

Total accrued liabilities

     $ 11,352         $ 14,887   
    

 

 

      

 

 

 

12. Stockholders’ Equity

Purchase of Capital Stock

On June 8, 2009, the Company’s Board of Directors authorized a program for periodic purchases of GTSI’s common stock through May 27, 2011 for an aggregate purchase price not to exceed $5 million.

On October 19, 2010, GTSI entered into an Amended and Restated Credit Agreement that prohibited GTSI from repurchasing its own common stock for purposes other than tax share settlements on the vesting of restricted stock awards.

On August 30, 2011, GTSI entered into an amendment to the Second Amended Credit Agreement that permits GTSI to purchase its common stock subject to certain conditions, including that such purchases cannot exceed an aggregate purchase price of $5 million. On August 31, 2011, the Board of Directors authorized a share repurchase program pursuant to Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) permitting the Company to repurchase its common stock up to an aggregate purchase price of $5 million.

During the year ended December 31, 2011 and 2010, under the repurchase program, the Company purchased 29,345 and 154,377 shares of its common stock, respectively. In addition, during the year ended December 31, 2011 and 2010, the Company acquired 6,669 and 20,816 shares of its common stock, respectively, related to tax share settlements on the vesting of restricted stock awards.

Stock-Based Compensation

Stock Incentive Plans

The Company has one stockholder approved combination incentive and non-statutory stock incentive plan, which is named the Amended and Restated 2007 Stock Incentive Plan (“2007 Plan”). The 2007 Plan provides for the granting of options to employees and non-employee directors to purchase up to 4,500,000 shares of the Company’s common stock. The 2007 Plan also permits the grant of restricted stock and restricted stock units to its employees and non-employee directors as well as stock appreciation rights (“SARs”).

Under the 2007 Plan, options have a term of up to 10 years, generally vest over four years and option prices are required to be at not less than 100% of the fair market value of the Company’s common stock at the date of grant and, except in the case of non-employee directors, must be approved by the Board of Directors or its Compensation Committee. The vesting period for restricted stock and restricted stock units is determined by the Compensation Committee on an individual award basis. GTSI recognizes stock-based compensation expense for these graded vesting awards on a straight-line basis over the requisite service period for the entire award, which is equal to the vesting period specified in the option agreement.

 

57


Table of Contents

Valuation Assumptions

The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of GTSI’s stock over the historical period of time equal to the expected term of the options. The Company uses historical data to estimate option exercises, employee terminations and award forfeitures within the valuation model. The expected term of options granted has been determined based on historical exercise behavior and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the U.S. Treasury rates at the time of grant that approximates the expected term of the option. The expected dividend assumption is zero as the Company is currently restricted under its Second Amended Credit Agreement from issuing dividends on its common stock and it does not expect to declare a dividend in the foreseeable future. The fair value of the Company’s stock based option awards to employees was based on the following weighted-average assumptions for the years ended December 31:

 

September 30, September 30, September 30,
       2011     2010     2009  

Expected volatility

       52.3     51.0     51.0

Expected dividends

       —          —          —     

Expected term (in years)

       4.9        4.6        5.5   

Risk free interest rate

       1.6     1.6     2.9

Stock Options

A summary of option activity under the Company’s stock incentive plans as of December 31, 2011, 2010 and 2009, and related changes during the years then ended is presented below (in thousands):

 

September 30, September 30, September 30, September 30,
                       Weighted           
              Weighted        Average           
              Average        Remaining        Aggregate  
              Exercise        Contractual        Intrinstic  
       Shares      Price        Term        Value  

Outstanding balance at December 31, 2008

       1,648       $ 8.05         $ 3.40           261   

Granted

       200       $ 6.40             

Exercised

       (75    $ 4.24             

Forfeited

       (74    $ 6.64             

Expired

       (194    $ 9.62             
    

 

 

              

Oustanding balance at December 31, 2009

       1,505       $ 7.83           3.83         $ 69   
    

 

 

              

Granted

       285       $ 5.22             

Exercised

       (30    $ 2.81             

Forfeited

       (221    $ 5.77             

Expired

       (575    $ 7.65             
    

 

 

              

Oustanding balance at December 31, 2010

       964       $ 7.79           2.64         $ 5   
    

 

 

              

Granted

       200       $ 4.66             

Exercised

       0       $ —               

Forfeited

       (60    $ 6.27             

Expired

       (385    $ 8.35             
    

 

 

              

Outstanding balance at December 31, 2011

       719       $ 6.75           3.66         $ —     
    

 

 

              

Exercisable at December 31, 2011

       421       $ 8.14           1.89         $ —     
    

 

 

              

The weighted-average grant-date fair value of options granted during 2011, 2010 and 2009 was $4.66, $5.22 and $6.40, respectively. The total intrinsic value of options exercised during 2011, 2010 and 2009 was $0.0 million, $0.1 million and $0.1 million, respectively. For the years ended December 31, 2011, 2010 and 2009, stock compensation expense related to stock options was $0.3 million, $0.4 million and $0.7 million, respectively.

 

58


Table of Contents

For the years ended December 31, 2011, 2010 and 2009, the tax impact from stock based compensation was a tax benefit of $0.1 million, $0.7 million and $0.8 million, respectively.

Restricted Shares

In 2011, the Company issued restricted stock grants of 26,664 shares of the Company’s common stock to the non-employee Board members, which will vest in April 2012, and no restricted stock to employees. In 2010, the Company issued restricted stock grants of 26,664 shares of the Company’s common stock to the non-employee Board members, which vested in April 2011, and no restricted stock to employees. During 2009, the Company issued restricted stock grants of 26,664 shares of the Company’s common stock to the non-employee Board members, which vested in April 2010, as well as 36,539 shares of restricted stock to employees, scheduled to vest in equal installments over a period of five years from the grant date. Compensation is recognized on a straight-line basis over the vesting period of the grants. During 2011, 2010 and 2009, less than $0.1 million, $0.6 million and $0.8 million, respectively, was recorded as stock compensation expense for restricted stock.

Holders of non-vested restricted stock have similar dividend and voting rights as common stockholders. The fair value of non-vested restricted stock is determined based on the closing trading price of the Company’s shares on the grant date. A summary of the status of the Company’s non-vested shares as of December 31, 2011, 2010 and 2009, and related changes during the years then ended is presented below (in thousands):

 

September 30, September 30,
              Weighted Average  
              Grant-Date Fair  
       Shares      Value  

Nonvested balance at December 31, 2008

       290       $ 10.83   

Granted

       63       $ 5.54   

Vested

       (101    $ 9.76   

Forfeited

       (37    $ 10.13   
    

 

 

    

Nonvested balance at December 31, 2009

       215       $ 9.91   
    

 

 

    

Granted

       27       $ 5.61   

Vested

       (83    $ 8.90   

Forfeited

       (74    $ 11.27   
    

 

 

    

Nonvested balance at December 31, 2010

       85       $ 8.35   
    

 

 

    

Granted

       27       $ 4.56   

Vested

       (45    $ 7.82   

Forfeited

       (23    $ 8.91   
    

 

 

    

Nonvested balance at December 31, 2011

       44       $ 6.34   
    

 

 

    

 

59


Table of Contents

Stock Appreciation Rights (“SARs”)

SAR’s provide a cash payment based on the increase in the value of a stated number of shares over a specific period of time. SAR’s are granted with five year terms and an exercise price of $9.60. In 2011 and 2010, there were no SARs granted as part of the 2007 Plan. During 2009 there were 76,179 SARs granted, respectively, as part of the 2007 long term incentive plan. All SARs are to be settled in GTSI stock. During 2011, 2010 and 2009, less than $0.1 million, $0.7 million and $0.9 million, respectively was recorded as stock compensation expense for SARs. A summary of SARs activity under the Company’s stock incentive plans as of December 31, 2011, 2010 and 2009, and related changes during the years then ended is presented below (in thousands):

 

September 30, September 30, September 30, September 30,
                       Weighted           
              Weighted        Average           
              Average        Remaining        Aggregate  
              Exercise        Contractual        Intrinstic  
       Shares      Price        Term        Value  

Outstanding balance at December 31, 2008

       758       $ 9.60           5.09         $ —     

Granted

       76       $ 9.60             

Exercised

       —           —               

Forfeited

       (65    $ 9.60             

Expired

       (52    $ 9.60             
    

 

 

              

Outstanding balance at December 31, 2009

       717       $ 9.60           4.44         $ —     
    

 

 

              

Granted

       0       $ —               

Exercised

       —           —               

Forfeited

       (171    $ 9.60             

Expired

       (165    $ 9.60             
    

 

 

              

Outstanding balance at December 31, 2010

       381       $ 9.60           3.04         $ —     
    

 

 

              

Granted

       —           —               

Exercised

       —           —               

Forfeited

       (56    $ 9.60             

Expired

       (118    $ 9.60             
    

 

 

              

Outstanding balance at December 31, 2011

       207       $ 9.60           2.03         $ —     
    

 

 

              

Exercisable at December 31, 2011

       160       $ 9.60           1.67         $ —     
    

 

 

              

Unrecognized Compensation

As of December 31, 2011, there was $0.7 million of total unrecognized compensation cost related to non-vested stock-based awards, which consisted of unrecognized compensation of $0.5 million related to stock options, $0.1 million related to restricted stock awards and $0.1 million related to SARs. The cost as of December 31, 2011 for unrecognized compensation related to stock options, restricted stock awards, and SARs is expected to be recognized over a weighted average period of 2.21 years, 0.74 years and 1.38 years, respectively. During 2011, approximately 91,752 stock option and SAR awards and 45,412 restricted stock awards vested.

As of December 31, 2010, there was $2.0 million of total unrecognized compensation cost related to non-vested stock-based awards, which consisted of unrecognized compensation of $0.6 million related to stock options, $0.6 million related to restricted stock awards and $0.8 million related to SARs. The cost as of December 31, 2010 for unrecognized compensation related to stock options, restricted stock awards, and SARs is expected to be recognized over a weighted average period of 2.62 years, 1.64 years and 2.26 years, respectively. During 2010, approximately 167,919 stock option and SAR awards and 83,485 restricted stock awards vested.

Employee Stock Purchase Plan

Under GTSI’s Employee Stock Purchase Plan (“ESPP”), eligible employees may elect to set aside, through payroll deduction, up to 15% of their compensation to purchase Company common stock at 85% of the fair market value of shares of common stock on the last day of the offering period. The maximum number of shares that an eligible employee may purchase during any offering period is equal to 5% of such employee’s compensation for the 12 calendar-month period prior to the commencement of an offering period divided by 95% of the fair market value of a share of common stock on the first day of the offering period. The ESPP is implemented through one offering during each six-month period beginning January 1 and July 1. Prior to July 1, 2008, the ESPP purchase price was 95% of the fair market value of a share of common stock on the last day of the offering period. No other material changes were made to the plan. The Company uses its treasury shares to fulfill the obligation of both the employee withholding and the discount.

 

60


Table of Contents

The table below summarizes the number of shares purchased by employees under the ESPP during offering periods indicated:

 

September 30, September 30,

Offering period ended

     Number of
shares
purchased
       Purchase
price
 

December 31, 2011

       14,775         $ 3.54   

June 30, 2011

       17,538         $ 4.57   

December 31, 2010

       20,649         $ 4.00   

June 30, 2010

       34,233         $ 4.64   

December 31, 2009

       46,350         $ 4.22   

June 30, 2009

       34,739         $ 4.56   

The weighted average fair market value of shares under the ESPP was $4.10 in 2011, $4.40 in 2010 and $4.37 in 2009. GTSI has reserved 1,600,000 shares of common stock for the ESPP, of which 458,223 were available for future issuance as of December 31, 2011. The ESPP plan was terminated as of January 1, 2012.

Stockholder Rights Plan

On September 13, 2010, the Company’s Board of Directors adopted a stockholder rights plan (the “Rights Plan”). The Rights Plan, which expired in September 2011, was 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. 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 became exercisable, each Right would 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 were not immediately exercisable. The Rights initially traded only with the Company’s common stock to which they were attached, and generally became 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 Company’s outstanding common stock. If a person became an Acquiring Person, the holders of each Right (other than an Acquiring Person) would be entitled, after the tenth business day, to purchase shares of the Company’s preferred stock at the exercise price of the Right, which is initially $20.00 per Right. The Rights Agreement provided that a person or group currently owning 20% or more of the Company’s outstanding common stock would not be deemed to be an Acquiring Person if the person or group did not subsequently accumulate an additional 1% of the Company’s outstanding common stock through open market purchases, expansion of the group or other means. The Rights, which would only become exercisable after a person became an Acquiring Person, had no objective value. If the Rights became 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. At any time prior to a person becoming an Acquiring Person, the Company’s Board of Directors could cause the Company to redeem the Rights in whole, but not in part, at a price of $0.01 per Right.

13. Related Party Transactions

On August 19, 2011, GTSI sold its 37% equity interest in Eyak Technology, LLC (“EyakTek”) to EyakTek for $20 million and settled all of the pending arbitration proceedings, litigation and related disputes with EyakTek and its officers and other owners, pursuant to a settlement and redemption agreement. GTSI had acquired the EyakTek equity interest in 2002 when GTSI invested approximately $0.4 million in EyakTek. GTSI was not the primary beneficiary of this “variable interest entity” because GTSI did not control EyakTek, whether through voting rights or other means. GTSI’s previous investment balance in EyakTek was included in the long-term receivables and other assets in the accompanying consolidated balance sheets. The investment in EyakTek was 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 December 31, 2010, our investment balance for EyakTek was $10.6 million, and for the years ended December 31, 2011, 2010 and 2009, our equity in earnings was $3.0 million, $7.9 million and $8.3 million, respectively.

 

61


Table of Contents

GTSI recognized sales to EyakTek and its subsidiary of $5.2 million, $47.6 million, and $21.9 million for the years ended December 31, 2011, 2010 and 2009, respectively. GTSI received 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 for the years ended December 31, 2011, 2010, and 2009, respectively, which are included in sales in the accompanying consolidated statements of operations.

The following table summarizes EyakTek’s financial information for the periods included in the accompanying consolidated statements of operations.

 

September 30, September 30, September 30,
       Period  
       January 1 through
August 19, 2011
       January 1 through
December 31, 2010
       January 1 through
December 31, 2009
 

Revenues

     $ 167,795         $ 422,155         $ 408,759   

Gross margin

     $ 21,881         $ 46,776         $ 42,404   

Net income

     $ 4,271         $ 21,409         $ 21,707   

 

September 30,
       December 31, 2010  

Current assets

     $ 111,158   

Noncurrent assets

     $ 215   

Current liabilities

     $ 82,487   

Noncurrent liabilities

     $ 202   

Member’s equity

     $ 28,684   

GTSI recorded a $7.3 million gain from the sale of its EyakTek equity interest; the details of the gain calculation are in the table below.

 

September 30,

Cash

     $ 20,000   

Less: Cost basis of equity investment, net

       (12,082

Transaction Fees

       (640
    

 

 

 

Gain on sale of equity investment

     $ 7,278   
    

 

 

 

EyakTek’s audited financial statements for the period of January 1 to August 19, 2011 included a $2.4 million contingent liability that was recorded subsequent to the August 19, 2011 sale of GTSI’s equity investment in EyakTek. The contingent liability did not have any impact on the equity earnings or gain on sale of investment previously reported by GTSI.

14. Earnings (Loss) Per Share

Basic earnings (loss) per share are calculated by dividing net income by the weighted average shares outstanding during the period, which includes shares of restricted stock that are fully vested. Diluted earnings (loss) per share are computed similarly to basic earnings (loss) per share, except that the weighted average shares outstanding are increased to include equivalents, when their effect is dilutive. In periods of net loss, all potentially dilutive shares are considered anti-dilutive and are excluded from the calculation.

 

62


Table of Contents

The following table sets forth the computation of basic and diluted earnings (loss) per share for the years ended December 31 (in thousands except per share amounts):

 

September 30, September 30, September 30,
       2011        2010      2009  

Basic earnings (loss) per share:

            

Net income (loss)

     $ 506         $ (930    $ 5,456   

Weighted average shares outstanding

       9,654           9,604         9,706   
    

 

 

      

 

 

    

 

 

 

Basic earnings (loss) per share

     $ 0.05         $ (0.10    $ 0.56   
    

 

 

      

 

 

    

 

 

 

Diluted earnings (loss) per share:

            

Net income (loss)

     $ 506         $ (930    $ 5,456   

Weighted average shares outstanding

       9,654           9,604         9,706   

Incremental shares attributable to the assumed exercise of outstanding stock options

       25           N/A         56   
    

 

 

      

 

 

    

 

 

 

Weighted average shares and equivalents

       9,679           9,604         9,762   
    

 

 

      

 

 

    

 

 

 

Diluted earnings (loss) per share

     $ 0.05         $ (0.10    $ 0.56   
    

 

 

      

 

 

    

 

 

 

For the years ended December 31, 2011 and 2009, 1,023,080 and 2,313,723 shares of common stock, respectively, were outstanding but not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. For the year ended December 31, 2010 all common stock equivalents, or 2,020,711 shares, were excluded in the computation of diluted loss per share because their effect would have been anti-dilutive due to the net loss during the year. These excluded shares related to potentially dilutive securities primarily associated with stock options granted by the Company pursuant to its equity plans.

15. Income Taxes

Income tax expense consists of the following for the years ended December 31 (in thousands):

 

September 30, September 30, September 30,
       Years Ended December 31,  
       2011      2010      2009  

Current:

          

Federal

     $ (229    $ (216    $ (2,551

State

       18         83         (132
    

 

 

    

 

 

    

 

 

 
     $ (211    $ (133    $ (2,683
    

 

 

    

 

 

    

 

 

 

Deferred:

          

Federal

     $ (556    $ (817    $ (1,038

State

       (77      (150      (488
    

 

 

    

 

 

    

 

 

 
     $ (633    $ (967    $ (1,526
    

 

 

    

 

 

    

 

 

 

Total income tax provision

     $ (844    $ (1,100    $ (4,209
    

 

 

    

 

 

    

 

 

 

 

63


Table of Contents

Deferred income taxes include the net tax effects of net operating loss (“NOL”) carryforwards and tax credits and the net tax effects of temporary differences between the carrying amounts of assets and liabilities and the amounts recorded for income tax purposes. The components of the deferred tax assets and liabilities are as follows as of December 31 (in thousands):

 

September 30, September 30,
       2011      2010  

Deferred tax assets:

       

Allowance for bad debt

     $ 13       $ 1,612   

Inventory reserves and capitalization

       93         103   

Reserves

       613         1,564   

Deferred revenue

       882         655   

Deferred rent

       1,141         1,148   

Stock compensation

       919         1,152   

Sale of receivables

       —           2   

Investment Partnership

       —           628   

Net operating losses

       96         63   

Other

       9         44   
    

 

 

    

 

 

 

Total deferred tax assets

       3,766         6,971   
    

 

 

    

 

 

 

Deferred tax liabilities:

       

Prepaid expenses and other

       (494      (420

Prepaid bonuses

       (94      (198

Depreciation and amortization

       (2,943      (2,383

Unbilled Receivables

       (1,496      (3,046
    

 

 

    

 

 

 

Total deferred tax liabilities

       (5,027      (6,047
    

 

 

    

 

 

 

Net deferred tax (liabilities) assets

     $ (1,261    $ 924   
    

 

 

    

 

 

 

Deferred tax assets are reduced by a valuation allowance if the Company believes it is more likely than not that some portion or the entire deferred tax asset will not be realized. As the Company believes it is more likely than not to realize all its deferred tax assets, no valuation allowances have been recorded for the periods December 31, 2011 and December 31, 2010.

The following is a reconciliation of the statutory U.S. income tax rate to the Company’s effective tax rate for the years ended December 31:

 

September 30, September 30, September 30,
       2011     2010     2009  

Statutory rate

       34.0     34.0     34.0

State income taxes, net of federal benefit

       6.1        9.8        5.1   

Non-deductible acquisition and disposal costs

       5.4        —          —     

Non-deductible meals & entertainment costs

       4.7        40.7        1.0   

Non-deductible accrued incentive costs

       —          —          0.7   

Tax return adjustments & other

       2.9        (172.2     2.1   

APIC tax shortfall

       15.7        782.7        1.0   

Change in uncertain tax positions

       (6.3     (47.9     (0.4

Change in valuation allowance

       —          —          —     
    

 

 

   

 

 

   

 

 

 

Effective tax rate

       62.5     647.1     43.5
    

 

 

   

 

 

   

 

 

 

Tax Uncertainties

Effective January 1, 2007, the Company adopted the provisions of FASB ASC 740-10, (“ASC 740”), which is the guidance for uncertain tax positions. ASC 740 requires an evaluation process for all tax positions taken. ASC 740 prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. If the probability for sustaining a tax position is greater than 50%, then the tax position is warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate settlement.

GTSI is subject to U.S. Federal income tax as well as income tax of multiple states and local jurisdictions. Under general rules of statutory limitation, the company's federal and state income tax returns remain open for examination back to 2008, with some states open four years to 2007.

 

64


Table of Contents

The Company’s tax reserves relate to state nexus issues and the state impact of IRS audit adjustments for the 2003 through 2005 tax years. With each year the Company’s tax exposure rolls forward with incremental increases expected based on continued accrual of interest. The Company’s tax liability for unrecognized tax benefits are as follows as of December 31 (in thousands):

 

September 30, September 30, September 30,
       2011      2010      2009  

Balance at beginning of the year

     $ 107       $ 157       $ 197   

Additions for prior year tax positions

       1         20         5   

Reductions for settlements

       —           —           (2

Lapses in statute of limitations

       (88      (70      (43
    

 

 

    

 

 

    

 

 

 

Balance at end of the year

     $ 20       $ 107       $ 157   
    

 

 

    

 

 

    

 

 

 

GTSI’s practice is to recognize interest and penalties related to uncertain tax positions in income tax expense. The Company had less than $0.1 million accrued for interest and less than $0.1 million accrued for penalties as of December 31, 2011 and December 31, 2010. During the year, accrued interest and accrued penalties both decreased by less than $0.1 million due primarily to the settlement and payment of assessed liabilities. Interest will continue to accrue on certain issues in 2012 and beyond.

It is not anticipated that any increase or decrease during the next 12 months in the amount of unrecognized tax benefits will be material. Further, it is anticipated that the effective tax rate impact of any unrecognized tax benefits will be immaterial.

16. Defined Contribution Plan

GTSI maintains the Employees’ 401(k) Investment Plan (the “401(k) Plan”), a savings and investment plan intended to be qualified under Section 401 of the Internal Revenue Code (“IRC”). All Company employees who are at least 21 years of age are eligible to participate. The 401(k) Plan is voluntary and allows participating employees to make pretax contributions, subject to limitations under IRC, of a percentage (not to exceed 30%) of their total compensation. New hires are automatically enrolled in the 401(k) Plan at a 3% deferral rate unless the new hire opts out or selects to increase or decrease their deferral percentage. Employee contributions are fully vested at all times. GTSI contributions vest at 20% over five years. GTSI matches employee contributions 50% of the first five percent of eligible pay. In 2011, 2010 and 2009, the Company contributed approximately $0.7 million, $1.0 million and $1.2 million to the 401(k) Plan, respectively. Beginning on January 1, 2012, GTSI has accelerated the vesting schedule to vest employer contributions at 33% in year one, 66% in year two, and 100% in year three.

InSysCo maintained the defined contribution profit sharing plan (the “profit sharing plan”) in which InSysCo employees were eligible to participate in through the end of the year, subsequent to the acquisition. All InSysCo employees that are at least 20  1/2 years old may participate in the profit sharing plan, in which company contributions are equal to 25% of the compensation of each eligible participant and vest to the participant immediately. The Company recorded contributions to the profit sharing plan of $1.2 million for the period from August 19, 2011 through December 31, 2011. Effective January 1, 2012, the InSysCo profit sharing plan will be terminated, upon which all InSysCo employees will be eligible to participate in the 401(k) Plan.

17. Commitments and Contingencies

Product Warranties

GTSI offers extended warranties on certain products which are generally covered for three or five years beyond the warranty provided by the manufacturer. Products under extended warranty require repair or replacement of defective parts at no cost to the customer. The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its extended warranty contracts. The following table summarizes the activity related to product warranty liabilities for the years ended December 31 (in thousands):

 

September 30, September 30,
       2011      2010  

Accrued warranties at beginning of year

     $ 229       $ 215   

Charges made against warranty liabilities

       0         (15

Adjustments to warranty reserves

       (96      0   

Accruals for additional warranties sold

       34         29   
    

 

 

    

 

 

 

Accrued warranties at end of year

     $ 167       $ 229   
    

 

 

    

 

 

 

 

65


Table of Contents

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 for the years ended December 31 (in thousands):

 

September 30, September 30,
       2011      2010  

Deferred warranty revenue at beginning of year

     $ 1,882       $ 798   

Deferred warranty revenue recognized

       (1,897      (2,285

Revenue deferred for additional warranties sold

       948         3,369   
    

 

 

    

 

 

 

Deferred warranty revenue at end of year

     $ 933       $ 1,882   
    

 

 

    

 

 

 

Lease Commitments

The Company conducts its operations from leased real properties, which include offices and a warehouse. These obligations expire at various dates between 2012 and 2019. The Company executed a lease for a new corporate headquarters in 2007 and relocated to its new location in 2008. The Company has a number of lease options for current and future space commitments under its 10-year term. This lease expires in 2019.

In June 2011, GTSI executed the Fifth Amendment to extend the Chantilly, Virginia lease related to the warehouse for an additional five years expiring December 2016 and to reduce its lease footage from approximately 142,000 square feet to approximately 96,000 square feet.

Most of the leases contain renewal options at inception, some of which have been exercised, as well as escalation clauses, which are recognized on a straight-line basis over the lease term. No leases contain purchase options or restrictions of the Company’s activities concerning dividends, additional debt, or further leasing. Rent expense for 2011, 2010 and 2009 was approximately $4.8 million, $4.7 million and $4.9 million, respectively.

Future minimum lease payments under operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2011 are as follows (in thousands):

 

September 30,

2012

     $ 4,592   

2013

       4,640   

2014

       4,759   

2015

       4,881   

2016

       5,007   

Thereafter

       10,809   
    

 

 

 

Total minimum lease payments

     $ 34,688   
    

 

 

 

Letters of Credit

As of December 31, 2011 and 2010, the Company provided a letter of credit in the amount of $2.4 million for the office space lease signed in December 2007.

As of December 31, 2011 and 2010, the Company had outstanding letters of credit in the amount of $7.8 million and $2.7 million, respectively, to guarantee the performance by the Company of its obligations under customer contracts.

Employment Agreements

At December 31, 2011, GTSI has change in control agreements with eight executives and key employees and severance agreements with six executives. These arrangements provide for payments of as much as 12 months of total target compensation and continuation of benefits upon the occurrence of specified events. As of December 31, 2011, no accruals have been recorded for these agreements.

 

66


Table of Contents

Contingencies

On October 1, 2010, GTSI received notice from the U.S. Small Business Administration (“SBA”) that GTSI was temporarily suspended from any future Federal government contracting based on alleged 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 affected the responsibility of GTSI as a government contractor. On October 19, 2010, the SBA lifted its temporary Federal contract suspension on GTSI pursuant to an administrative agreement with GTSI (the “SBA Agreement”). Pursuant to the SBA Agreement, GTSI agreed that it will not obtain or attempt to obtain any new Federal government contract, subcontract or any business that is intended to benefit small businesses, including task orders and options on existing contracts. As also required by the SBA Agreement, GTSI retains a SBA-approved monitor who reports regularly to the SBA on GTSI's compliance with the SBA Agreement and applicable Federal government contracting laws and regulations. The SBA Agreement will terminate on the earlier of (a) October 19, 2013, (b) the 90th day after the SBA's Office of Inspector General's notification of the completion of its continuing investigation of GTSI, or (c) the notification date of any proposed debarment of GTSI by the SBA.

The U.S. Attorney’s Office is reviewing the same subject matter that led to the SBA’s temporary suspension of GTSI from Federal government contracting and the resulting SBA Agreement. GTSI has provided information in response to that inquiry. GTSI will continue to cooperate with the continuing investigations of its conduct as a subcontractor for certain small businesses. The continuing investigations of GTSI by the Federal government may result in administrative, civil or criminal penalties, including a recommendation that may adversely affect or terminate GTSI's ability to serve as a government contractor.

Legal Proceedings

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. We believe the resolution of these other claims that we have in the normal course of our business 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 Federal government, including the SBA and the U.S. Attorney's Office as discussed above, investigate whether our operations are being conducted in accordance with applicable regulatory requirements. Federal government investigations of us, whether relating to government contracts or conducted for other reasons, may result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or may lead to suspension or debarment from future Federal government contracting. Federal government investigations often take years to complete.

18. Segment Reporting

GTSI engages in business activities as one operating segment that resells hardware and software and provides services primarily to the Federal government. The Company’s chief operating decision maker evaluates performance and determines resource allocation based on GTSI’s consolidated sales and operating results.

The following table summarizes the Company’s sales by type for the years ended December 31 (in thousands):

 

September 30, September 30, September 30,
       2011        2010        2009  

Hardware

     $ 220,997         $ 463,078         $ 495,594   

Software

       73,269           130,241           182,372   

Services

       47,806           51,140           55,625   

Financing

       14,594           22,252           28,279   
    

 

 

      

 

 

      

 

 

 

Total

     $ 356,666         $ 666,711         $ 761,870   
    

 

 

      

 

 

      

 

 

 

 

67


Table of Contents

Major Customers

All of GTSI’s sales are earned from U.S. entities. Sales to multiple agencies and departments of the Federal government, either directly or through prime contractors, accounted for approximately 90%, 96% and 95% of the Company’s consolidated sales during 2011, 2010, and 2009, respectively.

19. Selected Quarterly Financial Data (unaudited)

The following tables illustrate selected quarterly financial data for 2011 and 2010. GTSI has historically experienced significant seasonal fluctuations in its operations as a result of the U.S. Federal government buying and funding patterns. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends (in thousands).

 

September 30, September 30, September 30, September 30, September 30,
       2011  
       Q1      Q2      Q3        Q4        Total  

Sales

     $ 70,335       $ 81,283       $ 95,782         $ 109,266         $ 356,666   

Gross margin

       12,989         14,156         17,319           17,900           62,364   

Net (loss) income

       (2,673      (1,453      4,265           367         $ 506   

Basic (loss) earnings per share

     $ (0.28    $ (0.15    $ 0.44         $ 0.04         $ 0.05   

Diluted (loss) earnings per share

     $ (0.28    $ (0.15    $ 0.44         $ 0.04         $ 0.05   

 

September 30, September 30, September 30, September 30, September 30,
       2010  
       Q1      Q2      Q3        Q4 (a)      Total  

Sales

     $ 101,814       $ 135,047       $ 237,367         $ 192,483       $ 666,711   

Gross margin

       13,519         17,449         29,788           19,584         80,340   

Net (loss) income

     $ (4,588    $ (1,236    $ 5,934         $ (1,040    $ (930

Basic (loss) earnings per share

     $ (0.48    $ (0.13    $ 0.62         $ (0.11    $ (0.10

Diluted (loss) earnings per share

     $ (0.48    $ (0.13    $ 0.62         $ (0.11    $ (0.10

 

(a) Pre-tax income for the quarter ended December 31, 2010 was negatively impacted by a $4.6 million write-off of net financing receivables and $3.0 million in additional SG&A expenses related to severance, legal and monitoring and other expenses in connection with the SBA Agreement.

20. Subsequent Events

On February 21, 2012, GTSI entered into an agreement to sublet approximately 22% of the rentable square footage located in our headquarters in Dulles, VA. The agreement contains an initial term of 25 months beginning April 1, 2012, with two additional options to extend through the end of GTSI’s lease, May 2019. GTSI has retained the right to recapture the sublet premises at the end of the initial term and therefore has not decided to permanently exit the space. In accordance with ASC 840-20-25-15, GTSI will record a charge of $0.6 million in February 2012 upon execution of the agreement. The expected net positive cash flow from the sublease is $1.3 million over the initial term of the lease.

 

68


Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

An evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of December 31, 2011.

We acquired 100% of the outstanding common stock of InSysCo on August 15, 2011. InSysCo is included in our December 31, 2011 consolidated financial statements and constituted, in the aggregate, 11.8% of consolidated total assets at December 31, 2011, 2.7% of consolidated total revenues, and 2.4% of the consolidated loss from operations for the year ended December 31, 2011. Since the acquisition occurred during the last 12 months, the scope of our assessment of the effectiveness of internal control over financial reporting does not include InSysCo. This exclusion is consistent with the SEC’s general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition.

Our disclosure controls and procedures are designed to (i) ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to GTSI’s management including our CEO and our CFO, as appropriate to allow timely decisions regarding required disclosures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2011.

Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management is required to assess the effectiveness of our internal control over financial reporting as of the end of the fiscal year and report, based on that assessment, whether our internal control over financial reporting is effective.

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Management, under the supervision and with the participation of our CEO and CFO, conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2011, based upon the criteria set forth in Internal Control—Integrated Framework established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2011.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

Under the supervision and with the participation of management, an evaluation was performed to determine whether there were any changes in our internal control procedures over financial reporting that occurred during the quarter ended December 31, 2011. Based on this evaluation, management determined there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

None.

 

69


Table of Contents

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is incorporated by reference to the Registrant’s definitive Proxy Statement for the Annual Meeting of Registrant’s Stockholders scheduled to be held on May 25, 2012 (the “Proxy Statement”). The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after December 31, 2011.

 

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the Proxy Statement.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Except for the “Equity Compensation Plan Information” disclosed in Item 5 above, the information regarding the security ownership of certain beneficial owners and management required by this Item is incorporated by reference to the Proxy Statement.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated by reference to the Proxy Statement.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item is incorporated by reference to the Proxy Statement.

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

  (a) Consolidated Financial Statements of GTSI Corp. are as follows:

 

  (1). Consolidated Financial Statements

 

  a. Consolidated Balance Sheets as of December 31, 2011 and 2010

 

  b. Consolidated Statements of Operations for each of the three years in the period ended December 31, 2011

 

  c. Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended December 31, 2011

 

  d. Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2011

 

  e. Notes to Consolidated Financial Statements

 

  (2). Consolidated Financial Statement Schedules. Schedules have been omitted because they are not applicable or are not required or the information required to be set forth in those schedules is included in the consolidated financial statements or related notes.

 

  (b) Exhibits

The exhibits listed in the Index to Exhibits are filed as part of this Annual Report on Form 10-K.

 

70


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

GTSI CORP.
By:  

/s/ STERLING E. PHILLIPS, JR.

  Sterling E. Phillips, Jr.
  Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 29, 2012 by the following persons on behalf of the registrant and in the capacities indicated.

 

Signature

  

Title

 

Date

/s/ STERLING E. PHILLIPS, JR.

Sterling E. Phillips, Jr.

  

Chief Executive Officer

(Principal Executive Officer)

  March 29, 2012

/s/ PETER WHITFIELD

Peter Whitfield

  

Senior Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

  March 29, 2012

/s/ JOHN M. TOUPS

John M. Toups

  

Chairman of the Board

  March 29, 2012

/s/ LLOYD GRIFFITHS

Lloyd Griffiths

  

Director

  March 29, 2012

/s/ LEE JOHNSON

Lee Johnson

  

Director

  March 29, 2012

/s/ THOMAS HEWITT

Thomas Hewitt

  

Director

  March 29, 2012

/s/ JOSEPH KEITH KELLOGG, JR.

Joseph Keith Kellogg, Jr.

  

Director

  March 29, 2012

/s/ STEVEN KELMAN

Steven Kelman

  

Director

  March 29, 2012

/s/ LINWOOD A. LACY, JR

Linwood A. Lacy, Jr.

  

Director

  March 29, 2012

/s/ BARRY REISIG

Barry Reisig

  

Director

  March 29, 2012

/s/ DANIEL R. YOUNG

Daniel R. Young

  

Director

  March 29, 2012

 

71


Table of Contents

EXHIBIT INDEX

 

Exhibit
Number

  

Description

2.1    Stock Purchase Agreement between GTSI Corp and Information Systems Consulting Group, Inc., dated August 15, 2011 (26)
3.1    Restated Certificate of Incorporation (1)
3.2    Bylaws, as amended (2)
3.3    Amendment to the Restated Certificate of Incorporation of GTSI Corp. (Certificate of Designation) (18)
4.1    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 (17)
10.1    GTSI Employee's 401(k) Investment Plan, and amendments No. 1, 2 and 3 thereto (3)
10.2    Employee Stock Purchase Plan, as amended to date (4)
10.3    1997 Non-Officer Stock Option Plan, as amended to date (5)
10.4    Lease dated August 11, 1995 between the Company and Security Capital Industrial Trust, and Amendments for distribution center facility (6)
10.5    Amended and Restated 2007 Stock Incentive Plan (10)
10.6    Lease dated December 5, 2007 between the Company and SP Herndon Development LP for new headquarters facility (11)
10.7    GTSI Corp. Long Term Incentive Plan * (8)
10.8    GTSI 2005 Executive Incentive Compensation Plan * (3)
10.9    Form of GTSI Change in Control Agreement *(3)
10.10    Form of GTSI Severance Agreement *(9)
10.11    2008 Short Term Incentive Plan Description* (12)
10.12    Employment Agreement dated October 29, 2008 between the Registrant and Peter Whitfield* (13)
10.13    GTSI's Board of Directors authorization of common stock repurchase program dated as of June 8, 2009 (14)
10.14    Change in Control Agreements and amendments to existing employment agreements* (15)
10.15    Election of Board of Director (16)
10.16    Administrative Agreement between GTSI and the SBA dated as of October 19, 2010. (19)
10.17    Appointment of Sterling E. Phillips Jr. as Chief Executive Officer and President. * (20)
10.18    Consulting Agreement dated January 3, 2009 between the Registrant and Lee Johnson (filed here within)
10.19    Employment Agreement dated January 24, 2011 between the Registrant and Sterling Phillips * (21)
10.20    Board appointment dated January 26, 2011 * (22)
10.21    Bonus arrangement dated February 11, 2011 between the Registrant and Peter Whitfield * (23)
10.22    Form of Indemnification Agreement dated April 28, 2011. * (24)
10.23    Second Amended and Restated Credit Agreement with Castle Pines Capital LLC and Wells Fargo (25)
10.24    First Amendment to Second Amended and Restated Credit Agreement and Consent, dated August 12, 2011 (26)
10.25    Settlement and Redemption Agreement between GTSI Corp. and Eyak Technology, LLC., dated August 19, 2011 (27)
10.26    Second Amendment to Second Amended and Restated Credit Agreement and Consent, dated August 30, 2011 (28)
14.1    Code of Ethics (7)
23.1    Consent of PricewaterhouseCoopers LLP (filed herewith)
23.2    Consent of Aronson & Company (filed herewith)
31.1    Section 302 Certification of Chief Executive Officer (filed herewith)
31.2    Section 302 Certification of Chief Financial Officer (filed herewith)
32.1    Section 906 Certification of Chief Executive Officer and Chief Financial Officer (filed herewith)
99.1    Results of Operations and Financial Conditions (29)
99.1    Other Events (30)
99.1    Results of Operations and Financial Condition (31)
99.1    Other Events (32)
99.1    Other Events (33)
99.1    Other Events (34)
99.1    Other Events (35)
99.1    Other Events (36)
99.1    Results of Operations and Financial Condition (37)
99.1    Other Events (38)

 

72


Table of Contents
* Management contracts and compensatory plans and arrangements required to be filed pursuant to Item 15 (c).

 

(1) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000.

 

(2) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 1, 2007.

 

(3) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

(4) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated December 27, 2005.

 

(5) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

(6) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2004.

 

(7) Incorporated by reference to the Company’s Internet website, www.GTSI.com.

 

(8) Incorporated by reference to Appendix B of the Registrant's 2004 Proxy Statement

 

(9) Incorporated by reference to the Registrant’s current report on Form 8-K dated April 28, 2006.

 

(10) Incorporated by reference to the Registrant’s current report on Form 8-K dated December 5, 2007.

 

(11) Incorporated by reference to the Registrant’s current report on Form 8-K dated February 25, 2008.

 

(12) Incorporated by reference to the Registrant’s current report on Form 8-K dated April 23, 2008.

 

(13) Incorporated by reference to the Registrant’s current report on Form 8-K dated October 29, 2008.

 

(14) Incorporated by reference to the Registrant’s current report on Form 8-K dated June 12, 2009.

 

(15) Incorporated by reference to the Registrant’s current report on Form 8-K dated September 4, 2009.

 

(16) Incorporated by reference to the Registrant’s current report on Form 8-K dated November 9, 2009.

 

(17) Incorporated by reference to the Registrant’s current report on Form 8-K dated September 13, 2010.

 

(18) Incorporated by reference to the Registrant’s current report on Form 8-K dated September 13, 2010.

 

(19) Incorporated by reference to the Registrant’s current report on Form 8-K dated October 19, 2010.

 

(20) Incorporated by reference to the Registrant’s current report on Form 8-K dated November 23, 2010.

 

(21) Incorporated by reference to the Registrant’s current report on Form 8-K dated January 24, 2011

 

(22) Incorporated by reference to the Registrant’s current report on Form 8-K dated January 26, 2011

 

(23) Incorporated by reference to the Registrant’s current report on Form 8-K dated February 11, 2011

 

(24) Incorporated by reference to the Registrant’s current report on Form 8-K dated April 28, 2011

 

(25) Incorporated by reference to the Registrant’s current report on Form 8-K dated June 7, 2011

 

(26) Incorporated by reference to the Registrant’s current report on Form 8-K dated August 17, 2011

 

(27) Incorporated by reference to the Registrant’s current report on Form 8-K dated August 19, 2011

 

(28) Incorporated by reference to the Registrant’s current report on Form 8-K dated August 31, 2011

 

(29) Incorporated by reference to the Registrant’s current report on Form 8-K dated May 12, 2011

 

(30) Incorporated by reference to the Registrant’s current report on Form 8-K dated August 9, 2011

 

(31) Incorporated by reference to the Registrant’s current report on Form 8-K dated August 15, 2011

 

(32) Incorporated by reference to the Registrant’s current report on Form 8-K dated August 17, 2011

 

(33) Incorporated by reference to the Registrant’s current report on Form 8-K dated August 19, 2011

 

(34) Incorporated by reference to the Registrant’s current report on Form 8-K dated August 31, 2011

 

(35) Incorporated by reference to the Registrant’s current report on Form 8-K dated October 3, 2011

 

(36) Incorporated by reference to the Registrant’s current report on Form 8-K dated October 21, 2011

 

(37) Incorporated by reference to the Registrant’s current report on Form 8-K dated November 15, 2011

 

(38) Incorporated by reference to the Registrant’s current report on Form 8-K dated December 12, 2011

 

73