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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2000 Commission File No. 0-19394
GTSI Corp.
(Exact name of registrant as specified in its charter)
Delaware 54-1248422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3901 Stonecroft Boulevard, Chantilly, Virginia 20151-0808
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 502-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.005 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on March 1,
2001, as reported on The Nasdaq Stock Market, was $37,855,520.
The number of shares outstanding of the registrant's Common Stock on March
1, 2001, was 8,130,481.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be delivered to
stockholders in connection with their Annual Meeting of Stockholders scheduled
to be held on May 15, 2001 are incorporated by reference into Part III of this
Form 10-K.
PART I
Item 1. BUSINESS.
The Company
GTSI Corp., a Delaware Corporation ("GTSI" or the "Company"), is a leading
business to Government marketer (B2G) of microcomputer and Unix workstation
hardware, software and networking products. (Unless the context indicates
otherwise, all references herein to the capitalized term "Government" shall
refer to the U.S. Federal Government, and all references herein to the
non-capitalized term "government" shall refer generally to any federal, state or
municipal government.) The Company was incorporated in 1983.
GTSI offers its customers a convenient and cost-effective centralized
source for microcomputer and workstation solutions through its broad selection
of popular products and services at competitive prices. The Company specializes
in understanding both the various information technology needs and the
procurement processes of Government customers. GTSI sells to most departments
and agencies of the Government, state governments and systems integrators and
prime contractors selling to the government market. In 2000, GTSI's sales
directly to Government agencies, to prime contractors for resale to Government
agencies and to state and local government agencies accounted for 89%, 8% and 3%
of sales, respectively.
GTSI currently offers access to approximately 250,000 information
technology products from approximately 1,300 manufacturers, including
Hewlett-Packard Company ("Hewlett-Packard"), Microsoft Corporation
("Microsoft"), Panasonic Personal Computer Company (a division of Matsushita
Electric Corporation of America), Compaq Computer Corporation ("Compaq"), Sun
Microsystems, Inc. ("Sun"), CISCO Systems Incorporated ("CISCO"), International
Business Machines Corp. ("IBM"), Apple Computer, Inc. ("Apple") and Toshiba
America Information Systems, Inc. ("Toshiba"). The Company provides its vendors
with a low-cost marketing and distribution channel to the many end users
comprising the government market, while virtually insulating these vendors from
most of the complex government procurement rules and regulations.
GTSI fulfills customer orders from its state-of-the-art 200,000-square
foot distribution center located in Chantilly, Virginia, near Dulles
International Airport and Washington, D.C. In addition to the normal
distribution functions, activities at the center include stocking of popular
items for fast delivery, customizing equipment through the integration of
various hardware and software components, and specialized services such as
providing source acceptance inspections and documentation. The distribution
center has the capability of supporting approximately $1.5 billion in shipments
per year. This includes the capacity to integrate hardware at an estimated rate
of 1,600 to 1,800 units per day, including functional and diagnostic testing of
all integrated components. In 1998, the Company's distribution and integration
operations achieved ISO 9002 certification. The Company also subleases a 10,000
square foot distribution center in Chattanooga, Tennessee. In addition to being
able to ship to any of the 48 contiguous states overnight, the center's location
in the Washington, D.C. metropolitan area allows for expedited deliveries to
anywhere in the world.
"GTSI" is a registered service mark of GTSI Corp. All other trademarks and
service marks are proprietary to their respective owners.
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Business Strategy
GTSI is committed to, and focused on, the government customer. The
Company's business strategy is to continue to focus on higher-end product-based
solutions, to broaden its product offering, to remain a low-cost,
high-reliability provider of commodity products. The Company also focuses on
bringing new technologies to government customers by concentrating on the
following elements:
Focus on the Government Market. Because of its historical focus on the
Government market, GTSI has developed the expertise and established the vendor
and customer relationships necessary to be a leader in this market. As a result,
GTSI's marketing and sales force is effective at reaching and servicing the
Government market, which consists of procurement and contracting officers,
information resource managers, systems integrators, value-added resellers
("VARs"), prime contractors and a wide array of end users. In addition, by
focusing on the Government market, the Company has avoided the significant costs
of commercial retail outlets and the potentially higher credit risk associated
with selling solely or primarily to commercial entities.
Pursue Government Contracts. GTSI pursues Government contracts ranging in
size from as small as a few hundred dollars to as large as potentially hundreds
of millions of dollars in sales. The Company holds a wide range of Government
contracts, including multi-million dollar, multi-year contracts with the
Department of Defense ("DoD") and certain civilian agencies, as well as several
multiple award schedules and Blanket Purchasing Agreements ("BPA's") with a
variety of DoD and civilian agencies (generally, "contract vehicles"). GTSI also
serves as a subcontractor to companies holding Government contracts. The Company
intends to continue to identify and pursue those contract vehicles that best
leverage GTSI's broad product selection, distribution capabilities and vendor
relationships.
Focus on Office Automation Products. GTSI focused initially on the rapidly
growing market for microcomputer applications software and expanded successively
into the complementary office automation market segments of peripherals,
microcomputers and networking products, including LANs. In 1996, GTSI began
focusing on internet and intranet products and services and entered into an
agreement with Hewlett-Packard to add their Unix-Based server products. In 1998,
GTSI began offering a full range of seat management services to Government
agencies. These services include project management, help desk support, local
area network management support, basic hardware support, continuous training
support, asset management, information technology planning as well as technical
assessment and evaluation. In future years, the Company intends to add other
complementary office automation products and expanded systems integration
services.
Focus on Customer Service. In the Company's process orientation and
interaction with its many customers, Company employees focus on attempting to
provide high quality customer service(s) associated with the order, delivery,
installation and repair of microcomputer and workstation products. By following
a "one person - one transaction - one time" approach to customer service, the
Company's employees strive to ensure customer satisfaction and thereby increase
the possibilities for future business. In 2000, the Company implemented the
Siebel Customer Relationship Management system to its customer support
organization and sales organization.
Provide a Centralized Source for Procuring Office Automation Products and
Services. In addition to offering a full line of microcomputer hardware,
software and peripheral products as well as the leading brand of workstations,
GTSI offers its customers pre- and post-sale technical support and assistance in
the selection, configuration, installation and maintenance of the products and
systems that GTSI sells. Furthermore, by offering a wide range of microcomputer
and workstation products through a variety of procurement mechanisms, GTSI
offers its customers the convenience, flexibility and cost
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savings of purchasing from a centralized source. GTSI believes that its
convenient "one-stop shop" for microcomputer and workstation products is an
important factor in its success in the government market.
Maintain Competitive Pricing and Improve Operating Efficiencies. The
government market is price-sensitive. GTSI therefore focuses both on offering
competitive pricing to its customers and on constantly improving operating
efficiencies.
Establish and Maintain Strong Vendor Relationships. To provide a
centralized source of products for its customers, GTSI maintains strong
relationships with leading hardware and software vendors. GTSI offers its
vendors a wide range of marketing and sales services, which provide them with
access to the millions of end users comprising the government market. In
addition, the Company virtually insulates its vendors from most of the
procurement regulatory complexities, costs, extensive paperwork and complicated
billing requirements associated with the government market.
The Government Procurement Process
The Company's 2000 revenues were derived primarily from sales directly to
departments and agencies of the government and to prime contractors reselling to
the government market. The Company achieves these sales primarily through
contracts with the government and through open market sales. Company contracts
with the government include General Services Administration ("GSA") schedule
contracts, BPAs and indefinite dealing/indefinite quantity contracts.
GSA Schedule Contracts
In 1996, GTSI held four GSA Schedule contracts: Schedule A, Schedule B/C,
Schedule 58 Parts VI and VII, and Schedule E. Schedule A included general
purpose commercial automatic data processing equipment and software including
workstations and connected peripherals equipment. Schedule B/C included
general-purpose automatic data processing equipment (end-user computers,
normally microcomputers and related software) for office use environment.
Schedule 59 Part VI and VII was for telecommunications products, and Schedule E
was for electronic commerce and services. On November 26, 1997 GSA combined the
four schedules under the terms of the B/C Schedule Contract and the B/C Schedule
Contract became the Information Technology ("IT") Schedule. Products offered
under the IT Schedule Contract include workstations, desktops, laptops,
notebooks, servers, laser printer, color printers, scanners, monitors, modems,
hard drives, memory, networking products, facsimile products, internet and
intranet products, video teleconferencing, maintenance, training and services.
GTSI's IT schedule is set to expire on March 31, 2002. In August 1998, GTSI was
awarded GSA Schedule 36. Schedule 36 is for the supply of Hewlett-Packard
printer toner cartridges. Schedule 36 is set to expire on September 30, 2003.
The GSA, which is the central procurement agency of the Executive Branch
of the Government, negotiates schedule contracts. Although Government agencies
are not required to purchase products under GSA Schedule contracts, these
contracts provide all Government agencies, certain international organizations
and authorized prime contractors with an efficient and cost-effective means for
buying commercial products. Government agencies and other authorized purchasers
(collectively, "GSA Schedule Purchasers") may purchase goods under GSA Schedule
contracts at predetermined ceiling prices, terms and conditions. GSA Schedule
Purchasers may place unlimited orders for products under GSA Schedule contracts.
However, agencies are instructed to seek lower prices for orders exceeding a
"maximum order" threshold. This threshold is $25,000 per order for classroom
training, $50,000 per order for shrink-wrap software and $500,000 per order for
other software and hardware.
-4-
GSA Schedule contracts are awarded on the basis of a number of factors,
the most important of which are compliance with applicable Government
regulations and the prices of the products to be sold. Any number of competing
vendors may be awarded a GSA Schedule contract for a given product although
manufacturers may enter into exclusive relationships. GSA Schedule contracts
require that each bidder must either be the manufacturer of the product covered
by the contract or furnish evidence of capability to provide a manufacturer's
product for the period of the GSA Schedule contract. Products may be added to a
GSA Schedule contract during its term under certain circumstances with the
consent of both the contractor and Government. GSA Schedule contracts include a
GSA administrative fee calculated on the product price. This fee is collected by
the Company and is remitted quarterly to the GSA.
GTSI's GSA Schedule contracts require the Government to pay for product
shipped under the contracts within 30 days of acceptance by the Government. The
GSA Schedule contracts also permit payment by Government-issued credit cards.
When payment is made by credit card, the Company usually receives payment in
less than 30 days. The Government may require GTSI to accept returns only of
incorrectly shipped product. GTSI's GSA Schedule contracts require GTSI to pass
on to customers the vendor's warranty and to provide for on-site or depot
maintenance at a pre-paid fixed fee. GTSI's GSA Schedule contracts also contain
price reduction clauses requiring, among other things, that GTSI pass on to
Government customers certain reduced prices GTSI may receive from its vendors
during a contract's term but prohibiting GTSI to pass on vendor price increases
for a period of one year. To mitigate the potential adverse impact of any such
price increase, the Company requires substantially all vendors acting as
suppliers to GTSI under its GSA Schedule contracts to provide GTSI with supply
and price protection. The GSA Schedule includes an economic price adjustment
clause that permits the Company to adjust contract prices upward if certain
conditions have been satisfied after a period of one year.
Blanket Purchase Agreements
Historically, the Company has held numerous BPA's with federal agencies. A
BPA is a simplified but non-mandatory, fixed price, IDIQ contract for the
Government to purchase products, usually by establishing charge accounts with
qualified sources. Agencies typically enter into BPA's for similar products with
several companies. BPA's generally include a list of products at established
prices, individual purchase limits for authorized purchasers, and other
pre-negotiated terms and conditions. Purchases under BPA's are often paid for
with a Government-issued credit card.
In 1996, the GSA authorized agencies to enter into BPA's with GSA Schedule
holders. The GSA-authorized BPA's incorporate many terms and conditions of the
GSA Schedule contracts, and incorporate many products offered on GSA Schedule
contracts, often at lower prices than available on the GSA Schedules. The
Company normally enters into separate agreements with vendors in order to offer
reduced BPA prices to the Government. The BPA sales vehicle allows the Company
to focus specific vendor relationships on specific sets of customers. In
response to the GSA's authorization, the Company has increased its emphasis on
BPA's.
Formal Bids
Many Government purchases of computer products and services are made under
contracts or purchase orders awarded through formal competitive bids and
negotiated procurements. In addition to its GSA Schedule and open market
business, GTSI also pursues formal Government bids. Substantially all of these
bids are awarded on the basis of "best value" to the Government (which,
depending on the bid, can be a combination of price, technical expertise, past
performance on other Government contracts and other factors), GTSI seeks to use
its vendor contacts, purchasing power, distribution strength and
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procurement expertise to compete successfully for the business. These major
procurements can exceed millions of dollars in total revenues, span many years,
and provide a purchasing vehicle for many agencies. The vast majority of the
contracts pursued by GTSI have been fixed-price (i.e., at the time of initial
award, the end-user selling prices are set for the duration of the contract at a
specified level or at specified levels varying over time) and IDIQ (i.e., the
contract provides no pre-set delivery schedules or minimum purchase levels). In
some cases, various agencies levy a fee on purchases made by departments outside
of the agency which awarded the contract. These fees are collected by the
Company, and as under the GSA Schedule contract, remitted to the respective
agency on a contract specified payment schedule.
GTSI's bids group is responsible for evaluating bid opportunities,
identifying key products or services needed to respond to bids, negotiating
favorable agreements with suppliers and subcontractors, preparing written
responses to the solicitation document, satisfying all mandatory technical
requirements and, in general, successfully managing the proposal effort. GTSI's
competitors for these contracts typically include major systems integrators,
computer manufacturers and a variety of other systems integrators, VARs and
commercial resellers.
Open Market
Many microcomputer and workstation products may also be resold by GTSI
through open market procurements. These procurements are separate and apart from
GSA Schedules or formal competitive bids, and include simplified acquisition
procedures, requests for quotes, invitations for bids and requests for
proposals. The Company is on most Government bid lists relevant to its product
offerings and responds with proposals to hundreds of such bid solicitations each
year. When awarding contracts, the Company's customers often evaluate, in
addition to price, which is typically the most important factor, a number of
other factors, such as the vendor's experience, performance record, service,
support and financial strength. Unless purchasing electronically, Government
agencies procuring products not on a Schedule or other contract vehicle must
typically publicize their procurements with a value in excess of $25,000 to
allow competitors to submit price quotes. The Company also sells to Government
prime contractors, including systems integrators, typically through open market
procurements. As a result of recent legislative changes, the Government is
encouraged to make purchases under $2,500 by credit card and often without
competition.
State and Local Contracts
Most purchases in the state government market are made through individual
competitive procurements, although many state governments issue invitations for
bid for statewide computer term contracts. State and local procurements
typically require formal responses and the posting of "bid bonds" or
"performance bonds" to ensure complete and proper service by a prospective
bidder. Each state maintains a separate code of procurement regulations that
must be understood and complied with in order to successfully market and sell to
that state. GTSI currently maintains several state and local microcomputer
contracts, submits oral and written bids to state and local governments each
month and is on a number of state and local government bid lists.
Government Market Considerations
A substantial portion of the Company's contracts are fixed-price and IDIQ.
The uncertainties related to future contract performance costs, product life
cycles, quantities to be shipped and delivery dates, among other factors, make
it difficult to predict the future sales and profits, if any, that may result
from such contracts.
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Under applicable Government regulations GTSI qualified as a "small
business" under several of the contracts it held during 2000 by virtue of it
being a non-manufacturing entity with a rolling average over the prior 12 months
of 500 or fewer employees at the time of contract award. As a small business,
GTSI enjoyed a number of significant benefits, including being able to: compete
for designated small business set-aside contracts; bid pursuant to preferential
small purchase procedures for open market purchases under $100,000 directed to
non-manufacturer small businesses; qualify as a small business subcontractor to
prime contractors on contracts over $500,000 in which the prime contractor must
submit to the Government a small business subcontracting plan; offer Government
agencies the advantage of having their purchases from GTSI count toward
fulfilling their internal small purchase goals; and avoid having to establish
small business subcontracting plans in order to compete for certain large
Government contracts.
As a result of the acquisition of the BTG Division in February 1998, GTSI
no longer qualifies as a small business for contract awards after February,
1998. Although most government contracts entered into before the BTG Division
acquisition will not be affected by this change, the Company cannot predict the
effect, if any, of this change on its operations. GTSI has a number of possible
actions available to it to seek to mitigate an adverse impact to GTSI of the
future loss of its small business status, including the following: increasing
sales through the large number of Government contracts which are not subject to
small purchase procedures; aggressively implementing GTSI's low-cost, one-stop
shop strategy to economically encourage customers to continue to place orders
with GTSI; expanding its sales to prime contractors qualifying as small or
minority-owned businesses; and increasing its sales to state and other markets
not subject to Government small business regulations. Currently, GTSI cannot
precisely quantify the extent of the impact, if any, on its future results from
a loss of its small business status.
Noncompliance with Government procurement regulations or contract
provisions could result in termination of Government contracts, substantial
monetary fines or damages, suspension or debarment from doing business with the
Government and even civil or criminal liability. During the term of any
suspension or debarment by any Government agency, the contractor could be
prohibited from competing for, or being awarded any contract by any Government
agency. In addition, substantially all of the Company's Government contracts are
terminable at any time at the convenience of the Government or upon default.
Upon termination of a Government contract for default, the Government may also
seek to recover from the defaulting contractor the increased costs of procuring
the specified goods and services from a different contractor. The effect of any
of these possible Government actions or the adoption of new or modified
procurement regulations or practices could adversely affect the Company.
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its operations as a result of
Government buying and funding patterns. Although these patterns have
historically led to sales being concentrated in the Company's third and fourth
quarters, the seasonality and the unpredictability of the factors affecting such
seasonality make GTSI's quarterly and yearly financial results difficult to
predict and subject to significant fluctuation.
The industry in which the Company conducts its business, as well as the
geographic location of the Company's headquarters near the nation's capitol and
the concomitant density of high technology companies headquartered nearby,
results in a limited pool of qualified employees. Although the Company believes
that its compensation and benefits are competitive, such competition and
geography may from time to time adversely affect the Company's ability to
attract and retain a competent and productive workforce.
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Products
The Company currently offers access to approximately 250,000 information
technology products from approximately 1,300 hardware and software vendors. The
Company continuously monitors sales of existing and newly introduced products to
ensure that it carries state-of-the-art technology products.
Hardware. The Company resells microcomputers from major brand name
manufacturers, including Hewlett-Packard, Panasonic, Compaq, Sun, Cisco, IBM,
Apple and Toshiba and peripherals from major brand name manufacturers, including
Hewlett-Packard, Sony, Iomega, Panasonic and Kodak. Peripherals carried by the
Company include disk drives, CD-ROM drives, printers, video display monitors,
plug-in circuit boards, modems and related products. GTSI's LAN hardware
products are supplemented by the Company's LAN services, which include assisting
customers in selecting, configuring, installing and maintaining LANs.
Software. The Company remarkets computer software from substantially every
leading MS-DOS and Windows based software publisher, as well as leading UNIX,
Linux and Apple products. The Company's software vendors include Microsoft,
Symantec, IBM/Lotus, Art Technology Group ("ATG"), Veritas, Siebel Systems,
MicroStrategy, Adobe, and Citrix. The Company has subset specialization in
Customer Relationship Management software, as well as Web Development and
Personalization software.
Marketing and Sales
The Company's marketing and sales personnel design and direct the
Company's sales efforts and market research, telemarketing and direct mail
campaigns; Company-sponsored catalogues and seminars; advertising in specialty
publications; and participation in major trade shows. GTSI provides training to
its marketing and sales force on various government procurement processes and
technical features of the products and services it offers. All sales personnel
have been trained on, and have online access to, GTSI's computerized system for
maintaining price, product availability, bid, ordering and order-status
information.
From inception, GTSI recognized that the size and diversity of the
government market made it imperative to identify and understand the needs of
customers. Through years of intensive effort, GTSI has compiled and continuously
updates one of the most comprehensive databases of federal, state and local
government microcomputer users and their buying patterns. This proprietary,
on-line computerized database currently contains over 300,000 entries, including
an extensive list of agency procurement and contracting officers, information
resource managers, senior policy makers, end users, systems integrators, VARs
and prime contractors. GTSI uses this database, among other things, for
targeting telemarketing and direct mail campaigns. The Company conducts direct
mail campaigns consisting of brochures, fliers, questionnaires, reply cards and
other promotional items. In 2000, the Company implemented the Siebel Customer
Relationship Management system for managing this database and maintaining
customer relationships.
In addition to being an active participant in major federal and state
government trade shows, GTSI sponsors and produces its own federal and state
government seminars and agency-specific shows. GTSI designs these seminars and
shows to provide training and information about microcomputers and workstations
and related services that are of significant interest to government users. GTSI
also produces its own "Expos" in which GTSI and specific agencies work together
to showcase products to key end users and decision makers. These seminars, shows
and expositions are supplemented by technical support hot lines, customer
bulletin boards and an evaluation library of microcomputer and workstation
product profiles, technical literature and demonstration hardware and software.
In 2000, the Company expanded
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its ability to deliver focused electronic messages to its key customers through
its "eblast" marketing program.
The Company publicly introduced its web site, GTSI Online
(http://www.gtsi.com), on the world wide web in 1995. In 1997 and 1998, the
website provided access to certain product, contract and Company information. In
the first quarter of 1999, the Company introduced its third generation website
which consists of an electronic shopping/product and contract information
section (www.gtsi.com) and a government-focused information portal
(www.governmentIT.com). In 2000, the Company expanded its customers' access to
open market, rapid delivery products through its GTSI Express program.
Additionally, the Company developed partnerships with key customers to
streamline the interfaces between its web sties and integrate gtsi.com into
their purchasing processes.
Vendor Relationships
To offer its customers a centralized source for their microcomputer and
workstation needs, the Company establishes and maintains relationships with key
vendors and offers them a number of profitable opportunities to expand their
sales to the government market, including:
o Access to the government market through a significant number
of diverse contract vehicles;
o Substantial relief from the cost of compliance with
procurement regulations involved in selling directly to the
government market;
o Lower operating costs related to reduction or elimination of
selling and marketing programs, and elimination of
non-commercial billing and collection costs related to the
government market; and
o Participation in value-added services, including numerous
government-specific marketing programs and end-user technical
support.
The terms of the Company's agreements with its vendors vary widely, but
typically permit the Company to purchase product for resale to at least the
government market. Virtually none of the Company's vendor agreements requires
the Company to purchase any specified quantities of product. The Company
typically requires vendors acting as suppliers to GTSI under its term Government
contracts to provide GTSI with supply and price protection for the duration of
such contracts. Other than supply agreements under term Government contracts,
the Company's vendor agreements are typically terminable by the vendor on short
notice, at will or immediately upon default by GTSI and may contain limitations
on vendor liability. These vendor agreements also generally permit GTSI to
return previous product purchases at no charge within certain time limits, for a
restocking fee and/or in exchange for other products of such vendor. The Company
also purchases some products from independent distributors.
Vendors provide the Company with various forms of marketing and sales
assistance, including but not limited to sales incentives and market development
funds. Vendors provide sell-through and other sales incentives in connection
with certain product promotions. Additionally, key vendors participate with the
Company in cooperative advertising and sales events and typically provide
funding which offsets the costs of such efforts. A reduction in or
discontinuance of any of these incentives or significant delays in receiving
reimbursements could materially adversely affect the Company. The Company must
continue to obtain products at competitive prices from leading vendors in order
to provide a centralized source of price-competitive products for its customers
and to be awarded government
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contracts. Although almost all of GTSI's vendors currently do not have all of
their own computer products on a GSA Schedule contract, one or more may elect to
apply for its own GSA Schedule contract and may do so at lower end-user selling
prices than those GTSI currently offers or could profitably offer. Although GTSI
believes its relationships with its key vendors to be good, a decision by one or
more to sell directly to the Government (especially if at significantly lower
prices than GTSI), to sell their products to GTSI's competitors on more
favorable terms than to GTSI, to allow additional resellers to represent their
products on a GSA Schedule contract, to restrict or terminate GTSI's rights to
sell their products or restrict their products from being carried on a GSA
Schedule contract, could materially adversely affect the Company.
Customers
The Company's customers are primarily federal, state and local government
agencies and prime contractors to the Government, including systems integrators.
In 2000, the Company sold products or services to thousands of different
customers, including to most agencies and major departments of the Government,
to many state governments and to hundreds of prime contractors. Although no
single customer accounted for greater than 5% of the Company's 2000 sales,
aggregate 2000 sales to the Government's Departments of the Army, Navy and Air
Force were 19.9%, 14.4% and 19.9%, respectively, of GTSI's 2000 sales.
The Company's sales are highly dependent on the Government's demand for
microcomputer and workstation products. Although the Company does not believe
that the loss of any single customer would have a materially adverse effect on
it, a material decline in its overall sales to the Government as a whole or to
certain key agencies thereof could have such an effect. Reductions in DoD or
other Government outlays could occur and may adversely affect the Company.
Furthermore, legislation is periodically introduced in Congress that, if
enacted, may change the Government's current procurement processes. GTSI cannot
predict whether any such legislative or regulatory proposals will be adopted or,
if adopted, the impact upon its operating results. Changes in the structure,
composition and/or buying patterns of the Government could affect the Company's
future operating results.
Backlog
At February 28, 2001, and December 31, 2000, the Company's total backlog
of orders was approximately $48.2 million and $62.7 million, respectively, as
compared with approximately $55.0 million and $54.9 million at February 28,
2000, and December 31, 1999, respectively. Total backlog consists of written
purchase orders received and accepted by GTSI but not yet shipped. Backlog
fluctuates significantly from quarter to quarter because of the seasonality of
Government ordering patterns and the periodic inventory shortages resulting from
constrained products.
Service and Warranty
GTSI provides post-sale field service for certain products that it sells
primarily through subcontractors and to a limited extent through the Company's
in-house technical staff. The Company typically warrants products sold to the
Government and certain other customers for the same term as the manufacturer's
warranty period although many IDIQ contracts include provisions for warranties
that extend beyond those offered by the manufacturer. The Company also sells
extended warranties on many of the government contracts. Product repaired while
under the manufacturer's warranty is at the manufacturer's expense; product
repaired after expiration of the manufacturer's and GTSI's warranty, if longer,
is at the customer's expense. GTSI outsources to third parties a significant
portion of its extended warranty obligations.
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Competition
The government microcomputer and workstation market is intensely
competitive and subject to rapid change. GTSI competes with certain leading
microcomputer and/or workstation hardware manufacturers, which sell to the
government market directly and through representatives other than the Company,
and with a number of systems integrators, government and commercial resellers
and commercial computer retail chains, distributors and VARs (including
companies qualifying as minority-owned, disadvantaged or small businesses under
applicable Government regulations) seeking to enter or expand their presence in
the government market. In 2000, certain manufacturers selling directly to the
Government have gained market share in the GSA schedule market. A number of
GTSI's existing and potential competitors have greater financial, sales,
marketing and technological resources than the Company.
The Company believes that the principal competitive factors in the
government microcomputer market are price, expertise in the applicable
government procurement processes, breadth of product line, customer and vendor
relationships, financial strength, the technical and other skills of marketing
and sales personnel, distribution capability, available inventory and customer
service and support. The Company believes that the principal competitive factors
in the government workstation market are essentially the same, except that
technical expertise and customer service and support are often more important
and breadth of product line and available inventory are often less important.
The Company believes that it competes favorably on each of these factors,
although to a lesser degree with respect to technical expertise. GTSI also
believes that it has a competitive advantage over certain of its competitors
because of its procurement expertise and avoidance of costly overhead related to
selling into multiple market segments and maintaining numerous retail outlets.
In addition, the Company's ability to offer a centralized source for purchases
of a wide variety of leading computer products from numerous manufacturers often
provides a competitive advantage over manufacturers which sell only their own
line of products directly to the government.
Employees
At March 2, 2001, the Company had 605 employees, including 347 in sales,
marketing and contract management; 193 in operations; and 65 in executive,
finance, information technology, human resources and legal. None of the
Company's employees is represented by a labor union, and the Company has
experienced no labor-related work stoppages.
Item 2. PROPERTIES.
The Company's executive offices are located in an approximately
100,500-square foot facility in Chantilly, Virginia under a lease expiring in
November 2009, with one five-year option. GTSI's warehousing and distribution
operations are also located in Chantilly, Virginia in a separate 200,000-square
foot facility under a lease expiring in December 2006. The Company also has a
branch sales office occupying 139 square meters in Mannheim, Germany. The
Company also subleases a 10,000 square foot distribution center in Chattanooga,
Tennessee under a sublease, which expires on March 31, 2001, with three one-year
options.
Item 3. LEGAL PROCEEDINGS.
The Company is occasionally a defendant in litigation incidental to its
business. The Company believes that none of such litigation currently pending
against it, individually or in the aggregate, will have a material adverse
effect on the Company's financial condition or results of operations.
-11-
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
-12-
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Stock Data. The Company's common stock trades on The Nasdaq Stock Market
under the symbol "GTSI." As of December 31, 2000, there were 160 record holders
of the Company's common stock. As of March 16, 2001, there were 190 record
holders and approximately 3,700 beneficial holders of the Company's common
stock. The following table sets forth, for the periods indicated, the high and
low closing prices for the Company's common stock.
------------------------------------------
2000 1999
-----------------------------------------------------
Quarter High Low High Low
-----------------------------------------------------
First 6 3/4 2 3/4 5 1/4 3 3/16
-----------------------------------------------------
Second 3 3/4 2 5/8 4 1/4 3 1/8
-----------------------------------------------------
Third 5 1/8 2 5/8 4 1/4 3 1/8
-----------------------------------------------------
Fourth 4 1/8 2 3/4 3 3/4 2 7/16
-----------------------------------------------------
The Company has never paid cash dividends. It is the current policy of the
Company to retain earnings to finance the growth and development of its
business, and therefore the Company does not anticipate paying cash dividends on
its common stock in the foreseeable future. Furthermore, certain financial
covenants in the Company's bank credit agreement restrict the Company's ability
to pay cash dividends.
Additional Investor Relations Information. All of the Company's current
required filings with the Securities and Exchange Commission, as well as press
releases and other investor relations information, may be found at
http://www.gtsi.com on the internet's world wide web. For those without internet
access, such information may be obtained without charge by request to the
Company addressed to: Investor Relations, GTSI Corp., 3901 Stonecroft Boulevard,
Chantilly, Virginia 20151-0808.
Transfer Agent. The Company's transfer agent is First Union National Bank,
Shareholder Services Group, 1525 West W.T. Harris Blvd., 3C3, Charlotte, NC
28288-1153; telephone 1-800-829-8432.
Annual Meeting. The Annual Meeting of Stockholders is scheduled to be held
at 9:00 a.m. on Tuesday, May 15, 2001, at the Company's headquarters located at
3901 Stonecroft Boulevard in Chantilly, Virginia.
Item 6. SELECTED FINANCIAL DATA.
The selected financial data for the three years ended December 31, 2000,
1999 and 1998 are derived from, and are qualified in their entirety by reference
to, the Company's audited Financial Statements and Notes thereto included
elsewhere in this Form 10-K. The December 31, 2000, 1999 and
-13-
1998 Consolidated Financial Statements of the Company have been audited by
Arthur Andersen LLP, independent accountants, as indicated in their report,
which is also included elsewhere in this Form 10-K. The selected financial data
for all other periods are derived from the Company's audited consolidated
financial statements, which are not included in this Form 10-K.
(In thousands, except per share amounts) Twelve months ended December 31,
2000 1999 1998 1997 1996 (1)
--------- --------- --------- --------- ---------
Income Statement Data:
Sales $ 677,755 $ 660,570 $ 593,571 $ 486,377 $ 491,642
Cost of sales 617,622 610,463 541,934 450,454 458,510
--------- --------- --------- --------- ---------
Gross margin 60,133 50,107 51,637 35,923 33,132
--------- --------- --------- --------- ---------
Operating Expense:
Selling, general and administrative 49,382 44,931 44,660 36,940 38,008
Depreciation and amortization 3,934 3,584 3,661 3,539 13,456
--------- --------- --------- --------- ---------
Total operating expenses 53,316 48,515 48,321 40,479 51,464
--------- --------- --------- --------- ---------
Income (loss) from operations 6,817 1,592 3,316 (4,556) (18,332)
Interest (income) expense, net (2,259) (1,090) 977 548 1,537
--------- --------- --------- --------- ---------
Income (loss) before taxes 9,076 2,682 2,339 (5,104) (19,869)
Income tax benefit (2,008) -- -- -- (2,031)
--------- --------- --------- --------- ---------
Net income (loss) before cumulative effect of
SAB No. 101 adoption 11,084 2,682 2,339 (5,104) (17,838)
--------- --------- --------- --------- ---------
Cumulative effect of SAB 101 adoption (467) -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 10,617 $ 2,682 $ 2,339 $ (5,104) $ (17,838)
========= ========= ========= ========= =========
Net income (loss) per common share
Basic:
Basic net income (loss) per share
before cumulative effect of
SAB No. 101 adoption $ 1.23 $ 0.29 $ 0.27 $ (0.76) $ (2.67)
Cumulative effect per share of
SAB No. 101 adoption (0.05) -- -- -- --
--------- --------- --------- --------- ---------
Basic net income (loss) per share $ 1.18 $ 0.29 $ 0.27 $ (0.76) $ (2.67)
========= ========= ========= ========= =========
Diluted:
Diluted net income (loss) per share
before cumulative effect of
SAB No. 101 adoption $ 1.20 $ 0.29 $ 0.26 $ (0.76) $ (2.67)
Cumulative effect per share of
SAB No. 101 adoption (0.05) -- -- -- --
--------- --------- --------- --------- ---------
Diluted net income (loss) per share $ 1.15 $ 0.29 $ 0.26 $ (0.76) $ (2.67)
========= ========= ========= ========= =========
Weighted average common shares
outstanding
Basic 9,021 9,271 8,700 6,733 6,690
========= ========= ========= ========= =========
Diluted 9,225 9,314 8,909 6,733 6,690
========= ========= ========= ========= =========
(1) The year ended December 31, 1996 includes a pretax charge of $9.1
million ($8.2 million after tax, or $1.22 per share) related to the
impairment of intangible assets acquired as part of the acquisition
of Falcon Microsystems, Inc.in 1994.
-14-
(In thousands) December 31,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital $ 43,659 $ 44,350 $ 42,206 $ 30,860 $ 34,599
Total assets 227,065 186,333 161,090 137,464 141,001
Notes payable to banks 11,925 9,479 14,889 21,569 15,828
Total liabilities 168,585 133,137 105,766 97,590 96,153
Stockholders' equity 58,480 53,196 55,324 39,874 44,848
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Consolidated
Financial Statements and Notes. 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.
Overview
GTSI Corp. ("GTSI" or the "Company") is a leading business to Government
marketer (B2G) of microcomputer and Unix workstation hardware, software and
networking products to the Federal government market. The Company currently
offers access to over 250,000 information technology products from more than
1,300 manufacturers. GTSI also performs network integration services, including
configuring, installing and maintaining microcomputers in local area networks.
The Company sells to virtually all departments and agencies of the Government,
many state governments and several hundred systems integrators and prime
contractors that sell to the government market. GTSI offers its customers a
convenient and cost-effective centralized source for microcomputer and
workstation products through its competitive pricing, broad product selection
and procurement expertise. The Company provides its vendors with a low-cost
marketing and distribution channel to the millions of end users comprising the
government market, while virtually insulating these vendors from most of the
complex government procurement rules and regulations.
Changes in sales throughout the Company's history have been attributable
to increased or decreased unit sales, to expansion of the Company's product
offerings (e.g., peripherals, microcomputers and networking and workstation
products, from 1985 through 1992); to the addition of new vendors (e.g., IBM,
Sun, Panasonic, Apple and Nexar, from 1988 through 1996, and Cisco in 1998); and
to the addition or expiration of sales contract vehicles (e.g., the addition of
the SEWP II Contract, the NIH ECS-II Contract, the TDA-1 Contract and STAMIS
Contract, and the expiration of the Companion Contract in 1995 and Desktop IV
systems ordering in 1996). The Company's financial results have fluctuated
seasonally, and may continue to do so in the future, because of the Government's
buying patterns which have historically favorably impacted the last two calendar
quarters and adversely affected the first two calendar quarters.
The Company's business strategy is to continue to focus on higher-end
product-based solutions, to broaden its product offering, to remain a low-cost,
high-reliability provider of commodity products. The Company also focuses on
bringing new technologies to government customers.
-15-
Results of Operations
The following table sets forth, for the years indicated, the percentages
that selected items within the income statement bear to sales, and the annual
percentage changes in the dollar amounts of such items.
Percentage of Sales Percentage Change
--------------------------- ------------------------------
Years Ended December 31, Years Ended December 31,
--------------------------- ------------------------------
2000 1999 1998 1999 to 2000 1998 to 1999
----- ----- ----- ------------ ------------
Income Statement Data:
Sales 100.0% 100.0% 100.0% 2.6% 11.3%
Cost of sales 91.1% 92.4% 91.3% 1.2% 12.6%
----- ----- -----
Gross margin 8.9% 7.6% 8.7% 20.0% -3.0%
Operating expense:
Selling, general and administrative 7.3% 6.8% 7.5% 9.9% 0.6%
Depreciation and amortization 0.6% 0.5% 0.6% 9.8% -2.1%
----- ----- -----
Total operating expenses 7.9% 7.3% 8.1% 9.9% 0.4%
----- ----- -----
Income from operations 1.0% 0.3% 0.6% 328.2% -52.0%
Interest (income) expense, net -0.3% -0.2% 0.2% 107.2% -211.6%
----- ----- -----
Income before taxes 1.3% 0.5% 0.4% 238.4% 14.7%
Income tax benefit -0.3% 0.0% 0.0% -100.0% --
----- ----- -----
Net income before cumulative effect of SAB No. 101 adoption 1.6% 0.5% 0.4% 313.3% 14.7%
----- ----- -----
Cumulative effect of SAB 101 adoption 0.0% 0.0% 0.0% 100.0% --
----- ----- -----
Net income 1.6% 0.5% 0.4% 295.9% 14.7%
===== ===== =====
The following tables set forth, for the periods indicated, the approximate
sales by product, by contract vehicle and by vendor, along with related
percentages of total sales.
Product Category -------------------- -------------------- --------------------
(Dollars in millions) 2000 1999 1998
-------------------- -------------------- --------------------
Hardware $534.5 78.9% $514.4 77.9% $474.7 80.0%
Software 122.5 18.1% 123.7 18.7% 82.3 13.9%
Services 20.8 3.0% 22.5 3.4% 36.6 6.1%
------ ----- ------ ----- ------ -----
Total $677.8 100.0% $660.6 100.0% $593.6 100.0%
====== ===== ====== ===== ====== =====
Contract Vehicles -------------------- -------------------- --------------------
(Dollars in millions) 2000 1999 1998
-------------------- -------------------- --------------------
GSA Schedules $230.6 34.0% $261.6 39.6% $188.6 31.8%
IDIQ 327.1 48.2% 307.3 46.5% 318.2 53.6%
Open Market 79.7 11.8% 76.8 11.6% 68.6 11.5%
Other Contracts 40.4 6.0% 14.9 2.3% 18.2 3.1%
------ ----- ------ ----- ------ -----
Total $677.8 100.0% $660.6 100.0% $593.6 100.0%
====== ===== ====== ===== ====== =====
-16-
Vendor Category -------------------- -------------------- --------------------
(Dollars in millions) 2000 1999 1998
-------------------- -------------------- --------------------
Hewlett-Packard $160.0 23.6% $166.4 25.2% $138.1 23.3%
Panasonic 93.3 13.7% 68.5 10.4% 53.4 9.0%
Microsoft 63.7 9.4% 75.8 11.5% 56.0 9.4%
Sun 53.4 7.9% 47.5 7.2% 20.3 3.4%
Compac 41.3 6.1% 51.6 7.8% 62.9 10.6%
Cicso 37.2 5.5% 34.0 5.1% 30.0 5.0%
IBM 18.4 2.7% 9.2 1.4% 7.2 1.2%
Toshiba 8.6 1.3% 11.1 1.7% 14.1 2.4%
Dell 6.5 1.0% 11.3 1.7% 16.5 2.8%
Other 195.4 28.8% 185.2 28.0% 195.1 32.9%
------ ----- ------ ----- ------ -----
Total $677.8 100% $660.6 100.0% $593.6 100.0%
====== === ====== ===== ====== =====
2000 Compared with 1999
Sales. Sales consist of revenues from product delivered and services
rendered, net of allowances for customer returns and credits. Net sales in 2000
increased $17.2 million, or 2.6% over 1999. The primary reason for the increase
was an approximately $19.8 million, or 6.4%, increase in sales under the
Company's indefinite-delivery/indefinite-quantity ("IDIQ") contracts and $25.5
million, or 171.1%, increase in Other Contract sales. Increased sales in the
IDIQ and Other Contract sales categories were partially offset by lower sales
under the Company's GSA schedules of approximately $31.0 million, or 11.9%.
Sales on Other Contracts were up $25.5 million dollars led by strong sales
to a new prime contractor of $12.3 million and increased sales in the Company's
Panasonic distribution business, up $6.7 million. Miscellaneous state contracts
and the Tennessee State Sun contract were up a combined $3.7 million and the
Immigration and Naturalization vehicle was up $1.6 million.
IDIQ contract sales were up $19.8 million dollars partially as a result of
increased sales on the combined SEWP contract vehicles of $49.6 million dollars.
The increase in SEWP contract sales can be attributed to a wide product offering
on this vehicle and the ability of all Government agencies to purchase off of
this contract. Ruggedized Portables was another vehicle that experienced
increased sales, rising $4.3 million from 1999, as the contract didn't begin
until the third quarter of 1999. Sales on the Army Portable 2 and Portable 3
vehicles were up a net $2.8 million year over year. These increases were
partially offset by a decrease in the PC 2 and PC 3 contract vehicles and the
Stamis contract of $15.4 million and $13.1 million, respectively, from the prior
year as the Army shifted spending to non-IT priorities. The State Department
contract vehicle was $3.2 lower than last year due to the State Department's
lower operating budget and IC4I was down $2.9 million as this contract vehicle
expired in late 1999.
The decline in sales under the Company's GSA Schedules is due to lower
sales on the GSA Schedule B/C of $25.8 million. Sales on the GTSI-PA vehicle
were off $11.0 million as large one-time orders from several customers were
received in 1999. Sales were also lower on the TDA-Bridge contract by $22.1
million due to the cancellation of the IRS contract.
During the fourth quarter of 2000, the Company adopted the provisions of
the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," retroactive to January 1,
2000. The impact of adoption of SAB No. 101 is to generally defer
-17-
the recognition of sales from two to seven days as compared to the Company's
previous revenue recognition policy. The impact of adoption of SAB No. 101 on
the year 2000 was to reduce revenues by $2.5 million and decrease gross margin
by $358,000. The Company implemented the guidance set forth in SAB No. 101 by
recording a charge of $467,000 for the cumulative effect of adoption on January
1, 2000.
Total booked backlog at December 31, 2000 was approximately $62.7 million
compared to $54.9 million at December 31, 1999. Total booked backlog was $48.2
million at February 28, 2001, compared to $55.0 million at February 29, 2000.
Booked backlog represents orders received but product has yet to ship.
Gross Margin. Gross margin increased $10.0 million, or 20.0%, to $60.1
million from $50.1 million in 1999. Gross margin as a percentage of sales
increased to 8.9% in 2000, as compared to a gross margin of 7.6% in 1999. The
increase in gross margin percentage is due to better contract margins, more
effective inventory management and better warranty experience. A favorable
geographical mix of contracts, which lowered freight costs, also helped gross
margin.
Sales contract margins were higher in 2000 versus 1999 due to a shift from
lower margin GSA contract vehicles to higher margin IDIQ contract vehicles and
the maturation of IDIQ contract vehicles, for example the PC3 and Portables 3
contracts which were awarded in 1999. More effective warranty administration,
inventory management, and lower freight costs contributed to improved margins.
Maintenance costs were $1.8 million dollars lower and freight costs were $2.1
million lower than in 1999. Freight costs decreased from 1.15% of sales in 1999
to 0.83% of sales in 2000. Inventory management costs, net of product
liquidations, were $1.5 million lower than last year. Cumulatively, these costs
were $6.6 million dollars lower than last year.
Operating Expenses. Total operating expenses for 2000 increased $4.8
million, or 9.9%, to $53.3 million from $48.5 million in 1999, and increased to
7.9% from 7.3% as a percentage of sales. Total personnel costs and
infrastructure costs increased by $4.1 million, or 8.4%, due primarily to
increased personnel costs to support increased emphasis on customer relationship
selling. Other factors contributing to the increase in operating expenses
include increased legal costs of $316,000 to defend various contract awards and
protests and $470,000 in increased bad debt allowance over 1999.
Interest Expense. Net interest expense is the amount of interest expense
on borrowings offset by interest income and prompt payment discounts. Net
interest income increased by $1.2 million, from $1.1 million to $2.3 million, or
107.2%, in 2000 compared to 1999. Interest income increased by $1.9 million, but
was partially offset by an increase in interest expense of $708,000 over 1999.
The increase in interest income is primarily due to a greater utilization of
cash discounts earned on prompt payments of vendor invoices.
Income Taxes. The Company's effective tax rate in 2000 was favorably
impacted by the recognition of its previously reserved tax assets, which
resulted in a $2.0 million income tax benefit in the fourth quarter and full
year 2000. The Company anticipates that its ongoing effective tax rate will be
approximately 39%.
1999 Compared with 1998
Sales. Sales consist of revenues from product delivered and services
rendered, net of allowances for customer returns and credits. Net sales in 1999
increased $67.0 million, or 11.3% over 1998. The primary reason for the increase
was higher sales under the Company's GSA schedules and Open Market sales of
approximately $73.0 million, or 38.7%, and $8.2 million, or 12.0%, respectively.
The increase is
-18-
partially offset by lower sales under IDIQ contracts of approximately $10.9
million, or 3.4%, and lower sales on other contracts of $3.3 million, or 18.1%.
The decline in IDIQ sales is primarily attributable to the replacement of the
TDA-1 IDIQ contract sales of $27.6 million in 1998 with the TDA BPA agreement
sales of $25.4 million in 1999. In 1996, GSA expressly authorized agencies to
procure from GSA Schedule holders under BPA's which incorporate many terms and
conditions of the GSA Schedule contracts. Additionally, BPA's offer many of the
same products as GSA schedules, often at lower prices than available on GSA
schedules. In response to GSA's authorization, the Company has increased its
emphasis on BPA's.
Sales under GSA contracts increased primarily as a result of TDA Bridge
BPA sales of $25.4 million, which replaced the expired 1998 TDA-1 IDIQ contract.
Additional increases result from increased sales under the Army Microsoft
Upgrade BPA contract of $20.2 million; and increased sales under the Enhanced
Technology contract of $9.4 million resulting from a full year effect of this
contract which was awarded in April, 1998; and increased overall emphasis on
BPA's.
Total booked backlog at December 31, 1999 was approximately $54.9 million
compared to $59.7 million at December 31, 1998. Total booked backlog was $55.0
million at February 29, 2000, up 1.6 million or 3.0% compared to February 28,
1999. Booked backlog represents orders received but product has yet to ship.
Gross Margin. In 1999, gross margin decreased in absolute dollars by $1.5
million, or 3.0%, and decreased as a percentage of sales to 7.6% from 8.7%, when
compared to 1998. Margins in 1999 were affected by a combination of the
replacement of several existing contracts by competitive wins and continued
downward pressure on personal computer margins. Although the gross margin in
1999 is below the gross margin in 1998, the gross margin in 1998 included the
beneficial effect of a one-time $2.2 million inventory valuation adjustment.
Removal of this inventory adjustment results in a pro-forma gross margin of 8.2%
for 1998.
Operating Expenses. Total operating expenses for 1999 increased $194,000,
or 0.4%, compared to 1998, but as a percentage of sales, operating expenses
decreased to 7.3% from 8.1%. Operating expenses, at $48.5 million in 1999, were
relatively equal with operating expenses of $48.3 in 1998. Although total
operating expenses were relatively flat compared to 1998, personnel costs
increased by $3.5 million, or 12.5% due to expanded sales and program management
and support coverage due to the acquisition of new contract vehicles as well as
an emphasis on revenue growth. This increase was substantially offset by
reductions in advertising, consulting, and rent. Advertising expense was reduced
by $2.1 million, or 33.4%, compared to 1998, primarily related to the Company's
discontinued catalog business along with the better management of show related
costs. Consultant expense was reduced by $907,000, or 40.8%, in transitioning
functions internally to Company personnel. Rent expense was reduced $650,000, or
54.2% due to better negotiated lease terms related to the Company's move to its
new headquarters in November of 1998.
Interest Expense. Net interest expense is the amount of interest expense
on borrowings offset by interest income and prompt payment discounts. Net
interest expense decreased by $2.1 million, or 211.6% in 1999 compared to 1998.
The Company utilized more prompt payment discounts and reduced average
borrowings as compared to the same period in 1998. The reduced average borrowing
was primarily due to improved cash flow from the increased collections emphasis
on aged accounts receivables. Average days sales outstanding ("DSO") decreased 5
days to 47 in 1999 from 52 in 1998. Average borrowing was also reduced by the
increase of credit card sales which allows for the immediate collection of
invoices.
-19-
Income Taxes. No provision for income tax has been recognized with respect
to the Company's income from operations for 1999 due to the reversal of tax
valuation allowance that fully offset the Company's current tax expenses for
1999.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the application of generally
accepted accounting principles to revenue recognition issues in financial
statements. During the fourth quarter of 2000, the Company adopted the
provisions of SAB No. 101 retroactive to January 1, 2000. SAB No. 101 clarifies
the appropriate timing of revenue recognition when products are shipped to
customers. The impact to the Company of the adoption of SAB No. 101 is to
generally defer the recognition of revenue from two to seven days as compared to
the Company's previous method. The Company implemented the guidance set forth in
SAB No. 101 by recording an adjustment for the cumulative effect of adoption of
$467,000 on January 1, 2000.
The Emerging Issues Task Force ("EITF") has issued EITF Issue No. 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent." Consistent with
the requirements under SAB No. 101, EITF No. 99-19 provides guidance regarding
whether a company should report revenue based on (a) the gross amount billed to
a customer because it has earned revenue from the sale of the goods or services
or (b) the net amount retained (that is, the amount billed to a customer less
the amount paid to a supplier) because it has earned a commission or fee. During
the fourth quarter of 2000, and on a retroactive basis for all periods
presented, the accompanying financial statements have been reclassified to
reflect the provisions of EITF No. 99-19. This accounting pronouncement
clarifies the income statement presentation of the Company's revenues and
expenses generated from the sale of software maintenance agreements. The Company
had previously reported total billings to customers for software maintenance
agreements as sales and the total amount we owed to the maintenance providers as
cost of sales. Pursuant to the guidance EITF No. 99-19, our income statement
presentation has been reclassified to reflect only the net margin on these
transactions as sales. Adoption of EITF No. 99-19 had no impact on the Company's
reported gross margin or net income, but merely results in the reduction of
previously reported sales and cost of sales of $12.3 million, $7.9 million and
$13.4 million for 1998, 1999 and 2000, respectively.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies
to record derivatives on the balance sheet as assets or liabilities, measured at
fair value. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000. The Company determined that adoption of SFAS No. 133 will not have a
material affect on its financial statements.
Effect of Inflation
The Company believes that inflation has not had a material effect on its
operations. However, if inflation increases in the future it could temporarily
adversely affect the profitability of GTSI's sales under its Government
fixed-price contracts, which generally preclude the Company from passing on
inflation-related or other increases in product costs to Government customers
during the term of a pre-existing contract. The Company mitigates this risk in
part by often obtaining agreements from certain of its suppliers prohibiting
them from increasing their prices to GTSI during fixed-price, term contracts.
-20-
Seasonal Fluctuations and Other Factors
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its operations as a result of
Government buying and funding patterns, which also impact the buying patterns of
GTSI's prime contractor customers. These buying and funding patterns
historically have had a significant positive effect on GTSI's bookings in the
third quarter ending September 30 each year (the Government's fiscal year end),
and consequently on sales and net income in the third and fourth quarters of
each year. Quarterly financial results are also affected by the timing of the
award of and shipments of products under government contracts, price competition
in the microcomputer and workstation industries, the addition of personnel or
other expenses in anticipation of sales growth, product line changes and
expansions, and the timing and costs of changes in customer and product mix. In
addition, customer order deferrals in anticipation of new product releases by
leading microcomputer and workstation hardware and software manufacturers,
delays in vendor shipments of new or existing products, a shift in sales mix to
more complex requirements contracts with more complex service costs, and vendor
delays in the processing of incentives and credits due GTSI, have occurred (all
of which are also likely to occur in the future) and have adversely affected the
Company's operating performance in particular periods. The seasonality and the
unpredictability of the factors affecting such seasonality make GTSI's quarterly
and yearly financial results difficult to predict and subject to significant
fluctuation. The Company's stock price could be adversely affected if any such
financial results fail to meet the financial community's expectations.
Additionally, legislation is periodically introduced in Congress that may
change the Government's procurement practices. GTSI cannot predict whether any
legislative or any regulatory proposals will be adopted or, if adopted, the
impact upon its operating results. Changes in the structure, composition and/or
buying patterns of the Government, either alone or in combination with
competitive conditions or other factors, could adversely affect future results.
Liquidity and Capital Resources
During 2000, the Company's operating activities generated approximately
$7.6 million of cash flow, compared to $10.3 million for 1999. Significant
factors impacting cash provided by operating activities in 2000 include an
increase in accounts receivables of $17.8 million, an increase in inventories of
$6.8 million, an increase in other assets of $12.2 million, offset by
corresponding increases in accounts payable and accrued liabilities of $30.2
million and $4.3 million respectively. The increase in accounts receivable was
primarily attributed to an increase of $13.5 million in trade accounts
receivable due to increased shipments and an increase in short-term lease
receivable of $5.4 million, offset by a $1.1 million decrease in various vendor
receivables. The increase in inventory was primarily due to an increase in
inventory in transit. The increase in other assets was primarily due to an
increase in warranty spares to support contracts of $2.1 million, an increase in
prepaid inventory of $7.0 million, and an increase in long-term lease receivable
of $3.4 million. The increase in accounts payable was due to an increase in
trade accounts payable of $27.8 due to increased backlog and shipments at year
end and an increase of $2.4 million in income taxes payable.
Investing activities used cash of approximately $4.3 million in 2000
primarily for the Company's continued investment in its customer relationship
management initiatives and its Web site development.
The Company's financing activities used approximately $3.4 million of cash
flow during 2000 due to an increase in the Company's outstanding borrowing under
its line-of-credit of $2.4 million and $6.0 million used to repurchase the
common stock of the Company.
-21-
On May 2, 1996, the Company executed a three-year credit facility with a
bank (the "Principal Lender") for $40.0 million and a one-year credit facility
with the other lenders (collectively, the "Lenders") for an additional $55.0
million (collectively, the "Credit Facility"). Additionally, on June 27, 1996,
the Company executed a separate $10.0 million facility with the Principal Lender
for inventory financing of vendor products (the "Wholesale Financing Facility").
On July 28, 1997, the Company and its banks executed the Second Amended
and Restated Business Credit and Security Agreement (the "Credit Agreement") to
modify some of the terms and conditions, as well as the amounts available under
the Credit Facility and the Wholesale Financing Facility. These modifications
included the revision of the Credit Facility's term to one year with a one year
automatic renewal.
On, March 31, 1999, the Second Amended and Restated Business Credit
Agreement of July 28, 1997 was amended to make the Tangible Net Worth
requirement for the Company an amount no less than $40 million at all times
beginning the calendar quarter ending March 31, 1999 and each calendar quarter
thereafter. All other material terms of the Credit Agreement remained the same.
On, November 24, 1999, the Company and its banks executed separate
amendments for the continuation of the Credit Agreement through November 30,
2000 with an automatic one year renewal, and adjusting, among other things, the
seasonality of the amount available under the Credit Facility. The limit of the
Credit Facility is $50 million during the period July 1 through January 31.
During the period February 1 through April 30, the total amount available under
the Credit Facility is limited to $30 million. During the period May 1 though
June 30, the total amount available under the Credit Facility is $20 million. In
addition, the interest rate under the Credit Facility is a rate of the London
Interbank Offered Rate (LIBOR) plus 1.75%. The Wholesale Financing Facility was
also amended effective December 1, 1999 to $50.0 million throughout the fiscal
year.
On, November 17, 2000, the Company and its banks executed the Fourth
Amendment to the Credit Agreement for the continuation of the Credit Agreement.
The termination provisions of the agreement were modified to provide for a
90-day written termination notice upon receipt by either party. The Amendment
also provided for, among other things, increasing the Company's stock repurchase
authorization from third-party shareholders to $6.1 million, up from $5.25
million in the previous Amendment. All other material terms of the Credit
Agreement remained the same.
As of December 31, 2000, 1999, and 1998, respectively, the Company's
interest rate on the Credit Facility was 8.40%, 8.24%, and 7.83%, respectively.
Amounts due to the Lenders of $11.9 million as of December 31, 2000 are
classified as current liabilities up from $9.5 million as of December 31, 1999
and the available portion of the Credit Facility was approximately $38.1 million
at December 31, 2000, up from $35.3 million at December 31, 1999.
Borrowing is limited to 85% of eligible accounts receivable. The Credit
Facility is secured by substantially all of the operating assets of the Company.
Current obligations are first funded and then all cash receipts are
automatically applied to reduce outstanding borrowings. The Credit Facility also
contains certain covenants that include restrictions on the payment of dividends
and the purchase of the Company's Common Stock, as well as provisions specifying
compliance with certain quarterly and annual financial statistical ratios. At
December 31, 2000, the Company was in compliance with all financial covenants
set forth in the credit facility.
-22-
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Inapplicable.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
The statements which are not historical facts contained in this
Management's Discussion and Analysis of Financial Condition, Results of
Operations and Notes to Consolidated Financial Statements, are forward-looking
statements that involve certain risks and uncertainties. Actual results may
differ materially based on numerous factors, including but not limited to
competition in the government markets, spending patterns of the Company's
customers, general economic and political conditions, success of negotiations
with the Company's Lenders, changes in government procurement regulations, and
other risks described in this Annual Report on Form 10-K and in the Company's
other Securities and Exchange Commission filings.
-23-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements and Schedule of GTSI Corp. and
Subsidiary are filed as part of this Form 10-K. Supplemental unaudited quarterly
financial information is included in Note 10 of Notes to Consolidated Financial
Statements.
Index to Financial Statements and Schedule Page
----
Financial Statements:
Report of Independent Public Accountants 25
Consolidated Balance Sheets as of December 31, 2000 and 1999 26
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 27
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998 28
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 29
Notes to Consolidated Financial Statements 30-44
Schedule:
Schedule II - Valuation and Qualifying Accounts 45
Schedules not listed above have been omitted because they are not applicable or
the information required to be set forth therein is included in the financial
statements or notes thereto.
-24-
Report of Independent Public Accountants
To GTSI Corp.:
We have audited the accompanying consolidated balance sheets of GTSI Corp.
and subsidiary (formerly Government Technology Services, Inc., a Delaware
corporation) as of December 31, 2000 and 1999, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GTSI Corp. and subsidiary as
of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
As explained in Note 1 to the financial statements, the Company has given
retroactive effect to the change in accounting for certain of its revenue
transactions in accordance with Emerging Issues Task Force Issue No. 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent." In addition,
effective January 1, 2000, the Company changed its method of revenue recognition
for certain of its transactions in accordance with the provisions of the
Securities and Exchange Commission Staff Accounting Bulletin No. 101, " Revenue
Recognition in Financial Statements".
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Vienna, Virginia
February 5, 2001
-25-
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands, except share amounts) 2000 1999
--------- ---------
ASSETS
Current assets:
Cash $ 79 $ 149
Accounts receivable, net 137,181 125,179
Merchandise inventories 53,570 41,483
Other current assets 18,269 6,057
--------- ---------
Total current assets 209,099 172,868
Property and equipment, net 12,830 12,627
Other assets 5,136 838
--------- ---------
Total assets $ 227,065 $ 186,333
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to banks $ 11,925 $ 9,479
Note payable, currrent 500 500
Accounts payable 134,071 103,871
Accrued warranty liabilities 10,249 9,135
Accrued liabilities 8,695 5,533
--------- ---------
Total current liabilities 165,440 128,518
Notes payable, net of current portion 1,000 1,500
Other liabilities 2,145 3,119
--------- ---------
Total liabilities 168,585 133,137
--------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock - $0.25 par value, 680,850 shares authorized;
none issued or outstanding -- --
Common stock - $0.005 par value 20,000,000 shares authorized, 9,806,084
issued and 7,956,272 outstanding at December 31, 2000; and 20,000,000 shares
authorized, 9,806,084 issued and 9,235,043 outstanding at December 31, 1999 49 49
Capital in excess of par value 43,484 43,687
Retained earnings 22,933 12,316
Treasury stock, 1,849,812 shares at December 31, 2000 and 571,041 shares at
December 31, 1999, at cost (7,986) (2,856)
--------- ---------
Total stockholders' equity 58,480 53,196
--------- ---------
Total liabilities and stockholders' equity $ 227,065 $ 186,333
========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
-26-
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(In thousands, except per share amounts) 2000 1999 1998
---------------------------------------
Sales $ 677,754 $ 660,570 $ 593,571
Cost of sales 617,621 610,463 541,934
--------- --------- ---------
Gross margin 60,133 50,107 51,637
Operating expenses 53,316 48,515 48,321
--------- --------- ---------
Income from operations 6,817 1,592 3,316
--------- --------- ---------
Interest and financing income (3,206) (1,742) (541)
Interest expense 947 652 1,518
--------- --------- ---------
Interest (income) expense, net (2,259) (1,090) 977
--------- --------- ---------
Income before income taxes 9,076 2,682 2,339
Income tax benefit (2,008) -- --
--------- --------- ---------
Net income before cumulative effect of SAB No. 101 adoption 11,084 2,682 2,339
Cumulative effect of SAB No. 101 adoption (467) -- --
--------- --------- ---------
Net income $ 10,617 $ 2,682 $ 2,339
========= ========= =========
Net income per common share
Basic
Basic net income per share before cumulative effect of SAB No. 101 adoption $ 1.23 $ 0.29 $ 0.27
Cumulative effect per share of SAB No. 101 adoption (0.05) -- --
--------- --------- ---------
Basic net income per share $ 1.18 $ 0.29 $ 0.27
========= ========= =========
Diluted
Diluted net income per share before cumulative effect of SAB No. 101 adoption $ 1.20 $ 0.29 $ 0.27
Cumulative effect per share of SAB No. 101 adoption (0.05) -- --
--------- --------- ---------
Diluted net income per share $ 1.15 $ 0.29 $ 0.26
========= ========= =========
Weighted average common shares outstanding
Basic 9,021 9,271 8,700
========= ========= =========
Diluted 9,225 9,314 8,909
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
-27-
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 2000, 1999 and 1998
-------------------------------------------------------------------------------------------
Preferred Stock Common Stock
------------------------------------------ Capital in Total
Shares Shares Excess of Retained Treasury Stockholders'
(In thousands) Issued Amount Issued Amount Par Earnings Stock Equity
-------------------------------------------------------------------------------------------
Balance, December 31, 1997 -- $ -- 6,806 $ 34 $ 33,086 $ 7,295 $ (541) $ 39,874
Stock options exercised -- -- -- -- (326) -- 470 144
Acquisition of BTG Division-
issuance of preferred stock 15,375 15,375 -- -- -- -- -- --
Acquisition of BTG Division-
conversion of preferred stock into
common stock (15,375) (15,375) 3,000 15 12,952 -- -- 12,967
Net income -- -- -- -- -- 2,339 -- 2,339
------------------------------------------------------------------------------------------
Balance, December 31, 1998 -- $ -- 9,806 $ 49 $ 45,712 $ 9,634 $ (71) $ 55,324
Stock options exercised -- -- -- -- (81) -- 178 97
BTG settlement - purchase of
Treasury stock and repurchase option -- -- -- -- (1,944) -- (2,963) (4,907)
Net income -- -- -- -- -- 2,682 -- 2,682
------------------------------------------------------------------------------------------
Balance, December 31, 1999 -- $ -- 9,806 $ 49 $ 43,687 $ 12,316 $ (2,856) $ 53,196
Stock options exercised -- -- -- -- (203) -- 916 713
Purchase of treasury stock -- -- -- -- -- -- (6,046) (6,046)
Net income -- -- -- -- -- 10,617 -- 10,617
------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- $ -- 9,806 $ 49 $ 43,484 $ 22,933 $ (7,986) $ 58,480
======= ==================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
-28-
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(In thousands) 2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,617 $ 2,682 $ 2,339
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of SAB No. 101 adoption 467 -- --
Depreciation and amortization 3,934 3,584 3,661
Loss on disposal of property and equipment 134 288 --
Deferred taxes (4,334) (440) (1,740)
(Decrease) increase in cash due to changes in assets and liabilities:
Accounts receivable (17,805) (21,702) (15,429)
Merchandise inventories (6,751) (4,939) 9,408
Other assets (12,176) 223 (566)
Accounts payable 30,200 28,389 8,086
Accrued liabilities and warranty liabilities 4,276 1,553 3,333
Other liabilities (974) 657 1,439
-------- -------- --------
Net cash provided by operating activities: 7,588 10,295 10,531
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,271) (5,004) (4,827)
Payments related to purchase of BTG Division -- -- (7,826)
Payments from BTG settlement -- 132 --
-------- -------- --------
Net cash used in investing activities: (4,271) (4,872) (12,653)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment of) bank notes, net 2,446 (5,410) 1,146
Payment of notes payable (500) -- --
Purchase of treasury stock (6,046) -- --
Proceeds from exercises of stock options 713 97 159
-------- -------- --------
Net cash (used in) provided by financing activities: (3,387) (5,313) 1,305
-------- -------- --------
Net (decrease) increase in cash (70) 110 (817)
Cash at beginning of year 149 39 856
-------- -------- --------
Cash at end of year $ 79 $ 149 $ 39
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,429 $ 571 $ 2,114
Income taxes $ -- $ -- $ 2,553
The accompanying notes are an integral part of these
consolidated financial statements.
-29-
GTSI CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GTSI Corp. ("GTSI", or the "Company", formerly Government Technology
Services, Inc.) operates in a single business segment and resells microcomputer
and workstation hardware, software and peripherals to agencies of federal, state
and local governments (the "Government"). Business activities also include sales
to systems integrators, prime contractors and other companies reselling
information technology to various government agencies. In August 1994, GTSI
acquired all of the outstanding shares of common stock of Falcon Microsystems,
Inc. ("Falcon"). GTSI and Falcon are hereinafter referred to as the "Company."
Acquisition of BTG Division
On February 12, 1998, the Company entered into and closed on an Asset
Purchase Agreement with BTG, Inc. and two of its subsidiaries (collectively,
"BTG") under which the Company acquired substantially all of the assets of the
BTG division that resells computer hardware, software and integrated systems to
the Government (the "BTG Division"). The acquired assets consisted primarily of
inventory and rights under certain contracts and intangible personal property,
along with furniture, fixtures, supplies and equipment. In addition, the Company
assumed certain liabilities under specified contracts of BTG as well as certain
liabilities arising from the ownership or operation of the acquired assets after
the closing. The Company paid at closing $7,325,265 in cash (after a $174,735
adjustment for accrued vacation liability and satisfaction of an outstanding
invoice owed by BTG) and issued 15,375 shares, having a liquidation preference
of $15,375,000, of a new series of preferred stock designated as Series C 8%
Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"). The Company
paid an additional $500,000 in cash upon the release of liens on certain items
of equipment, which are part of the acquired assets. A portion of the
consideration, $800,000 in cash and 1,538 shares of Series C Preferred Stock,
was held under an escrow agreement to secure BTG's indemnification obligations
under the Asset Purchase Agreement. Under the Asset Purchase Agreement, BTG was
obligated to repay to the Company up to $4.5 million to the extent that there
was a shortfall in the amounts that the Company received from dispositions of
certain inventory acquired.
The acquisition of the BTG Division was accounted for using the purchase
method of accounting. The purchase price was allocated to tangible assets based
on fair market value. The financial statements include the results of operation
of the BTG Division since the acquisition date.
The following table sets forth the unaudited pro forma results of the
operations of the Company and the BTG Division for the year ended December 31,
1998, assuming the acquisition occurred on January 1, 1998. Net income for 1998
excludes approximately $1 million of nonrecurring cost and $270,000 of interest
expense directly attributable to the acquisition.
-30-
(In thousands, except per share data) (unaudited)
1998
-----------
Revenues $ 647,021
Net income $ 1,970
Basic net income per share $ 0.23
Diluted net income per share $ 0.22
The pro forma results are not indicative of the results of operations had
the acquisition taken place on January 1, 1998.
Subsequent to the closing, BTG delivered to the Company certain other
inventory ("Surplus Inventory"). By letter dated May 15, 1998, the Company and
BTG agreed that BTG would invoice GTSI an aggregate of $3,912,419 for Surplus
Inventory. In addition, BTG agreed to pay to the Company $1 million on June 30,
1998, which constituted full and complete payment for any inventory shortfall as
described in the Asset Purchase Agreement, as well as $250,000 for costs
associated with processing the Surplus Inventory.
Pursuant to the Asset Purchase Agreement, the Company agreed to convene a
meeting of stockholders no later than January 1, 1999 to approve a proposal to
convert the Series C Preferred Stock into 3,000,000 shares of Common Stock (the
"Conversion Proposal"), and a proposal to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock from
10,000,000 to 20,000,000 (the "Charter Amendment Proposal"). At the Company's
annual meeting of stockholders held on May 12, 1998, the Company's stockholders
approved the Conversion Proposal and the Charter Amendment Proposal. The Series
C Preferred Stock was converted automatically into 3,000,000 shares of Common
Stock valued at $5.125 per share and which, pursuant to the exemption provided
under Section 4(2) of the Securities Act of 1933, as amended ("Securities Act"),
were not registered under the Securities Act.
On February 10, 1999, the Company entered into subsequent agreements with
BTG. The agreements relate to the reacquisition of GTSI common stock by GTSI
from BTG, the terms of certain contracts and the relationship of the parties
going forward. Pursuant to the agreements, GTSI reacquired 600,000 shares of its
common stock from BTG. Of the 600,000 shares, 200,000 were tendered to GTSI at
no cost and 400,000 were purchased by GTSI for $5.00 per share, in exchange for
a three-year, 8% interest bearing note from BTG with the principal due in three
annual installments of $500,000, $500,000 and $1,000,000, respectively. As part
of the agreements, GTSI had an exclusive five-year option to purchase the
remaining 1.3 million shares of GTSI stock held by BTG for $5.25 per share. As a
result of the agreement, BTG transferred to GTSI all of the cash portion of the
February 12, 1998 escrow, totaling $827,219, and BTG's ownership interest in
GTSI was reduced to 13.3%. On October 23, 2000, the Company exercised its option
with BTG and purchased the remaining 1.3 million shares of GTSI stock held by
BTG for $4.25 a share or $5.53 million.
1. Accounting Policies
Significant accounting policies of the Company are summarized below:
-31-
Basis of Consolidation. The consolidated financial statements include the
accounts of GTSI and its wholly-owned subsidiary, Falcon. All significant
intercompany accounts and transactions are eliminated in consolidation.
Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
The most significant estimates include the allowance for doubtful accounts and
reserves for future costs to be incurred under the Company's warranty programs.
Revenue Recognition. Revenue from hardware product sales is generally
recognized when title to the products sold passes to the customer, with
provisions established for estimated product returns. Based upon the Company's
standard shipping terms, title generally passes upon the customer's receipt of
the products. Revenue from software product sales is recognized in accordance
with the provisions of American Institute of Certified Public Accountants
Statement of Position 97-2, "Software Revenue Recognition." Revenue from the
sale of software products is recognized when persuasive evidence of an
arrangement exists, the software has been delivered, the fee is fixed or
determinable and collection is probable. Net revenues from sales of third party
software maintenance contracts are recognized at the time of sale.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the application of generally
accepted accounting principles to revenue recognition issues in financial
statements. SAB No. 101 clarifies the appropriate timing of revenue recognition
when products are shipped to customers. The impact to the Company of the
adoption of SAB No. 101 is to generally defer the recognition of revenue from
two to seven days as compared to the Company's previous method. During the
fourth quarter of 2000, the Company adopted the provisions of SAB No. 101
retroactive to January 1, 2000. The Company implemented the guidance set forth
in SAB No. 101 by recording a charge to income of $467,000 representing the
cumulative effect of adopting SAB No. 101 on January 1, 2000.
The Emerging Issues Task Force ("EITF") has issued EITF Issue No. 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent." Consistent with
the requirements under SAB No. 101, EITF No. 99-19 provides guidance regarding
the income statement presentation of revenue based on either (a) the gross
amount billed to a customer because it has earned revenue from the sale of the
goods or services or (b) the net amount retained (that is, the amount billed to
a customer less the amount paid to a supplier) because it has earned a
commission or fee. During the fourth quarter of 2000, and on a retroactive basis
for all periods presented, the accompanying financial statements have been
reclassified to reflect the provisions of EITF No. 99-19. Adoption of EITF No.
99-19 had no impact on our reported gross margin or net income, but merely
results in the reduction of previously reported sales and cost of sales for our
resold software maintenance agreements of approximately $13.4 million, $7.9
million and $12.3 million for 2000, 1999 and 1998, respectively.
Financial Instruments. At December 31, 2000 and 1999, the recorded values
of financial instruments such as accounts receivable and payable and notes
payable to banks approximated their fair values, based on the short-term
maturities of these instruments.
Accounts Receivable. Accounts receivable principally represents amounts
collectible from the Government and prime contractors to the Government. Other
accounts receivable result from items billed to suppliers under various
agreements involving the sale of their products. The Company performs
-32-
ongoing credit evaluations of its non-governmental customers but generally does
not require collateral to support any outstanding obligation owed to GTSI.
Allowances for potential uncollectible amounts are estimated and deducted from
total accounts receivable.
Merchandise Inventories. Merchandise inventories are valued at the lower
of cost or market. Cost is determined using a weighted average method.
Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation. Depreciation and amortization are calculated using the
straight-line method over estimated useful lives ranging from three to ten
years. Leasehold improvements are amortized using the straight-line method over
the terms of the leases or their estimated useful lives, whichever is shorter.
Intangible Assets. Intangible assets are recorded at cost and amortized
using the straight-line method over their estimated useful lives. Included in
operating expenses for the years ended December 31, 2000, 1999, and 1998 is
amortization expenses of $0, $114,000 and $338,000, respectively.
Impairment of Long-Lived Assets. The Company evaluates long-lived assets
for events or changes in circumstances that would indicate that the carrying
value may not be recoverable. In making that determination, the Company
considers a number of factors, including undiscounted future cash flows, prior
to interest expense. The Company measures an impairment loss by comparing the
fair value of the assets to their carrying value.
Income Taxes. The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax
assets and liabilities are computed based on the estimated future tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. SFAS
No. 109 requires that a valuation allowance is established when necessary to
reduce deferred tax assets to amounts expected to be realized.
Earnings Per Share. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," the Company presents basic and
diluted earnings per share on the face of the income statement for all periods
presented. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity. For
the years ended December 31, 2000, 1999 and 1998, diluted weighted average
common shares outstanding includes the dilutive effect of options if exercised
of 204,000, 43,000 and 209,000 shares respectively.
Interest and Financing Income. For the years ended December 31, 2000,
1999, and 1998, interest and financing income includes $2.1 million, $1.0
million, and $33,000, respectively, of financing income earned on prompt payment
of vendor invoices.
Marketing Development and Cooperative Advertising Funds. Certain vendors
provide the Company with sales incentive programs. Generally, the funds received
under these programs are determined based on the Company's purchases and/or
sales of the vendor's product. The funds are earned upon performance of specific
promotional programs or upon completion of predetermined objectives dictated by
the vendor. Once earned, the funds reduce associated expenses of promotional
programs.
-33-
Check Overdrafts. Included in accounts payable at December 31, 2000 and
1999, are approximately $ 1.7 million and $9.1 million, respectively, which
represent checks that have been issued but have yet to clear the bank.
Reclassifications. Certain amounts from prior years have been reclassified
to conform to the current year financial statement presentation.
New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
The Company determined that adoption of SFAS No. 133 will not have a material
effect on its financial statements.
2. Accounts Receivable
The composition of accounts receivable as of December 31, 2000 and 1999 is
as follows (in thousands):
2000 1999
--------- ---------
Trade accounts receivable $ 116,825 $ 109,130
Vendor and other receivables 22,065 18,605
--------- ---------
138,890 127,735
Less: Allowance for uncollectible accounts (1,709) (2,556)
--------- ---------
Accounts receivable, net $ 137,181 $ 125,179
========= =========
3. Property and Equipment
The composition of property and equipment as of December 31, 2000 and
1999 is as follows (in thousands):
2000 1999
--------- ---------
Office furniture and equipment $ 10,286 $ 10,379
Computer software 12,685 9,599
Leasehold improvements 4,797 4,797
-----------------------
27,768 24,775
Less: accumulated depreciation and amortization (14,938) (12,148)
-----------------------
Property and equipment, net $ 12,830 $ 12,627
=======================
Depreciation and amortization expense on property and equipment was
$3,934, $3,470, and $3,323 in 2000, 1999 and 1998 respectively.
-34-
4. Notes Payable to Banks
On May 2, 1996, the Company executed a three-year credit facility with a
bank (the "Principal Lender") for $40.0 million and a one-year credit facility
with the other lenders (collectively, the "Lenders") for an additional $55.0
million (collectively, the "Credit Facility"). Additionally, on June 27, 1996,
the Company executed a separate $10.0 million facility with the Principal Lender
for inventory financing of vendor products (the "Wholesale Financing Facility").
On July 28, 1997, the Company and its banks executed the Second Amended
and Restated Business Credit and Security Agreement (the "Credit Agreement") to
modify some of the terms and conditions, as well as the amounts available under
the Credit Facility and the Wholesale Financing Facility. These modifications
included the revision of the Credit Facility's term to one year with a one year
automatic renewal.
On, March 31, 1999, the Credit Agreement of July 28, 1997 was amended to
make the Tangible Net Worth requirement for the Company an amount no less than
$40 million at all times beginning the calendar quarter ending March 31, 1999
and each calendar quarter thereafter. All other material terms of the Credit
Agreement remained the same.
On, November 24, 1999, the Company and its banks executed separate
amendments, effective December 1, 1999, for the continuation of the Credit
Agreement through November 30, 2000 with an automatic one year renewal, and
adjusting, among other things, the seasonality of the amount available under the
Credit Facility. The limit of the Credit Facility is $50 million during the
period July 1 through January 31. During the period February 1 through April 30,
the total amount available under the Credit Facility is limited to $30 million.
During the period May 1 though June 30, the total amount available under the
Credit Facility is $20 million. In addition, the interest rate under the Credit
Facility is a rate of the London Interbank Offered Rate (LIBOR) plus 1.75%. The
Wholesale Financing Facility was also amended effective December 1, 1999 to
$50.0 million throughout the fiscal year.
On November 17, 2000, the Company and its banks executed an amendment,
effective December 1, 2000, for the continuation of the Credit Agreement with a
90-day written termination notice upon receipt by either party and, among other
things, increased the Company's Stock Repurchase authorization from third-party
stockholders to $6.1 million, up from $5.25 million in the previous Amendment.
All other material terms of the Credit Agreement remained the same.
As of December 31, 2000, 1999, and 1998, respectively, the Company's
interest rate on the Credit Facility was 8.40%, 8.24%, and 7.83%, respectively.
Amounts due to the Lenders of $11.9 million as of December 31, 2000 are
classified as current liabilities, as compared with $9.5 million outstanding as
of December 31, 1999, and the available portion of the Credit Facility was
approximately $38.1 million at December 31, 2000, as compared with $35.3 million
available at December 31, 1999.
Borrowing is limited to 85% of eligible accounts receivable. The Credit
Facility is secured by substantially all of the operating assets of the Company.
Current obligations are first funded and then all cash receipts are
automatically applied to reduce outstanding borrowings. The Credit Facility also
contains certain covenants that include restrictions on the payment of dividends
and the repurchase of the Company's Common Stock, as well as provisions
specifying compliance with certain quarterly and annual financial statistical
ratios. At December 31, 2000, the Company was in compliance with all financial
covenants set forth in the Credit Facility.
-35-
The following information pertains to the notes payable to banks for the
years ended December 31, 2000, 1999 and 1998 (dollars in thousands):
2000 1999 1998
------- -------- --------
Weighted average interest rate ...... 8.2% 7.5% 8.2%
Weighted average borrowings ......... $ 9,600 $ 4,100 $ 12,500
5. Income Taxes
The components of the provision (benefit) for income taxes for the years
ended December 31, 2000, 1999 and 1998 are as follows (in thousands):
2000 1999 1998
------- ------- -------
Current taxes:
Federal $ 1,923 $ 370 $ 1,443
State 403 70 297
------- ------- -------
2,326 440 1,740
Deferred taxes:
Federal (4,063) (397) (1,443)
State (271) (43) (297)
------- ------- -------
(4,334) (440) (1,740)
------- ------- -------
Income tax benefit $(2,008) $ -- $ --
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities and the amounts recorded
for income tax purposes. As of December 31, 1999, the Company had a valuation
allowance of $5.0 million against its net deferred tax assets. In the fourth
quarter of 2000, the Company, after its third consecutive year of positive
earnings, concluded that a valuation allowance against its net deferred tax
assets was no longer necessary as the future realizability of these assets was
now more likely than not.
-36-
Significant components of the Company's deferred taxes as of December 31,
2000 and 1999 were as follows (in thousands):
December 31,
------------------
2000 1999
------------------
Deferred tax assets:
Accounts receivable and inventory reserves $ 864 $ 1,436
Intangible assets 1,682 1,819
Accrued warranty 2,985 3,272
Bid and proposal costs 446 332
Vacation accrual 326 280
Depreciation 61 --
Rent abatement 96 84
Other reserves 692 365
------------------
Total deferred tax assets 7,152 7,588
------------------
Deferred tax liabilities:
Depreciation -- 118
Web site development costs 638 245
------------------
Total deferred tax liabilities 638 363
------------------
Net deferred tax assets 6,514 7,225
Valuation allowance -- (5,045)
------------------
Net deferred tax assets reported $ 6,514 $ 2,180
==================
The Company's effective tax rate for the years ended December 31, 2000,
1999, and 1998 differs from the statutory rate for Federal income taxes as a
result of the following factors:
2000 1999 1998
------ ------ ------
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal tax benefit 4.5% 4.0% 4.2%
Valuation allowance -59.3% -39.8% -36.4%
Other -1.3% 1.8% -1.8%
------ ------ ------
-22.1% -- --
====== ====== ======
6. Stockholders' Equity
Stock Options and Warrants. The Company has two combination incentive and
non-statutory stock option plans, the "1996 Plan" and the "1994 Plan," that
provide for the granting of options to employees (both plans) and non-employee
directors (only under the 1996 Plan) to purchase up to 1,600,000 and 300,000
shares, respectively, of the Company's common stock. In addition, in May 1997
the Company's Board of Directors adopted the 1997 Non-Officer Stock Option Plan
(the "1997 Plan"). The 1997 Plan provides for the granting of non-statutory
stock options only to employees other than officers and directors to purchase up
to 300,000 shares of the Company's common stock. Until its expiration on March
15, 1996, the Company had another combination incentive and non-statutory stock
option plan, the "1986 Plan," that provided for the granting of options to
employees to purchase up to
-37-
1,100,000 shares of the Company's common stock. Under the 1997, 1996, 1994 and
1986 Plans, options have a term of up to ten years, generally vest over four
years and option prices are required to be at not less than 100% of the fair
market value of the Company's common stock at the date of grant and, except in
the case of non-employee directors, must be approved by the Board of Directors
or its Compensation Committee. Options under the 1997, 1996, 1994 and 1986 Plans
were as follows:
Weighted
Weighted Average
Number of Option Exercise Price Per Average Exercise Remaining
Shares Share Price Per Share Life
- ------------------------------------------------------------------------------------------------------------------------------
1997 Plan:
Outstanding at December 31, 1997 119,342 $ 4.88-5.50 $ 5.00
Granted 239,000 3.63-5.38 4.90
Forfeited or canceled (62,167) 4.88-5.50 5.07
Exercised -- -- --
Outstanding at December 31, 1998 296,175 3.63-5.38 4.90
Granted 74,000 2.88-3.75 3.48
Forfeited or canceled (94,250) 3.75-5.31 4.90
Exercised -- -- --
Outstanding at December 31, 1999 275,925 2.88-5.38 4.52
Granted 57,000 3.25-5.22 3.60
Forfeited or canceled (49,625) 3.31-5.31 4.70
Exercised (3,333) 2.88 2.88
Outstanding at December 31, 2000 279,967 $ 2.88-5.38 $ 4.23 5.1
- ------------------------------------------------------------------------------------------------------------------------------
1996 Plan:
Outstanding at December 31, 1997 399,500 $ 4.88-7.31 $ 5.21
Granted 223,750 4.50-5.25 4.88
Forfeited or canceled (50,500) 5.00-7.31 5.58
Exercised -- -- --
Outstanding at December 31, 1998 572,750 4.50-5.44 5.05
Granted 826,000 2.88-4.94 3.72
Forfeited or canceled (144,750) 3.75-5.25 4.63
Exercised -- -- --
Outstanding at December 31, 1999 1,254,000 2.88-5.44 4.22
Granted 463,000 2.81-3.31 3.21
Forfeited or canceled (254,000) 2.88-5.25 4.24
Exercised (10,750) 3.13-3.75 3.62
Outstanding at December 31, 2000 1,452,250 $ 2.81-5.44 $ 3.91 6.1
-38-
Weighted
Weighted Average
Number of Option Exercise Price Per Average Exercise Remaining
Shares Share Price Per Share Life
- ------------------------------------------------------------------------------------------------------------------------------
1994 Plan:
Outstanding at December 31, 1997 232,500 $3.25-13.44 $ 7.02
Granted 80,000 4.53-5.00 4.81
Forfeited or canceled (26,000) 3.50-5.19 4.21
Exercised (15,000) 3.50 3.50
Outstanding at December 31, 1998 271,500 3.25-13.44 6.83
Granted 84,000 2.88-3.75 3.03
Forfeited or canceled (74,000) 5.00-5.25 5.14
Exercised -- -- --
Outstanding at December 31, 1999 281,500 2.88-13.44 6.13
Granted 35,000 3.31 3.31
Forfeited or canceled (60,500) 4.81-13.44 7.71
Exercised (6,500) 2.88 2.88
Outstanding at December 31, 2000 249,500 $2.88-12.88 $ 5.70 4.9
- ------------------------------------------------------------------------------------------------------------------------------
1986 Plan:
Outstanding at December 31, 1997 84,500 $3.50-14.25 $ 4.95
Granted -- -- --
Forfeited or canceled (13,000) 3.25 3.25
Exercised (7,000) 3.25 3.25
Outstanding at December 31, 1998 64,500 3.50-14.25 5.48
Granted -- -- --
Forfeited or canceled (7,500) 14.25 14.25
Exercised -- -- --
Outstanding at December 31, 1999 57,000 3.50-10.25 4.33
Granted -- -- --
Forfeited or canceled (50,000) 3.50 3.50
Exercised -- -- --
Outstanding at December 31, 2000 7,000 $ 10.25 $ 10.25 0.8
- ------------------------------------------------------------------------------------------------------------------------------
Nonstatutory Stock Options:
Outstanding at December 31, 1997 1,255,000 $3.75-10.50 $ 4.67
Granted 81,000 4.88 4.88
Forfeited or canceled (20,000) 6.13 6.13
Exercised -- -- --
Outstanding at December 31, 1998 1,316,000 3.75-10.50 4.61
Granted 150,000 3.13-4.63 4.13
Forfeited or canceled (321,000) 4.63-5.38 5.05
Exercised -- -- --
Outstanding at December 31, 1999 1,145,000 3.13-10.50 4.42
Granted -- -- --
Forfeited or canceled (50,000) 3.13-10.50 4.41
Exercised (100,000) 3.75 3.75
Outstanding at December 31, 2000 995,000 $3.13-10.50 $ 4.47 4.8
- ------------------------------------------------------------------------------------------------------------------------------
FOR ALL PLANS:
Outstanding at December 31, 2000 2,983,717 $2.81-12.88 $ 4.29 5.4
-39-
Outstanding and Exercisable by Price Range as of December 31, 2000
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Outstanding at Contractual Life- Exercise Exercisable at Exercise
Prices 12/31/00 Years Price 12/31/00 Price
- ------------------- -------------- ----------------- ------------ -------------- ------------
2.81-2.85 75,000 6.4 $ 2.81 50,000 $ 2.81
2.85-4.28 2,110,667 5.7 3.59 1,244,337 3.72
4.28-5.70 618,050 5.1 5.04 569,925 5.05
5.70-7.13 13,000 2.9 6.36 12,000 6.38
7.13-8.55 9,000 3.0 7.31 7,200 7.31
9.98-11.40 107,000 3.4 10.48 107,000 10.48
11.40-12.83 48,000 1.0 12.50 48,000 12.50
12.83-12.88 3,000 3.4 12.88 3,000 12.88
----------- --------- ------------ -------- --------- --------
2.81-12.88 2,983,717 5.4 $ 4.29 2,041,462 $ 4.67
=========== ========= ============ ======== ========= ========
The Company adopted the disclosure requirements of SFAS 123, "Accounting
for Stock-Based Compensation," effective for the Company's December 31, 1996
financial statements. The Company applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its plans, as allowed under
SFAS 123. Accordingly, no compensation cost has been recognized for stock option
and stock purchase plans. If compensation cost for the Company's stock-based
compensation plans had been determined based on the fair value at the grant
dates for awards under those plans consistent with the method in SFAS 123, the
Company's net income and net income per share would have increased to the pro
forma amounts (in thousands, except net income per share amounts) indicated
below.
2000 1999 1998
--------- -------- ---------
Net income - pro forma $ 9,697 $ 1,340 $ 1,504
Net income per share - pro forma (basic) 1.08 0.14 0.17
Net income per share - pro forma (diluted) 1.05 0.14 0.17
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 2000: no dividend yield, 76% volatility, a risk-free interest rate of
4.95%, and an average expected life of six years; and the following assumptions
were used for grants in 1999 and 1998: no dividend yield, volatility from 68% to
70%, risk-free interest rates ranging from 3.79% to 6.00%, and expected lives
from seven to eight years.
At December 31, 2000, in the 1997 Plan options for 164,010 shares were
exercisable and 20,033 options were available for grant; in the 1996 Plan
options for 757,251 shares were exercisable and 147,750 options were available
for grant; in the 1994 Plan options for 158,201 shares were exercisable and
50,500 options were available for grant; and in the 1986 Plan options for 7,000
shares were exercisable.
Stock Purchase Plan. The Company has established an Employee Stock
Purchase Plan ("ESPP"). Eligible employees may elect to set aside, through
payroll deduction, up to 15% of their compensation to purchase common stock of
the Company. The maximum number of shares that an
-40-
eligible employee may purchase during any offering period is equal to 5% of such
employee's compensation for the 12 calendar-month period prior to the
commencement of an offering period divided by 85% of the fair market value of a
share of common stock on the first day of the offering period. The ESPP is
implemented through one offering during each six-month period beginning January
1 and July 1. The ESPP purchase price is 85% of the lower of the fair market
value of a share of common stock on the first day or the last day of the
offering period. In the offering periods ended June 30, 2000 and December 31,
2000, employees purchased 27,221 and 43,007 shares, respectively, at prices of
$2.34 and $2.66, respectively. In the offering periods ended June 30, 1999 and
December 31, 1999, employees purchased 11,912 and 23,641, respectively, at
prices of $3.51 and $2.34, respectively. In the offering periods ended June 30,
1998 and December 31, 1998, employees purchased 9,367 and 11,943 shares,
respectively, at prices of $4.04 and $3.85, respectively. The weighted average
fair market value of shares under the ESPP was $2.53, $2.73 and $3.93 in 2000,
1999, and 1998, respectively. The Company has reserved 750,000 shares of common
stock for the ESPP, of which 470,175 were available for future issuance as of
December 31, 2000.
7. Commitments and Contingencies
The Company is occasionally a defendant in litigation incidental to its
business. The Company believes that none of such litigation currently pending
against it, individually or in the aggregate, will have a material adverse
effect on the Company's financial condition or results of operations.
The Company leases office and warehouse space and various equipment under
noncancelable operating leases.
In November 1988, the Company executed a ten-year lease for its corporate
headquarters that comprises approximately 120,000 square feet of office space
and 14,000 square feet of warehouse space. The Company also entered into a
nine-year lease for 55,170 square feet of office space in two buildings
beginning December 1, 1989. The lease for the entire facility expired on
November 30, 1998. In October 1997, the Company executed a ten-year lease for a
new administrative facility consisting of approximately 100,500 square feet of
new office space in Chantilly, Virginia. The agreement has one five-year option
period and commenced on December 1, 1998. The Company is obligated under the
lease agreement to provide to the landlord a letter of credit in the amount of
$2.0 million as a security deposit for all tenant requested improvements
associated with the lease. This deposit will be reduced by 10%, per year, over
the life of the lease. The Company has recorded leasehold improvements in the
amount of $2.0 million, as well as a liability for deferred rent of $2.0 million
in conjunction with the build-out improvements. The asset and liability are
being amortized over the life of the lease. The Company also entered into a
lease agreement on April 1, 1999 for a 20,000-square foot distribution center in
Chattanooga, Tennessee. The Company has exercised its one year lease renewal
option for the Chattanooga facilities effective April 1, 2001. Rent expense for
the years ended December 31, 2000, 1999 and 1998 was approximately $2.0 million,
$2.1 million, and $2.8 million, respectively. The Company also maintains a sales
office in Germany and has entered into a lease agreement as of January 1, 1999
for a term of two-years ending on December 31, 2000. The Company renewed this
lease commitment as of January 1, 2001 for a one year term ending on December
31, 2001.
-41-
Collective future minimum lease payments as of December 31, 2000 are as
follows (in thousands):
Operating
Year ending December 31, Leases (1)
----------
2001 $ 1,979
2002 1,950
2003 1,985
2004 2,035
2005 2,095
Thereafter 4,597
----------
Total minimum lease payments $ 14,641
==========
(1) Includes $42,075 in 2001 and $14,025 for lease renewal option exercised in
Chattanooga and Germany facilities.
8. 401(k) Plan
Effective April 1991, the Company adopted the Employees' 401(k) Investment
Plan (the "Plan"), a savings and investment plan intended to be qualified under
Section 401 of the Internal Revenue Code of 1986, as amended (the "Code"). All
employees of the Company who are at least 21 years of age and have completed at
least six months of employment with the Company are eligible to participate. The
Plan is voluntary and allows participating employees to make pretax
contributions, subject to limitations under the Code, of a percentage (not to
exceed 15%) of their total compensation. Employee contributions are fully vested
at all times. The Company, in its sole discretion, may make contributions in
amounts, if any, as may be determined by the Board of Directors for the benefit
of all participants. In 2000, 1999 and 1998, the Company contributed a total of
$ 662,164, $ 242,917 and $101,034 to the Plan, respectively.
9. Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information," which
requires certain information about operating segments in the financial
statements and in condensed financial statements of interim periods. The Company
has determined that through December 31, 2000, it operated as one business
segment as defined by SFAS 131. In addition, the Company aggregates and reports
revenues from products which have similar economic characteristics in their
nature, production, and distribution process. The primary customer of the
Company is the federal government, which under SFAS 131 is considered a single
customer.
-42-
10. Quarterly Financial Data (unaudited)
The following tables set forth selected unaudited quarterly financial data
and the percentages such items represent of sales. The quarterly financial data
reflect, in the opinion of the Company, all normal and recurring adjustments
necessary to present fairly the results of operations for such periods. The
quarterly financial data also reflects the adoption of SAB No. 101 effective
January 1, 2000 and the adoption of EITF No. 99-19 on a retroactive basis for
all quarters presented (see Note 1). Results of any one or more quarters are not
necessarily indicative of annual results or continuing trends.
2000 Quarters Ended
--------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------------- ------------------- ----------------- -------------------
(In thousands, except per share data)
Sales (1) (a) $ 121,133 100.0% $ 136,468 100.0% $ 185,246 100.0% $ 234,907 100.0%
Cost of sales (a) 111,964 92.4% 123,929 90.8% 168,391 90.9% 213,337 90.8%
Gross margin (2) 9,169 7.6% 12,539 9.2% 16,855 9.1% 21,570 9.2%
Operating expenses 12,094 10.0% 11,978 8.8% 13,740 7.4% 15,504 6.6%
(Loss) income from operations (2,925) -2.4% 561 0.4% 3,115 1.7% 6,066 2.6%
Interest income, net (739) -0.6% (154) -0.1% (1,049) -0.6% (317) -0.1%
(Loss) income before income taxes (2,186) -1.8% 715 0.5% 4,164 2.3% 6,383 2.7%
Income tax benefit -- -- -- -- -- -- (2,008) -0.9%
(Loss) income prior to cumulative
effect of SAB No. 101 adoption (2,186) -1.8% 715 0.5% 4,164 2.3% 8,391 3.6%
Cumulative effect of SAB No. 101
adoption (467) -0.4% -- -- -- -- -- --
Net (loss) income (2) (2,653) -2.2% 715 0.5% 4,164 2.3% 8,391 3.6%
Net income per common share
Basic:
Basic net (loss) income per share
before cumulative effect of
SAB No. 101 adoption $ (0.24) $ 0.08 $ 0.45 $ 1.02
Cumulative effect per share of
SAB No. 101 adoption (0.05) -- -- --
--------- --------- --------- ---------
Basic net (loss) income per share $ (0.29) $ 0.08 $ 0.45 $ 1.02
========= ========= ========= =========
Diluted:
Diluted net (loss) income per share
before cumulative effect of
SAB No. 101 adoption $ (0.24) $ 0.08 $ 0.45 $ 1.01
Cumulative effect per share of
SAB No. 101 adoption (0.05) -- -- --
--------- --------- --------- ---------
Diluted net (loss) income per share $ (0.29) $ 0.08 $ 0.45 $ 1.01
========= ========= ========= =========
Weighted average common shares
outstanding
Basic 9,281 9,336 9,256 8,219
========= ========= ========= =========
Diluted 9,281 9,351 9,305 8,281
========= ========= ========= =========
-43-
1999 Quarters Ended
------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------------- ------------------- ------------------- ------------------
(In thousands, except per share data)
Sales (b) $ 124,522 100.0% $ 143,972 100.0% $ 192,844 100.0% $ 199,232 100.0%
Cost of sales (b) 114,450 91.9% 131,726 91.5% 179,352 93.0% 184,935 92.8%
Gross margin 10,072 8.1% 12,246 8.5% 13,492 7.0% 14,297 7.2%
Operating expenses 12,530 10.1% 12,345 8.6% 11,102 5.8% 12,538 6.3%
(Loss) income from operations (2,458) -2.0% (99) -0.1% 2,390 1.2% 1,759 0.9%
Interest (income) expense, net (565) -0.5% (168) -0.1% (358) -0.2% 1 0.0%
(Loss) income before income taxes (1,893) -1.5% 69 0.0% 2,748 1.4% 1,758 0.9%
Net (loss) income (1,893) -1.5% 69 0.0% 2,748 1.4% 1,758 0.9%
Net (loss) income per common share
Basic net (loss) income per share $ (0.20) $ 0.01 $ 0.30 $ 0.19
========= ========= ========= =========
Diluted net (loss) income per share $ (0.20) $ 0.01 $ 0.30 $ 0.19
========= ========= ========= =========
Weighted average common shares
outstanding
Basic 9,466 9,200 9,211 9,212
========= ========= ========= =========
Diluted 9,466 9,859 9,308 9,215
========= ========= ========= =========
Due to the adoption of SAB No. 101 and EITF No. 99-19, the quarterly financial
data reflected above differs from amounts previously reported in the Company's
1999 filings on Forms 10-Q and 10-K and the Company's 2000 filings on Forms 10-Q
as follows:
(1) Adjustment to quarterly sales of ($7,136), $7,122, and ($17,548) for the
first through the third quarter 2000, respectively, due to the adoption of SAB
No. 101.
(2) Adjustment to quarterly gross margin and net income or loss of ($611), $441
and ($1,493) for the first through the third quarter 2000, respectively, due to
the adoption of SAB No. 101.
(a) Reclassification of $993, $7,267, $3,632, and $1,481 in costs against sales
due to the adoption of EITF No. 99-19 for the first through the fourth quarter
2000, respectively.
(b) Reclassification of $1,027, $4,788, $1,650, and $453 in costs against sales
due to the adoption of EITF No. 99-19 for the first through the fourth quarter
1999, respectively.
-44-
GTSI CORP. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands) Balance at Charged to Balance
Beginning Costs and at end
Description of Period Expenses Deductions (1) of Period
- --------------------------------- --------- ---------- -------------- ---------
Year ended December 31, 2000:
Allowance for bad debts $ 2,556 $ (10) $ (837) $ 1,709
Year ended December 31, 1999:
Allowance for bad debts $ 5,980 $ (902) $(2,522) $ 2,556
Year ended December 31, 1998:
Allowance for bad debts $ 4,093 $ 2,097 $ (210) $ 5,980
(1) Adjustments and amounts written off during the period.
-45-
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to the
sections of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 15, 2001, entitled "Election of Directors,"
"Executive Officers" and "Common Stock Ownership of Principal Stockholders and
Management - Compliance with Section 16(a) Beneficial Ownership Reporting
Compliance," to be filed with the Commission.
Item 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
sections of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on May 15, 2001, entitled "Election of
Directors - Compensation of Directors" and "Executive Compensation and Other
Information," to be filed with the Commission.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
section of the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on May 15, 2001, entitled "Common Stock
Ownership of Principal Stockholders and Management," to be filed with the
Commission.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
sections of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on May 15, 2001, entitled "Election of
Directors - Nominees" and "Executive Compensation and Other
Information-Compensation Committee Interlocks and Insider Participation," to be
filed with the Commission.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
See the Index included in Item 8 on Page 24 of this Form 10-K.
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(2) Financial Statement Schedules
See the Index included in Item 8 on Page 24 of this Form 10-K.
(3) Exhibits
3.1 Restated Certificate of Incorporation
3.2 Bylaws, as amended
10.1 Amended and Restated 1986 Stock Option Plan, (4), including forms of
Stock Option Agreements and Stock Purchase Agreement(1)(3)
10.2 Employee Stock Purchase Plan, as amended to date (1)(6)
10.3 GSA Schedule B/C Award/Contract No. GS00K95AGS6407 dated April 1,
1996, issued by the General Services Administration to the
Registrant for the three-year period ending March 31, 1999, and
amendment thereto dated November 26, 1997
10.4 Officer Severance Plan, as amended to date (15)
10.5 GTSI Employees' 401(k) Investment Plan (3); and Amendment No. 1 (5);
Amendment No. 2 and Amendment No. 3 thereto (15)
10.6 U.S. Navy Standard Desktop Computer Companion Contract No.
N66032-91-D-0002 dated February 8, 1991; Modification thereof dated
June 28, 1991 (4); Modifications during 1992 (6); and Modifications
during 1993 (2)(9)
10.7 Authorized Apple Dealer Sales Agreement between Apple Computer, Inc.
and the Registrant, effective April 1993 (7)
10.8 U.S. Air Force Desktop IV Microsystems Contract No. F01620-93-D-0001
dated February 2, 1993; Modifications during 1993 (2)(9); and
Modifications during the quarter ended March 31, 1994 (10); and
Modifications during the quarter ended June 30, 1995 (14)
10.9 Lease dated August 11, 1995 between the Registrant and Security
Capital Industrial Trust covering new distribution center facility
(15)
10.10 Letter agreement dated January 16, 1996 between the Registrant and
Microsoft Corporation (15)
10.11 Settlement Agreement between the Registrant and the U.S. Air Force
with respect to the Desktop IV Microsystems Contract No.
F01620-93-D-0001 (2)(17)
10.12 Certificate of Designations, Preferences and Rights of Series C 8%
Cumulative Redeemable Convertible Preferred Stock of the Registrant
filed February 12, 1998 with the Secretary of State of Delaware (18)
10.13 1994 Stock Option Plan, as amended to date (19)
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10.14 1996 Stock Option Plan (19)
10.15 Lease dated December 10, 1997 between the Registrant and Petula
Associates, Ltd. covering new headquarters facility (excluding
attachments and exhibits) (19)
10.16 Second Amended and Restated Business Credit and Security Agreement,
dated as of July 28, 1997, among the Registrant, Certain Lenders
Named in such agreement, and Deutsche Financial Services
Corporation, as a Lender and as Agent (excluding attachments and
exhibits) (19)
10.17 Amendment, dated as of July 2, 1998, to Second Amended and Restated
Business Credit and Security Agreement, dated as of July 28, 1997,
among the Registrant, Certain Lenders Named [in such agreement], and
Deutsche Financial Services Corporation, as a Lender and as Agent
(23)
10.18 Amendment, dated as of July 2, 1998, to Agreement for Wholesale
Financing dated as of June 27, 1996, among the Registrant and
Deutsche Financial Services Corporation (23)
10.19 Agreement among the Registrant, BTG, Inc., BTG Technology Systems,
Inc. and Concept Automation, Inc. of America dated February 10, 1999
10.20 Amendment, dated as of November 24, 1999 to Second Amended and
Restated Business Credit and Security Agreement, dated July 28,
1997, among the Registrant, certain lenders named in such agreement
and Deutsche Financial Services Corp., as a Lender and Agent
10.21 Addendum, dated as of November 23, 1999 to Agreement for Wholesale
Financing dated June 27, 1996, among the Registrant and Deutsche
Financial Services Corp.
10.22 Amendment, dated as of November 17, 2000 to Second Amended and
Restated Business Credit and Security Agreement, dated July 28,
1997, among the Registrant, certain lenders named in such agreement
and Deutsche Financial Services Corp., as a Lender and Agent
10.23 Employment Agreement dated January 1, 2001 between the Registrant
and M. Dendy Young (1)
10.24 Offer Letter dated November 29, 2000 between the Registrant John T.
Spotila (1)
10.25 Offer Letter dated March 29, 1999 between the Registrant Robert D.
Russell (1)
23.1 Consent of Arthur Andersen LLP
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(1) Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
(2) Confidential treatment has been granted for portions of this exhibit, and
such confidential portions have been removed from this exhibit pursuant to Rule
24b-2 of the Securities Exchange Act of 1934, as amended.
(3) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-41351) filed with the Commission on June 21, 1991.
(4) Incorporated by reference to Pre-effective Amendment No. 3 to the
Registrant's Registration Statement on Form S-1 (Registration No. 33-41351)
filed with the Commission on September 20, 1991.
(5) Incorporated by reference to the Registrant's Registration Statement on Form
S-8 (Registration No. 33-55090) filed with the Commission on November 25, 1992.
(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-19394) for the year ended December 31, 1992.
(7) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 0-19394) for the quarter ended March 31, 1993.
(8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 0-19394) for the quarter ended September 30, 1993.
(9) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-19394) for the year ended December 31, 1993.
(10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 0-19394) for the quarter ended March 31, 1994.
(11) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Commission on August 31, 1994, as amended by Form 8-K/A No. 1
filed with the Commission on October 31, 1994.
(12) Incorporated by reference to the Registrant's Annual Report on Form 10-Q
(File No. 0-19394) for the year ended December 31, 1994.
(13) Incorporated by reference to the Registrant's Current Report on Form 10-K
(File No. 0-19394) for the year ended December 31, 1996.
(14) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Commission on January 17, 1995.
(15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 0-19394) for the quarter ended June 30, 1995.
(16) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-19394) for the year ended December 31, 1995.
(17) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 0-19394) for the quarter ended March 31, 1996.
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(18) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Commission on February 12, 1998.
(19) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-19394) for the year ended December 31, 1997.
(20) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Commission on May 18, 1998.
(21) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Commission on May 21, 1998.
(22) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed with the Commission on August 5, 1998.
(23) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 0-19394) for the quarter ended June 30, 1998.
(b) Reports on Form 8-K
None.
(c) Exhibits
See the list of Exhibits in Item 14(a)(3) beginning on Pages 47-48 of this
Form 10-K.
(d) Financial Statement Schedules
See the Index included in Item 8 on Page 24 of this Form 10-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chantilly,
Commonwealth of Virginia.
GTSI CORP.
Dated: March 30, 2001 By: /S/ M. DENDY YOUNG
------------------------------------
M. Dendy Young,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ M. DENDY YOUNG Chairman and March 30, 2001
- ----------------------------- Chief Executive Officer
M. Dendy Young (Principal Executive Officer)
and a Director
/S/ ROBERT D. RUSSELL Senior Vice President and March 30, 2001
- ----------------------------- Chief Financial Officer
Robert D. Russell (Principal Financial and
Accounting Officer)
/S/ LEE JOHNSON Director March 30, 2001
- -----------------------------
Lee Johnson
/S/ STEVEN KELMAN Director March 30, 2001
- -----------------------------
Steven Kelman, Ph.D.
/S/ JAMES J. LETO Director March 30, 2001
- -----------------------------
James J. Leto
/S/ LAWRENCE J. SCHOENBERG Chairman Emeritus March 30, 2001
- -----------------------------
Lawrence J. Schoenberg
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Signature Title Date
--------- ----- ----
/S/ JOHN M. TOUPS Director March 30, 2001
- ------------------------------
John M. Toups
/S/ DANIEL R. YOUNG Director March 30, 2001
- ------------------------------
Daniel R. Young
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