Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2003
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, VA 20151-1010
(Address and zip code of principal executive offices)
703-502-2000
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Shares Outstanding at October 31, 2003
- ------------------------------ --------------------------------------
Common Stock, $0.005 par value 8,294,268
================================================================================
GTSI CORP. AND SUBSIDIARY
Quarterly Report on Form 10-Q for the Period Ended September 30, 2003
Table of Contents Page
- ----------------- ----
COVER PAGE.....................................................................1
TABLE OF CONTENTS..............................................................2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS -
Consolidated Balance Sheets as of
September 30, 2003 (unaudited) and December 31, 2002..........3
Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 2003 and
2002 (unaudited)..............................................4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002 (unaudited).....5
Notes to Condensed Consolidated Financial Statements
(unaudited)...................................................6
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......21
ITEM 4. CONTROLS AND PROCEDURES.........................................21
PART II - OTHER INFORMATION...................................................22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................22
SIGNATURES....................................................................23
EXHIBIT 31.1: CEO CERTIFICATION
EXHIBIT 31.2: CFO CERTIFICATION
EXHIBIT 32.1: WRITTEN STATEMENTS OF CEO AND CFO
-2-
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30, December 31,
2003 2002
(Unaudited) (Audited)
------------ ------------
ASSETS
Current assets:
Cash $ 109 $ 32
Accounts receivable, net 177,801 139,164
Lease receivables, current 634 308
Merchandise inventories 94,826 56,039
Other current assets 24,145 15,080
------------ ------------
Total current assets 297,515 210,623
Property and equipment, net 16,658 11,707
Lease receivables, net of current portion 708 --
Other assets 3,375 2,588
------------ ------------
Total assets $ 318,256 $ 224,918
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ -- $ 7,539
Accounts payable 219,466 122,432
Accrued liabilities 17,790 13,412
Accrued warranty liabilities 3,463 4,404
------------ ------------
Total current liabilities 240,719 147,787
Other liabilities 1,761 1,640
------------ ------------
Total liabilities 242,480 149,427
------------ ------------
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 8,285,768 and 8,609,938 outstanding at
September 30, 2003 and December 31, 2002, respectively 49 49
Capital in excess of par value 44,732 44,439
Retained earnings 39,808 36,952
Treasury stock, 1,520,316 shares at September 30, 2003 and
1,196,146 shares at December 31, 2002, at cost (8,813) (5,949)
------------ ------------
Total stockholders' equity 75,776 75,491
------------ ------------
Total liabilities and stockholders' equity $ 318,256 $ 224,918
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements (unaudited).
-3-
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Sales $ 273,066 $ 276,846 $ 641,661 $ 654,581
Cost of sales 245,569 254,485 575,333 602,600
---------- ---------- ---------- ----------
Gross margin 27,497 22,361 66,328 51,981
Operating expenses 22,640 18,414 63,955 48,227
---------- ---------- ---------- ----------
Income from operations 4,857 3,947 2,373 3,754
---------- ---------- ---------- ----------
Interest and other income 939 1,506 2,534 4,142
Interest expense (99) (218) (217) (473)
---------- ---------- ---------- ----------
Interest and other income, net 840 1,288 2,317 3,669
---------- ---------- ---------- ----------
Income before income taxes 5,697 5,235 4,690 7,423
Income tax provision 2,227 2,094 1,834 2,969
---------- ---------- ---------- ----------
Net income $ 3,470 $ 3,141 $ 2,856 $ 4,454
========== ========== ========== ==========
Basic net income per share $ 0.42 $ 0.38 $ 0.34 $ 0.54
========== ========== ========== ==========
Diluted net income per share $ 0.39 $ 0.32 $ 0.31 $ 0.46
========== ========== ========== ==========
Basic weighted average shares outstanding 8,238 8,316 8,352 8,256
========== ========== ========== ==========
Diluted weighted average shares outstanding 8,986 9,723 9,088 9,608
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements (unaudited).
-4-
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
September 30,
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,856 $ 4,454
Adjustments to reconcile net income to net cash
provided by operating activities 15,147 (2,267)
---------- ----------
Net cash provided by operating activities 18,003 2,187
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of property and equipment (7,816) (3,349)
---------- ----------
Net cash used in investing activities (7,816) (3,349)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of bank notes, net (7,539) 131
Common stock repurchases (3,969) (797)
Proceeds from exercises of stock options 909 901
Proceeds from Employee Stock Purchase Plan 489 900
---------- ----------
Net cash (used in) provided by financing activities (10,110) 1,135
---------- ----------
Net increase (decrease) in cash 77 (27)
Cash at beginning of period 32 114
---------- ----------
Cash at end of period $ 109 $ 87
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 232 $ 523
========== ==========
Income taxes $ 327 $ 1,122
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements (unaudited).
-5-
GTSI CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements
of GTSI Corp. ("GTSI" or the "Company") have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC") and,
therefore, omit or condense certain footnotes and other information normally
included in financial statements prepared in accordance with generally accepted
accounting principles. This report should be read in conjunction with the
audited financial statements for the year ended December 31, 2002 and the
accompanying Notes to the Financial Statements, contained in the Company's 2002
Annual Report on Form 10-K. In the opinion of Management, all adjustments,
consisting primarily of normal recurring adjustments, necessary for a fair
presentation of interim period results have been made. The interim results
reflected in the unaudited condensed consolidated financial statements are not
necessarily indicative of results expected for the full year, or future periods.
New Accounting Pronouncements
In November 2002, the Emerging Issues Task Force (EITF) published Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF No. 00-21"),
which addresses certain aspects of the accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities. EITF No.
00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. EITF No. 00-21 is
effective for the Company for revenue arrangements entered into beginning July
1, 2003. The adoption of EITF No. 00-21 did not have a material impact on the
Company's 2003 condensed consolidated financial statements.
In November 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN No. 45). FIN No. 45 elaborates on the disclosure to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of FIN No. 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN No. 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. As a result of
adopting FIN No. 45 the Company has added additional disclosures related to
accrued warranty obligations.
In December 2002, the FASB issued Statement of Financial Standards
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS No. 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
6
reported results. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting Principle
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees" and
related interpretations. Accordingly, compensation expense for stock options is
measured as the excess, if any, of the fair market value of the Company's stock
at the date of the grant over the exercise price of the related option. The
Company adopted the annual disclosure provisions of SFAS No. 148 in its
financial report for the year ended December 31, 2002 and adopted the interim
disclosure provisions for its financial reports beginning with the quarter ended
March 31, 2003.
Had compensation costs for the Company's stock options been determined
based on SFAS No. 123 using an accepted fair valuation method, the Company's net
income and earnings per share would have been as follows (in thousands, except
per share amounts):
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income - as reported $ 3,470 $ 3,141 $ 2,856 $ 4,454
Deduct: Total stock-based employee compensation
expense determined under fair value based method
(SFAS No. 123) for all awards, net of related tax
effects (233) (223) (631) (448)
------------ ------------ ------------ ------------
Net income - pro forma $ 3,237 $ 2,918 $ 2,225 $ 4,006
============ ============ ============ ============
Net income per share - as reported (basic) $ 0.42 $ 0.38 $ 0.34 $ 0.54
============ ============ ============ ============
Net income per share - as reported (diluted) $ 0.39 $ 0.32 $ 0.31 $ 0.46
============ ============ ============ ============
Net income per share - pro forma (basic) $ 0.39 $ 0.35 $ 0.27 $ 0.49
============ ============ ============ ============
Net income per share - pro forma (diluted) $ 0.36 $ 0.30 $ 0.24 $ 0.42
============ ============ ============ ============
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities (FIN No. 46)." FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from the other parties. FIN No. 46 applies to
variable interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period
beginning after December 15, 2003, which is the Company's first quarter of
fiscal year 2004. The Company does not expect the adoption of FIN No. 46 to have
a material impact on its condensed consolidated financial statements.
On January 1, 2003 the Company adopted a new accounting pronouncement,
EITF Issue No. 02-16, "Accounting for Consideration Received from a Vendor by a
Customer (Including a Reseller of the Vendor's Products)." This pronouncement
requires that consideration from vendors, such as advertising support funds and
sales volume incentives, be accounted for as a reduction to cost of sales unless
certain requirements are met showing that the funds represent a reimbursement of
a specific, incremental,
7
identifiable cost incurred by the Company in selling the vendor's product. If
these specific requirements related to individual vendors are met, the
consideration is accounted for as a reduction in the related expense category,
such as advertising or selling and administrative expense. The Company provides
numerous advertising programs to support vendors, including catalogs, radio,
Internet, magazine and newspaper advertising for which it receives
consideration. The Company adopted EITF No. 02-16 for the quarter ended March
31, 2003.
As a result of adopting EITF No. 02-16, the Company records certain
vendor considerations as a reduction of inventory and a subsequent reduction in
cost of goods sold when the related product is sold. In previous reporting
periods, the Company recorded these items as a reduction to operating expenses
in that period. There was no material impact on the Company's operating income
for the three months ended September 30, 2003 due to EITF No. 02-16. However,
the impact for the nine months ended September 30, 2003 was an increase in cost
of goods sold of approximately $668,000 or a tax effected reduction to net
income of approximately $408,000.
For comparative purposes, if the Company applied EITF No. 02-16 to the
three months and nine months ended September 30, 2002, the Company's operating
income for the three-month period would have increased by $213,000 or a tax
effected increase to net income of $130,000 and the nine-month operating income
would have been reduced by $112,000 or a tax effected reduction to net income of
$68,000. In addition, gross margin would have increased from $22.4 million to
$25.9 million for the third quarter 2002 and from $52.0 million to $61.5 million
for the nine-month period ended September 30, 2002. Gross margin percentage
would have increased from 8.1% to 9.3% for the quarter and from 7.9% to 9.4% for
the nine month period ended September 30, 2002. Operating expenses would have
also increased from $18.4 million to $21.9 million and from $48.2 million to
$57.7 million for the quarter and year to date 2002, respectively.
2. Sales of Lease Receivables
The Company sells products to certain customers under sales-type lease
arrangements. The Company accounts for its sales-type leases according to the
provisions of SFAS No. 13, "Accounting for Leases," and accordingly, recognizes
current and long-term lease receivables, net of unearned finance income on the
accompanying balance sheets. The Company periodically sells lease receivables to
various, unrelated financing companies. The Company accounts for its sales of
lease receivables in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement
of FASB Statement No. 125."
3. Capitalized Software
The Company is implementing software to replace its current fulfillment
system. As of September 30, 2003, the Company has capitalized approximately
$10.2 million under this project. The Company is undergoing an evaluation of the
project's continued progress. If management determines as a result of the
evaluation that portions of the software have no future economic value, the
amount previously capitalized associated with that portion of the software will
be charged to expense.
8
4. Notes Payable to Banks
Subsequent to September 30, 2003, the Company closed a new $125 million
Credit Facility with a lender and terminated the existing credit facilities. The
new Credit Facility, which matures on February 28, 2005, includes a revolving
line of credit (the Revolver) and a provision for inventory financing of vendor
products (the Wholesale Financing Facility). Borrowing under the Revolver is
limited to 85% of eligible accounts receivable and carries an interest rate
indexed to LIBOR plus 1.75 percentage points. The Revolver is secured by
substantially all of the Company's assets. The Revolver also contains certain
covenants as well as provisions specifying compliance with certain quarterly and
annual financial ratios. Borrowing under the Wholesale Financing Facility is
limited to 100% of the value of the inventory. The Wholesale Financing Facility
is secured by the underlying inventory.
As of September 30, 2003 the Company had a revolving line of credit
with a group of banks, which allowed for borrowings up to $50.0 million during
its highest seasonal period. Additionally, the Company had a separate facility
with a bank for inventory financing of vendor products, which allowed for
borrowings up to $60.0 million during its highest seasonal period. Combined, the
revolver and the inventory financing facility allowed the Company to borrow from
$55.0 million to $110.0 million depending on the seasonal period. The seasonal
structure of the credit facilities coincided with the seasonality of the
Company's business and allowed the Company to minimize banking fees. The
interest rate under the revolver was a rate indexed to the London Interbank
Offered Rate (LIBOR) plus 1.75 percentage points.
Borrowing under the revolver was limited to 85% of eligible accounts
receivable. The revolver was secured by substantially all of the Company's
operating assets. Current obligations were first funded and then all cash
receipts were automatically applied to reduce outstanding borrowings. The
revolver also contained certain covenants that included 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
ratios. As of September 30, 2003 the Company was in compliance with all of its
covenants under the revolver and had available credit on the revolver of $50.0
million.
On March 31, 2003 the Company and its group of banks signed an
amendment to the revolver in which the group of banks consented to allow the
Company to repurchase up to an additional $5.0 million worth of its stock from
stockholders. During the nine months ended September 30, 2003 the Company
repurchased approximately $4.0 million of its stock.
9
5. Accrued Warranty Liabilities
The Company offers warranties on sales under certain products specific
to the terms of the customer agreements. Standard warranties require repair or
replacement of defective products reported during the warranty period at no cost
to the customer. The Company records an estimate for warranty expenses related
to costs based on its actual historical return rates and repair costs at the
time of sale.
Accrued warranty liability as of December 31, 2002 $ 4,404
Warranty activity from January 1, 2003 to September 30, 2003:
Charges made against the warranty (4,145)
Accruals related to warranty 3,204
--------
Net change to accrued warranty liability during period (941)
--------
Accrued warranty liability as of September 30, 2003 $ 3,463
========
6. Earnings Per Share
The following table sets forth the components of basic and diluted
earnings per share:
In thousands, except per share amounts
-----------------------------------------
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Basic earnings per share:
Net income (numerator) $ 3,470 $ 3,141 $ 2,856 $ 4,454
Weighted average shares outstanding (denominator) 8,238 8,316 8,352 8,256
-------- -------- -------- --------
Basic earnings per share $ 0.42 $ 0.38 $ 0.34 $ 0.54
======== ======== ======== ========
Diluted earnings per share:
Net income (numerator) $ 3,470 $ 3,141 $ 2,856 $ 4,454
Denominator:
Weighted average shares outstanding 8,238 8,316 8,352 8,256
Effect of dilutive securities:
Employee stock options 748 1407 736 1352
-------- -------- -------- --------
Denominator for dilutive earnings per share 8,986 9,723 9,088 9,608
-------- -------- -------- --------
Diluted earnings per share $ 0.39 $ 0.32 $ 0.31 $ 0.46
======== ======== ======== ========
10
7. Stock Options
On May 14, 2003, the stockholders of the Company approved a change to
extend the exercise period for certain options granted to its non-employee
directors following cessation from the Company to the earlier of the fifth
anniversary of the cessation date or the expiration date of the respective
option. Also, in January 2003 the Company agreed that the unvested options held
by one officer would automatically vest if a change in control of the Company
occurs. Both of these changes require a new measurement date as required by FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB Opinion No. 25". No compensation expense
was recorded as a result of the modifications at this time because the Company
is currently unable to estimate whether the non-employee directors will use the
benefit of the extension of their option awards as a result of the modification
and, in respect of the unvested options held by the officer, if a change in
control of the Company will occur.
8. 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.
11
ITEM 2. MANAGEMENT'S DISCUSSION & 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 Condensed
Consolidated Financial Statements and Notes (unaudited) thereto included
elsewhere in this Report, as well as the Company's consolidated financial
statements and notes thereto incorporated into its Annual Report on Form 10-K
for the year ended December 31, 2002. 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 is a recognized information technology (IT) solutions leader,
providing products and services to federal, state, and local government
customers worldwide. For two decades GTSI has served the public sector by
teaming up with global IT leaders such as HP, Panasonic, Microsoft, Sun and
Cisco. GTSI seeks to deliver maximum value through its broad range of products,
extensive contract portfolio, and ISO 9002-registered logistics. Through its
Technology Teams, GTSI delivers "best of breed" products and services to help
its customers realize strong value for their IT investments. The Technology
Teams consist of technical experts who support a wide range of integrated IT
solutions in such areas as high performance computing, advanced networking,
mobile and wireless solutions, high availability storage and information
assurance. GTSI continues to broaden its leadership in electronic commerce and
procurement through its federally focused website, gtsi.com that provides
customized shopping zones to meet customers' personalized needs. GTSI is
headquartered in Northern Virginia, outside of Washington, D.C.
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, personal computers and networking, Unix
servers/workstation and internet products), to the addition/removal of vendors,
and to the addition or expiration of sales contract vehicles. 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 affected the last two calendar quarters of the year.
The Company's business strategy is to continue to focus on higher-end
product-based solutions, to broaden its product offering, and to remain a
low-cost, and high-reliability provider of commodity products. The Company also
focuses on bringing new technologies to government customers.
12
Results of Operations
The following table sets forth, for the periods indicated, the
percentages that selected items within the statement of operations bear to sales
and the annual percentage changes in the dollar amounts of such items.
Percentage of Sales
--------------------------------------------
Three Nine
Months Ended Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.9 91.9 89.7 92.1
-------- -------- -------- --------
Gross margin 10.1 8.1 10.3 7.9
-------- -------- -------- --------
Operating expenses:
Selling, general, and administrative 8.0 6.4 9.7 7.0
Depreciation and amortization 0.3 0.3 0.3 0.4
-------- -------- -------- --------
Total operating expenses 8.3 6.7 10.0 7.4
-------- -------- -------- --------
Income from operations 1.8 1.4 0.3 0.5
Interest income, net 0.3 0.5 0.4 0.7
-------- -------- -------- --------
Income before taxes 2.1 1.9 0.7 1.2
Income tax provision 0.8 0.8 0.3 0.5
-------- -------- -------- --------
Net income 1.3 1.1 0.4 0.7
======== ======== ======== ========
13
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.
Three months ended September 30, Nine months ended September 30,
Contract Vehicle 2003 2002 2003 2002
------------------- ------------------- ------------------- -------------------
GSA Schedules $ 77.6 28.4% $ 97.5 35.2% $ 183.4 28.5% $ 196.6 30.0%
IDIQ Contracts 119.8 43.9% 113.8 41.1% 282.0 44.0% 256.5 39.2%
Open Market 50.5 18.5% 33.4 12.1% 105.9 16.5% 69.3 10.6%
Subcontracts and
Other Contracts 25.2 9.2% 32.1 11.6% 70.3 11.0% 132.1 20.2%
------------------- ------------------- ------------------- -------------------
Total $ 273.1 100.0% $ 276.8 100.0% $ 641.6 100.0% $ 654.5 100.0%
=================== =================== =================== ===================
Top 5 Vendors Three months ended September 30, Nine months ended September 30,
2003 2002 2003 2002
------------------- ------------------- ------------------- -------------------
Panasonic $ 48.4 17.7% $ 37.0 13.4% $ 116.8 18.2% $ 90.9 13.9%
HP 39.0 14.3% 32.9 12.0% 97.8 15.2% 68.8 10.5%
Sun 38.9 14.2% 46.8 16.9% 93.4 14.6% 82.5 12.6%
Cisco 32.2 11.8% 33.2 12.0% 70.7 11.0% 85.5 13.1%
Microsoft 19.3 7.1% 32.3 11.7% 51.2 8.0% 76.2 11.6%
Other 95.3 34.9% 94.6 34.2% 211.7 33.0% 250.6 38.3%
------------------- ------------------- ------------------- -------------------
Total $ 273.1 100.0% $ 276.8 100.0% $ 641.6 100.0% $ 654.5 100.0%
=================== =================== =================== ===================
Three months ended September 30, Nine months ended September 30,
Product 2003 2002 2003 2002
------------------- ------------------- ------------------- -------------------
Hardware $ 201.4 73.7% $ 194.8 70.4% $ 443.0 69.0% $ 468.1 71.5%
Software 44.2 16.2% 62.3 22.5% 128.0 20.0% 144.7 22.1%
Services 27.5 10.1% 19.7 7.1% 70.6 11.0% 41.7 6.4%
------------------- ------------------- ------------------- -------------------
Total $ 273.1 100.0% $ 276.8 100.0% $ 641.6 100.0% $ 654.5 100.0%
=================== =================== =================== ===================
14
Three Months Ended September 30, 2003 Compared
With the Three Months Ended September 30, 2002
Sales. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. Sales for the third
quarter of 2003 were $273.1 million, compared to $276.8 million in the third
quarter of 2002, or a decrease of 1.3%. Sales under the GSA Schedules category
are down $19.9 million to $77.6 million while open market sales increased $17.1
million to $50.5 million for the quarter. Sales in the Subcontract and Other
Contracts category decreased $6.9 million to $25.2 million for the quarter ended
September 30, 2003. This decrease is primarily due to decreased volume on
subcontracts with prime contractors, specifically on the FBI's Trilogy contract.
Backlog. The Company recognizes an order in its backlog at the time it
receives and accepts a written customer purchase order. The Company's Total
Backlog includes orders that have not shipped ("Unshipped Backlog") as well as
orders that have shipped but cannot be recognized as revenue at the period end.
Total Backlog at September 30, 2003 was approximately $228.3 million compared to
$203.6 million at September 30, 2002. Unshipped Backlog at September 30, 2003
was approximately $203.7 million compared to $181.3 million at September 30,
2002. Backlogs fluctuate significantly from quarter to quarter because of the
seasonality of Government ordering patterns and fluctuations in inventory
availability of various products.
Gross Margin. Gross margin is sales less cost of goods sold, which
includes product cost, freight, warranty maintenance cost and certain other
expenses related to the cost of acquiring products. Gross margin percentages
vary over time and may change significantly depending on the mix of customer's
use of available contract vehicles and the mix of product sold. Gross margin in
the third quarter of 2003 increased to 10.1% of total sales from 8.1%. The
increase is primarily due to the Company's January 1, 2003 adoption of Emerging
Issues Task Force ("EITF") Issue No. 02-16, "Accounting for Consideration
Received from a Vendor by a Customer (Including a Reseller of the Vendor's
Products)," which resulted in reclassifying certain vendor funds as a reduction
in cost of sales. If the Company had applied EITF No. 02-16 to the three months
ending September 30, 2002, gross margins would have increased to 10.1% of total
sales from 9.3% of total sales for the same period in 2002.
Operating Expenses. Total operating expenses for the three months ended
September 30, 2003 increased to $22.6 million from $18.4 million from the same
period in 2002. A large portion of this increase was a result of the adoption of
EITF No. 02-16. For comparative purposes operating expenses for the quarter
ending September 30, 2002 would have been $21.9 million. In addition to the
impact of this new accounting pronouncement, operating expenses increased due to
higher personnel costs due to increased headcount primarily in the Sales and
Technology Team organizations. Offsetting this increase was the reversal of two
previously recorded accrued liabilities related to the reconciliation of a state
business tax issue and the resolution of a customer dispute, which resulted in a
total expense reduction of $540,000. Expressed as a percentage of total sales,
total operating expenses increased to 8.3% from 6.7% in the same quarter last
year. Applying the impact from EITF No. 02-16 to the quarter ended September 30,
2002 for comparison purposes, total operating expenses expressed as a percentage
of sales would have increased to 8.3% for the third quarter of 2003 compared to
7.9% in the same quarter last year.
15
Interest and Other Income, Net. Net interest and other income in the
quarter ended September 30, 2003 decreased $448,000 to $840,000 compared to $1.3
million in the same period in 2002 due primarily to a decrease in prompt payment
discounts taken during the period. The Company continues to take advantage of
prompt payment discounts when offered by vendors. However, due to lower interest
rates, the Company's vendors have reduced their prompt payment programs. As a
slight offset to the decrease in interest and other income, interest expense
also decreased $196,000 for the quarter. This decrease is due to reduced credit
facility usage.
Income Tax. The Company recorded a tax provision of $2.2 million for
the third quarter of 2003 based on its expected annual effective tax rate of
approximately 39% for the year compared to a tax provision of $2.1 million and
an effective rate of 39% in the same period last year.
Nine Months Ended September 30, 2003 Compared
With the Nine Months Ended September 30, 2002
Sales. Sales for the nine-months of 2003 were $641.7 million, compared
to $654.6 million in the nine-months of 2002, or a decrease of 2.0%. Sales in
the GSA Schedules, IDIQ Contracts and Open Market contract categories all
experienced growth for the first nine-months of 2003 compared to the same period
last year. The increase in these three categories is attributed to the efforts
of our expanded sales force. The increase in these three categories is offset by
a $61.8 million decrease in sales made under the Subcontracts and Other
Contracts category. This decrease is primarily due to decreased volume on
subcontracts with prime contractors, specifically on the FBI's Trilogy contract.
Gross Margin. Gross margin in the nine-month period ended September 30,
2003 increased to 10.3% of total sales from 7.9% of total sales for the same
period in 2002. The primary factor impacting margins for the period is the
January 1, 2003 adoption of EITF Issue No. 02-16, which resulted in
reclassifying certain vendor funds as a reduction in cost of sales. If the
Company had applied EITF No. 02-16 to the nine months ended September 30, 2002,
gross margins would have increased to 10.3% of total sales from 9.4% of total
sales for the same period in 2002. The Company's gross margins may fluctuate
from period to period based on the product and contract mix sold during the
period.
Operating Expenses. Total operating expenses for the nine months ended
September 30, 2003 increased $15.8 million to $64.0 million from the same period
in 2002. Expressed as a percentage of total sales, total operating expenses
increased to 10.0% from 7.4% in the same period last year. A large portion of
this increase was a result of the adoption of EITF No. 02-16, which increased
margins, but also operating costs. In addition to the impact of this new
accounting pronouncement, operating expenses increased $6.3 million due
primarily to increased headcount in the Sales and Technology Team organizations.
Management feels that by making these investments in Sales and Technology Team
personnel the Company is now better positioned to take advantage of new
opportunities in the State and Local marketplace utilizing the newly awarded US
Communities Contract; sales to Prime Contractors through the Company's revamped
Integrator Solutions Group; and in the area of leasing to the Government. During
the third quarter 2003, the Company reversed two accrued liabilities related to
the reconciliation of a state business tax issue and the resolution of a
customer dispute, which resulted in a total expense reduction of $540,000. For
comparison purposes, if the Company had applied EITF No. 02-16 to the nine
months ended September 30, 2002, total operating expenses expressed as a
percentage of sales would have increased to 10.0% for the nine months of 2003
compared to 8.8% in the nine months of last year.
16
Interest and Other Income. Net interest and other income in the nine
months of 2003 decreased $1.4 million to $2.3 million compared to $3.7 million
in the same period in 2002 due primarily to a decrease in interest income from
equipment leases and a $500,000 gain on the sale of equipment leases in the
first quarter of 2002. Interest and other income was also impacted by a decrease
in prompt payment discounts offered by vendors.
Income Tax. The Company recorded a tax provision of $1.8 million for
the nine months of 2003 based on its expected annual effective tax rate for the
year of approximately 39% compared to a tax provision of $3.0 million and an
effective rate of 39% in the same period last year.
Effect of Inflation
The Company believes that inflation has not had a material effect on
its operations. If however, 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.
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 affects 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 federal 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 computer and IT 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 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 federal government's procurement practices, and agencies from
time to time may issue new regulations or modify existing regulations that may
also change the government's procurement practices. GTSI cannot predict whether
any 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, either alone or in combination with
competitive conditions or other factors, could adversely affect future results.
17
New Accounting Pronouncements.
In November 2002, the Emerging Issues Task Force (EITF) published Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF No. 00-21"),
which addresses certain aspects of the accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities. EITF No.
00-21 addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting. EITF No. 00-21 is
effective for the Company for revenue arrangements entered into beginning July
1, 2003. The adoption of EITF No. 00-21 did not have a material impact on the
Company's 2003 condensed consolidated financial statements.
In November 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN No. 45). FIN No. 45 elaborates on the disclosure to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of FIN No. 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN No. 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. As a result of
adopting FIN No. 45, the Company has added additional disclosures related to
accrued warranty obligations.
In December 2002, the FASB issued Statement of Financial Standards
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of SFAS No. 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock -based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting Principle
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees" and
related interpretations. Accordingly, compensation expense for stock options is
measured as the excess, if any, of the fair market value of the Company's stock
at the date of the grant over the exercise price of the related option. The
Company adopted the annual disclosure provisions of SFAS No. 148 in its
financial report for the year ended December 31, 2002 and adopted the interim
disclosure provisions for its financial reports beginning with the quarter ended
March 31, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities (FIN No. 46). FIN No. 46 clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from the other parties. FIN No. 46 applies to variable interest entities
created after January 31, 2003. The consolidation requirements apply to older
entities in the first fiscal year or interim period beginning after December 15,
2003, which is the Company's first quarter of fiscal year 2004. The Company does
not expect the adoption of FIN No. 46 to have a material impact on its condensed
consolidated financial statements.
18
On January 1, 2003 the Company adopted a new accounting pronouncement,
EITF Issue No. 02-16, "Accounting for Consideration Received from a Vendor by a
Customer (Including a Reseller of the Vendor's Products)." This pronouncement
requires that consideration from vendors, such as advertising support funds and
sales volume incentives, be accounted for as a reduction to cost of sales unless
certain requirements are met showing that the funds represent a reimbursement of
a specific, incremental, identifiable cost incurred by the Company in selling
the vendor's product. If these specific requirements related to individual
vendors are met, the consideration is accounted for as a reduction in the
related expense category, such as advertising or selling and administrative
expense. The Company provides numerous advertising programs to support vendors,
including catalogs, radio, Internet, magazine and newspaper advertising for
which it receives consideration. The Company adopted EITF No. 02-16 for the
quarter ended March 31, 2003.
As a result of adopting EITF No. 02-16, the Company records certain
vendor considerations as a reduction of inventory and a subsequent reduction in
cost of goods sold when the related product is sold. In previous reporting
periods, the Company recorded these items as a reduction to operating expenses
in that period. There was no substantial impact on the Company's operating
income for the three months ended September 30, 2003 due to EITF No. 02-16.
However, the impact for the nine months ended September 30, 2003 is an increase
in cost of goods sold of approximately $668,000 or a tax effected reduction to
net income of approximately $408,000.
For comparative purposes, if the Company applied EITF No. 02-16 to the
three months and nine months ended September 30, 2002, the Company's operating
income for the three-month period would have increased by $213,000 or a tax
effected increase to net income of $130,000 and the nine-month operating income
would have been reduced by $112,000 or a tax effected reduction to net income of
$68,000. In addition, gross margin would have increased from $22.4 million to
$25.9 million for the third quarter 2002 and from $52.0 million to $61.5 million
for the nine month period ended September 30, 2002. Gross margin percentage
would have increased from 8.1% to 9.3% for the quarter and from 7.9% to 9.4% for
the nine-month period ended September 30, 2002. Operating expenses would have
also increased from $18.4 million to $21.9 million and from $48.2 million to
$57.7 million for the quarter and year to date 2002, respectively.
Liquidity and Capital Resources
During the first nine months of 2003, the Company's operating
activities provided $18.0 million of cash flow, compared to the $2.2 million of
cash flow provided during the same period in 2002. The increase in cash flow
relates primarily to the increase in trade accounts payable year over year.
Accounts payable at September 30, 2003 is up in part due to vendors reducing
their prompt payment discounts during 2003.
Investing activities used cash of approximately $7.8 million during the
nine months ended September 30, 2003, compared to $3.3 million for the same
period in 2002 reflecting the Company's investment in software for a new
fulfillment system, intended to improve efficiency throughout the Company. As of
September 30, 2003, the Company has capitalized approximately $10.2 million
under this project. The Company is undergoing an evaluation of the project's
continued progress. If management determines as a result of the evaluation that
portions of the software have no future economic value, the amount previously
capitalized associated with that portion of the software will be charged to
expense.
19
During the nine months ended September 30, 2003, the Company's
financing activities used cash of approximately $10.1 million, of which $7.5
million was used to repay borrowings under the Company's Credit Facilities. The
Company also used $4.0 million of cash to purchase the Company's stock offset by
proceeds received from the exercise of options and stock.
Subsequent to September 30, 2003, the Company closed a new $125 million
Credit Facility with a lender and terminated the existing credit facilities. The
new Credit Facility, which matures on February 28, 2005, includes a revolving
line of credit (the Revolver) and a provision for inventory financing of vendor
products (the Wholesale Financing Facility). Borrowing under the Revolver is
limited to 85% of eligible accounts receivable and carries an interest rate
indexed to LIBOR plus 1.75 percentage points. The Revolver is secured by
substantially all of the Company's assets. The Revolver also contains certain
covenants as well as provisions specifying compliance with certain quarterly and
annual financial ratios. Borrowing under the Wholesale Financing Facility is
limited to 100% of the value of the inventory. The Wholesale Financing Facility
is secured by the underlying inventory.
As of September 30, 2003 the Company had a revolving line of credit
with a group of banks, which allowed for borrowings up to $50.0 million during
its highest seasonal period. Additionally, the Company had a separate facility
with a bank for inventory financing of vendor products, which allowed for
borrowings up to $60.0 million during its highest seasonal period. Combined, the
revolver and the inventory financing facility allowed the Company to borrow from
$55.0 million to $110.0 million depending on the seasonal period. The seasonal
structure of the credit facilities coincided with the seasonality of the
Company's business and allowed the Company to minimize banking fees. The
interest rate under the revolver was a rate indexed to the London Interbank
Offered Rate (LIBOR) plus 1.75 percentage points.
Borrowing under the revolver was limited to 85% of eligible accounts
receivable. The revolver was secured by substantially all of the Company's
operating assets. Current obligations were first funded and then all cash
receipts were automatically applied to reduce outstanding borrowings. The
revolver also contained certain covenants that included 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
ratios. As of September 30, 2003 the Company was in compliance with all of its
covenants under the revolver and had available credit on the revolver of $50.0
million.
On March 31, 2003 the Company and its group of banks signed an
amendment to the revolver in which the group of banks consented to allow the
Company to repurchase up to an additional $5.0 million worth of its stock from
stockholders. During the nine months ended September 30, 2003 the Company
repurchased approximately $4.0 million of its stock.
The Company anticipates that it will continue to rely primarily on
operating cash flow, loans and vendor credit to finance its operating cash
needs. The Company believes that such funds should be sufficient to satisfy the
Company's near term anticipated cash requirements for operations. Nonetheless,
the Company may seek additional sources of capital, including permanent
financing over a longer term at fixed rates, to finance its working capital
requirements.
20
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
Except for historical information, all of the statements, expectations,
beliefs, anticipations, intentions, and assumptions contained in the foregoing
material are "forward-looking statements" (within the meaning of the Private
Securities Litigation Reform Act of 1995, as amended) that involve a number of
risks and uncertainties. All such forward-looking statements are intended to be
subject to the safe harbor protection provided by the Private Securities Reform
Act of 1995, as amended, and by other applicable securities laws. It is possible
that the assumptions made by management -- including, but not limited to, those
relating to favorable gross margins, a favorable mix of contracts, benefits of a
more efficient operation, future contract awards, returns on new product
programs, profitability, recovery of the costs of inventory, and increased
control of operating costs -- may not materialize. Actual results may differ
materially from those projected or implied in any forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation to revise publicly the forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the risks factors described in other documents
the Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on the Form 10-Q to be filed by the Company
subsequent to this Annual Report on Form 10-K and any Current Reports on Form
8-K filed by the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company had a $50.0 million revolving line of credit indexed at
LIBOR plus 1.75 percentage points as of September 30, 2003. This variable rate
revolver subjects the Company to potential borrowing costs exposure resulting
from changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Based on its most recent evaluation, which was completed within 90 days
of the filing of this Form 10-Q, the Company's Chief Executive Officer and Chief
Financial Officer believe the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that
information required to be disclosed by the Company's management, including its
principal executive officer and principal financial officer, are appropriate, to
allow timely decisions regarding required disclosure. There were no significant
changes in the Company's internal controls or the other factors that could
significantly affect these controls subsequent to the date of their evaluation
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Principal Executive Officer.
31.2 Certification of Principal Financial Officer.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.
(b) 1. On July 29, 2003, we furnished a Current Report on Form 8-K
pursuant to Item 5. Other Events attaching a press release
dated July 23, 2003 announcing our earnings results for the
second quarter of 2003.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 13, 2003
GTSI Corp.
By: /s/ DENDY YOUNG
-------------------------------------
Dendy Young
Chairman and Chief Executive Officer
By: /s/ THOMAS A. MUTRYN
-------------------------------------
Thomas A. Mutryn
Senior Vice President and Chief
Financial Officer
23