UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 June 30, 2004
Commission File Number: 0-19394
GTSI CORP.
(Exact name of registrant as specified in its charter)
Delaware 54-1248422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3901 Stonecroft Boulevard, Chantilly, VA 20151-1010
(Address of principal executive offices) (Zip Code)
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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). 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 July 31, 2004
------------------------------ -----------------------------------
Common Stock, $0.005 par value 8,637,935
GTSI CORP. AND SUBSIDIARY
Form 10-Q for the Quarter Ended June 30, 2004
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS -
Consolidated Condensed Balance Sheets as of
June 30, 2004 (Unaudited) and December 31, 2003..............................................1
Consolidated Condensed Statements of Operations for the Three and
Six Months Ended June 30, 2004 and 2003 (Unaudited)..........................................2
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2004 and 2003 (Unaudited)..........................................3
Notes to Consolidated Condensed Financial Statements (Unaudited).................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................................................8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................15
ITEM 4. CONTROLS AND PROCEDURES.........................................................................16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................18
SIGNATURES........................................................................................................19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2004 2003
(Unaudited) (Audited)
------------ ------------
ASSETS
Current assets:
Cash $ 27,847 $ 177
Accounts receivable, net 140,117 181,988
Merchandise inventories 86,891 55,987
Other current assets 13,068 15,490
------------ ------------
Total current assets 267,923 253,642
Property and equipment, net 13,053 10,670
Other assets 2,196 4,449
------------ ------------
Total assets $ 283,172 $ 268,761
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ -- $ 12,813
Accounts payable 186,619 152,435
Accrued liabilities 10,933 11,168
Deferred revenue 3,649 8,323
Accrued warranty liabilities 4,186 4,555
------------ ------------
Total current liabilities 205,387 189,294
Other liabilities 1,250 1,522
------------ ------------
Total liabilities 206,637 190,816
------------ ------------
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 8,619,935 outstanding at June 30, 2004;
and 9,806,084 issued and 8,505,045 outstanding at December 31, 2003 49 49
Capital in excess of par value 46,716 45,911
Retained earnings 37,196 40,131
Treasury stock, 1,186,149 shares at June 30, 2004 and
1,301,039 shares at December 31, 2003, at cost (7,426) (8,146)
------------ ------------
Total stockholders' equity 76,535 77,945
------------ ------------
Total liabilities and stockholders' equity $ 283,172 $ 268,761
============ ============
The accompanying notes are an integral part of these financial statements.
- 1 -
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Unaudited
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Sales $ 238,990 $ 189,737 $ 417,612 $ 368,595
Cost of sales 217,453 166,981 377,994 329,764
---------- ---------- ---------- ----------
Gross margin 21,537 22,756 39,618 38,831
Operating expenses 24,622 21,613 46,319 41,315
---------- ---------- ---------- ----------
(Loss) income from operations (3,085) 1,143 (6,701) (2,484)
---------- ---------- ---------- ----------
Interest and other income 541 814 1,911 1,594
Interest expense (22) (70) (60) (118)
---------- ---------- ---------- ----------
Interest and other income, net 519 744 1,851 1,476
---------- ---------- ---------- ----------
(Loss) income before income taxes (2,566) 1,887 (4,850) (1,008)
Income tax (benefit) provision (1,013) 738 (1,915) (394)
---------- ---------- ---------- ----------
Net (loss) income $ (1,553) $ 1,149 $ (2,935) $ (614)
========== ========== ========== ==========
Basic net (loss) income per share $ (0.18) $ 0.14 $ (0.34) $ (0.07)
========== ========== ========== ==========
Diluted net (loss) income per share $ (0.18) $ 0.13 $ (0.34) $ (0.07)
========== ========== ========== ==========
Basic weighted average shares outstanding 8,573 8,258 8,564 8,410
========== ========== ========== ==========
Diluted weighted average shares outstanding 8,573 8,907 8,564 8,410
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
- 2 -
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Six months ended
June 30,
------------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,935) $ (614)
Adjustments to reconcile net loss to net cash
provided by operating activities 46,216 16,146
---------- ----------
Net cash provided by operating activities 43,281 15,532
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of property and equipment (3,843) (4,831)
---------- ----------
Net cash used in investing activities (3,843) (4,831)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of bank notes, net (12,813) (7,539)
Payments to acquire treasury stock -- (3,969)
Proceeds from exercises of stock options 615 338
Proceeds from Employee Stock Purchase Plan 430 489
---------- ----------
Net cash used in financing activities (11,768) (10,681)
---------- ----------
NET INCREASE IN CASH 27,670 20
CASH AT BEGINNING OF PERIOD 177 32
---------- ----------
CASH AT END OF PERIOD $ 27,847 $ 52
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 38 $ 151
========== ==========
Income taxes $ 1,018 $ 25
========== ==========
The accompanying notes are an integral part of these financial statements.
- 3 -
GTSI CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited interim consolidated condensed financial
statements of GTSI Corp. ("GTSI" or the "Company") have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission for
quarterly reports on Form 10-Q and, therefore, omit or condense certain note
disclosures and other information required by accounting principles generally
accepted in the United States of America for complete financial statements.
These financial statements should therefore be read in conjunction with the
audited consolidated financial statements and accompanying notes for the year
ended December 31, 2003 included in GTSI's Annual Report on Form 10-K. The
consolidated financial statements include the accounts of GTSI and its wholly
owned subsidiary. Material intercompany transactions and balances have been
eliminated. In the opinion of management, all adjustments, consisting primarily
of normal recurring adjustments, necessary for a fair presentation of interim
period results have been included. The results of operations for the three and
six month periods ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the full year, or future periods. Certain prior
period amounts have been reclassified to conform to the current period
presentation.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities ("FIN
46"). FIN 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 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 was the Company's first
quarter of fiscal year 2004. The adoption of FIN 46 did not have a material
impact on the Company's consolidated financial statements.
- 4 -
2. Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic
value method of accounting in accordance with Accounting Principle Board Opinion
No. 25 "Accounting for Stock Issued to Employees" and related Interpretations.
Accordingly, no compensation cost for stock options granted to employees was
reflected in net income, as all options granted had an exercise price equal to
the fair market value of the Company's common stock on the date of the grant.
The following table illustrates, in accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure" the effect on net (loss) income and
(loss) earnings per share if compensation costs for the Company's stock options
had been determined based on the fair value method consistent with the
provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" (in
thousands, except per share amounts):
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net (loss) income - as reported $ (1,553) $ 1,149 $ (2,935) $ (614)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (307) (348) (1,137) (758)
---------- ---------- ---------- ----------
Net (loss) income - pro forma $ (1,860) $ 801 $ (4,072) $ (1,372)
========== ========== ========== ==========
Net (loss) income per share - as reported (basic) $ (0.18) $ 0.14 $ (0.34) $ (0.07)
Net (loss) income per share - as reported (diluted) $ (0.18) $ 0.13 $ (0.34) $ (0.07)
Net (loss) income per share - pro forma (basic) $ (0.22) $ 0.10 $ (0.48) $ (0.16)
Net (loss) income per share - pro forma (diluted) $ (0.22) $ 0.09 $ (0.48) $ (0.16)
On March 18, 2004, the members of the Company's Board of Directors
formally waived the right granted to them by the May 14, 2003 stockholder
approval of extending the exercise price for certain options granted to its
non-employee directors following cessation from the Company. Therefore, there is
no longer any potential compensation expense impact related to the stock option
extensions.
During the quarter ended June 30, 2004, the company recorded a charge
of approximately $480,000 ($290,000, net of taxes) for stock-based compensation
to non-employees based on the fair value method.
3. Capitalized Software
The Company is implementing an enterprise resource planning ("ERP")
system to replace its current fulfillment system. Implementation of the ERP
system is designed to improve management information and gain operating
efficiencies. As of June 30, 2004, the Company has approximately $7.0 million of
costs capitalized related to this project, reported as property and equipment,
net, of which approximately $1.2 million and $3.0 million were capitalized in
the three and six month periods ended June 30, 2004, respectively.
- 5 -
4. Notes Payable to Banks
The Company has a $125 million credit facility with a group of banks
("Credit Facility"). The Credit Facility, which matures on February 28, 2005,
includes a revolving line of credit ("Revolver") and a provision for inventory
financing of vendor products ("Wholesale Financing Facility"). Borrowing under
the Revolver is limited to 85% of eligible accounts receivable. The Revolver is
secured by substantially all of the Company's assets. 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. The
Credit Facility carries an interest rate indexed to LIBOR plus 1.75 percentage
points. The Credit Facility also contains certain covenants as well as
provisions specifying compliance with certain quarterly and annual financial
ratios. At June 30, 2004, the Company was in compliance with all financial
covenants set forth in the Credit Facility and had available credit of $37.3
million.
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 based on
its actual historical return rates and repair costs at the time of sale.
Accrued warranty liability as of December 31, 2003 $ 4,555
Warranty activity from January 1, 2004 to June 30, 2004:
Charges made against the warranty (1,211)
Accruals related to warranty 842
---------
Net change to accrued warranty liability during period (369)
---------
Accrued warranty as of June 30, 2004 $ 4,186
=========
- 6 -
6. Earnings Per Share
Basic earnings per share are computed by dividing net income or loss by the
weighted average shares outstanding during the period. Diluted earnings per
share are computed similarly to basic earnings per share except that the
weighted average shares outstanding are increased to include equivalents, when
their effect is dilutive. The following table sets forth the computations for
basic and dilutive earnings per share:
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Basic earnings per share:
Numerator: Net (loss) income $ (1,553) $ 1,149 $ (2,935) $ (614)
Denominator: Weighted average shares outstanding 8,573 8,258 8,564 8,410
---------- ---------- ---------- ----------
Basic (loss) earnings per share $ (0.18) $ 0.14 $ (0.34) $ (0.07)
========== ========== ========== ==========
Diluted earnings per share:
Numerator: Net (loss) income $ (1,553) $ 1,149 $ (2,935) $ (614)
Weighted average shares and equivalents:
Weighted average shares outstanding 8,573 8,258 8,564 8,410
Effect of dilutive securities:
Employee stock options N/A* 649 N/A* N/A*
---------- ---------- ---------- ----------
Denominator: Weighted average shares and
equivalents 8,573 8,907 8,564 8,410
---------- ---------- ---------- ----------
Dilutive (loss) earnings per share $ (0.18) $ 0.13 $ (0.34) $ (0.07)
========== ========== ========== ==========
* For the three month period ended June 30, 2004 there were approximately
774,000 shares and for the six month periods ended June 30, 2004 and 2003, there
were approximately 855,000 and 730,000 shares, respectively, of potentially
dilutive options that are not included because the net losses for the periods
make their impact anti-dilutive.
7. Commitments and Contingencies
The Company is occasionally involved in various lawsuits, claims, and
administrative proceedings arising in the normal course of business. The Company
believes that any liability or loss associated with such matters, individually
or in the aggregate, will not have a material adverse effect on the Company's
financial condition or results of operations.
In November 2003, GTSI was served with a $25 million lawsuit, with
treble damages, related to the termination of a former subcontractor. This suit
follows the Company's earlier lawsuit against the former subcontractor.
Management continues to believe the claim is without merit and intends to
vigorously defend this lawsuit, but the ultimate outcome of this matter is
uncertain. Management is unable to estimate the amount GTSI may have to pay, if
any, related to this matter. No amounts have been accrued as of June 30, 2004.
- 7 -
ITEM 2. 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 unaudited
consolidated condensed financial statements and notes included elsewhere in this
Quarterly Report on Form 10-Q, as well as with the consolidated financial
statements and notes in our Annual Report on Form 10-K for the year ended
December 31, 2003. We use the terms "GTSI,", "we," "our," and "us" to refer to
GTSI Corp. and its subsidiary. Historical results and percentage relationships
among any amounts in the interim consolidated condensed financial statements are
not necessarily indicative of trends in operating results for any future period.
First Half 2004 Overview
For the first half of 2004, we experienced a year over year increase in
sales of $49.0 million. Despite this increase, we recorded a net loss for the
six months ended June 30, 2004 due to declines in gross margins as a percentage
of sales. We believe the decrease was largely caused by internal processes and
have begun implementing corrective actions to resolve the margin erosion issue.
We saw an increase in bookings during the first half of 2004 and an increase in
backlog of $48.8 million to $155.0 million as of June 30, 2004. Operating
expenses for the period also increased. The $5.0 million increase was directly
related to our activities to comply with the Sarbanes-Oxley Act of 2002 Section
404 ("SOX 404") requirements, our new branding campaign, "I Rely on GTSI",
increases in employee-related expenses and our continued investment in the
implementation of our enterprise resource planning ("ERP") system to replace our
current fulfillment system.
Company Overview
GTSI is a recognized IT solutions leader, providing products and
services to federal, state, and local government customers worldwide. For over
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.
Federal Government IT spending has grown at a 14% compounded annual
rate since 2000, and we believe that government IT spending will continue to be
robust in the foreseeable future. Our revenue has grown at a 11% compounded
annual rate since 2000. Changes in sales throughout our history have been
attributable to increased or decreased unit sales, expansion of our product
offerings (e.g., peripherals, personal computers and networking, Unix
servers/workstation and internet products), the addition/removal of vendors, and
the addition or expiration of sales contract vehicles.
A substantial portion of our contracts are fixed-price and indefinite
delivery/ indefinite quantity ("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, which may result from such contracts.
- 8 -
GTSI qualified as a "small business" under several of the GWACs and
BPAs it holds based on GTSI's size status at the time of the contracts' original
award. As a small business, GTSI enjoys a number of benefits, including being
able to compete for small business set-aside contracts, qualifying as a small
business subcontractor, bidding pursuant to small purchase procedures directed
to non-manufacturer small business, and offering Government agencies an avenue
to meet their internal small business purchase goals.
A company's size status under a contract is based on the North American
Industry Classification System ("NAICS") Code referenced in the subject
contract's solicitation. Dependent on the NAICS Code referenced in a
solicitation, GTSI may or may not qualify as a small business for new contract
awards. Under a Federal Acquisition Regulation ("FAR") Deviation issued by GSA
on October 10, 2002, GTSI will be required to recertify its size status on its
GSA Schedule Contract no later than 2007. At such time, GTSI may not qualify as
a small business for new contract awards under the GSA Schedule. In addition,
new legislation or regulations may require GTSI to recertify its size status on
its GSA Schedule sooner than 2007. GTSI cannot predict whether it would continue
to qualify as a small business at the time of recertification. To mitigate any
potential adverse impact, GTSI has developed strategic relationships with small
minority-owned businesses that benefit from the small business benefits
described above. GTSI acts as both a supplier and prime contractor to these
small minority-owned businesses.
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. We cannot predict whether any legislative or
regulatory proposals will be adopted or, if adopted, the impact on our 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 our future results.
Noncompliance with Government procurement regulations or contract
provisions or protest of a GTSI awarded contract could result in termination of
Government contracts, substantial monetary fines or damages, suspension or
debarment from doing business with the Government and 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 our
Government contracts can be terminated at any time at the Government's
convenience 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 GTSI.
Our business strategy is to continue to focus on higher-end
product-based solutions, to broaden our product offering, and to remain a
low-cost, and high-reliability provider of commodity products. We also focus on
bringing new technologies to government customers.
Critical Accounting Estimates
Our unaudited consolidated financial statements are based on the
selection of accounting policies and the application of significant accounting
estimates, some of which require management to make significant assumptions. We
believe that some of the more critical estimates and related assumptions that
affect our financial condition and results of operations are in the areas of
revenue recognition, allowance for doubtful accounts, merchandise inventories,
long-lived assets, warranties, and stock compensation. For more information on
critical accounting estimates, see the MD&A included in our Form 10-K for the
year ended December 31, 2003. We have discussed the application of these
critical accounting estimates with our Board of Directors and Audit Committee.
- 9 -
During the six months ended June 30, 2004, we did not change or adopt
new accounting policies that had a material effect on our consolidated financial
condition and results of operations.
Historical Results of Operations
The following table illustrates the unaudited percentage of sales
represented by items in our consolidated condensed statements of operations for
the periods presented.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 91.0 88.0 90.5 89.5
---------- ---------- ---------- ----------
Gross margin 9.0 12.0 9.5 10.5
Operating expenses:
Selling, general, and administrative 10.0 11.0 10.8 10.8
Depreciation and amortization 0.3 0.4 0.3 0.4
---------- ---------- ---------- ----------
Total operating expenses 10.3 11.4 11.1 11.2
---------- ---------- ---------- ----------
(Loss) income from operations (1.3) 0.6 (1.6) (0.7)
Interest income, net (0.2) (0.4) (0.4) (0.4)
---------- ---------- ---------- ----------
(Loss) income before taxes (1.1) 1.0 (1.2) (0.3)
Income tax (benefit) provision (0.4) 0.4 (0.5) (0.1)
---------- ---------- ---------- ----------
Net (loss) income (0.7)% 0.6% (0.7)% (0.2)%
========== ========== ========== ==========
- 10 -
The following tables set forth, for the periods indicated, the
approximate sales by product, by contract vehicle and by vendor (in millions),
along with related percentages of total sales.
Contract Vehicles Three months ended June 30, Six months ended June 30,
------------------------------------------ ------------------------------------------
2004 2003 2004 2003
------------------- ------------------- ------------------- -------------------
GSA Schedules $ 54.8 22.9% $ 53.9 28.4% $ 97.0 23.2% $ 105.8 28.7%
IDIQ Contracts 93.1 39.0 83.3 43.9 166.0 39.8 162.2 44.0
Open Market 59.8 25.0 28.5 15.0 95.7 22.9 55.5 15.1
Subcontracts and
Other Contracts 31.3 13.1 24.0 12.7 58.9 14.1 45.1 12.2
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 239.0 100.0% $ 189.7 100.0% $ 417.6 100.0% $ 368.6 100.0%
======== ======== ======== ======== ======== ======== ======== ========
Top 5 Vendors Three months ended June 30, Six months ended June 30,
------------------------------------------ ------------------------------------------
2004 2003 2004 2003
------------------- ------------------- ------------------- -------------------
Panasonic $ 36.2 15.1% $ 33.6 17.7% $ 70.6 16.9% $ 68.4 18.6%
Sun 37.4 15.6 34.8 18.4 57.8 13.9 54.5 14.8
HP 31.5 13.2 28.6 15.1 49.6 11.9 60.9 16.5
Cisco 20.8 8.7 18.1 9.5 43.9 10.5 38.5 10.4
Dell 17.1 7.2 8.7 4.6 27.3 6.5 18.5 5.0
Other 96.0 40.2 65.9 34.7 168.4 40.3 127.8 34.7
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 239.0 100.0% $ 189.7 100.0% $ 417.6 100.0% $ 368.6 100.0%
======== ======== ======== ======== ======== ======== ======== ========
Three months ended June 30, Six months ended June 30,
------------------------------------------ ------------------------------------------
Product Category 2004 2003 2004 2003
------------------- ------------------- ------------------- -------------------
Hardware $ 186.8 78.2% $ 112.8 59.5% $ 326.7 78.2% $ 241.8 65.6%
Software 26.5 11.1 54.8 28.9 46.3 11.1 83.8 22.7
Services* 25.7 10.7 22.1 11.6 44.6 10.7 43.0 11.7
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 239.0 100.0% $ 189.7 100.0% $ 417.6 100.0% $ 368.6 100.0%
======== ======== ======== ======== ======== ======== ======== ========
* For the three months ended June 30, 2004 and 2003, services included
approximately $18.9 million and $19.0 million of resold, third-party services
and maintenance contracts, respectively. Services also include approximately
$6.8 million and $3.1 million of consulting and other services for the three
months ended June 30, 2004 and 2003, respectively, that we provided either
through our own business resources or through our alliance partners. For the six
months ended June 30, 2004 and 2003, services included approximately $36.7
million and $35.4 million of resold, third-party services and maintenance
contracts, respectively. Services also include approximately $7.9 million and
$7.6 million of consulting and other services for the six months ended June 30,
2004 and 2003, respectively, that we provided either through our own business
resources or through our alliance partners.
- 11 -
Three Months Ended June 30, 2004 Compared With the Three Months Ended June 30,
2003
Sales. Sales consist of revenue from product shipments and services
rendered net of allowances for customer returns and credits. Sales for the
second quarter of 2004 increased $49.3 million, or 26.0%, compared to the same
period in 2003. Sales in every contract category experienced growth during the
second quarter of 2004 compared to the same period last year. The increase in
sales is attributed to the efforts of our expanded sales force. We have been
investing in our sales teams, particularly in our Technology Teams and
Integrators Solution Group Team, during recent quarters and we are starting to
see the results. Sales under the IDIQ Contracts category increased $9.8 million
to $93.1 million while open market sales increased $31.3 million to $59.8
million. Sales in the Subcontracts and Other Contracts category increased $7.3
million to $31.3 million for the quarter ended June 30, 2004.
Backlog. We recognize an order as backlog when we receive and accept a
written customer purchase order. Our 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 increased 46.0% from
$106.2 million at June 30, 2003 to $155.0 million at June 30, 2004. Unshipped
backlog at June 30, 2004, was approximately $145.3 million compared to $96.2
million at June 30, 2003. Backlogs fluctuate significantly from period to period
due to the seasonality of government ordering patterns and fluctuations in
inventory availability of various products.
Gross Margin. Gross margin is sales less cost of sales, 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 percentage
in the second quarter of 2004 decreased to 9.0% of total sales from 12.0% of
total sales in the same period in 2003 due primarily to pricing decisions made
at time of deal quoting. During the second quarter of 2003, GTSI's sales
organization was successful in securing an order for software inventory that had
been impaired during 2002. As a result, we reversed a $1.4 million impairment
charge in the second quarter of 2003. Without this inventory impairment
reversal, gross margin would have been $21.3 million, or 11.2% of total sales,
during the second quarter of 2003. We believe the decrease in gross margin is
chiefly due to internal pricing decisions, not caused by external pressures.
Management has developed and is implementing corrective actions designed to
resolve the margin erosion issue. We are focused and dedicated to raising GTSI's
gross margin percentage in future quarters.
Operating Expenses. Total operating expenses for the three months ended
June 30, 2004 increased to $24.6 million from $21.6 million in the same period
in 2003. This increase is directly related to our aggressive efforts to comply
with the SOX 404 requirement, our new ERP system development, our "I Rely on
GTSI" marketing campaign and increased employee-related costs. Expressed as a
percentage of total sales, total operating expenses decreased from 11.4% to
10.3% during the three months ended June 30, 2004.
Six Months Ended June 30, 2004 Compared With the Six Months Ended June 30, 2003
Sales. Sales for the first six months of 2004 were $417.6 million,
compared to $368.6 million in the first six months of 2003, or an increase of
$49.0 million, or 13.3%. As mentioned above the increase in sales is due to the
efforts of the Company's expanded sales force.
- 12 -
Gross Margin. Gross margin as a percentage of sales declined from 10.5%
for the six months ended June 30, 2003 to 9.5% in the current period. This
decrease was largely due to pricing decisions made during the second quarter of
2004. Management plans to implement corrective actions to increase gross margin
percentages in the future.
During the second quarter of 2003, GTSI's sales organization was
successful in securing an order for software inventory that had been impaired
during 2002. As a result, we reversed a $1.4 million impairment charge in the
second quarter of 2003. Without this inventory impairment reversal, gross margin
would have been $37.4 million, or 10.1% of total sales, during the second half
of 2003.
Operating Expenses. Total operating expenses for the six months ended
June 30, 2004 increased $5.0 million from the same period in 2003. This increase
was directly related to our efforts to comply with the SOX 404 requirement, our
new ERP system development, our "I Rely on GTSI" marketing campaign and
increased employee-related costs. Total operating expenses remained flat as a
percentage of sales at approximately 11% for the six month periods ended June
30, 2004 and 2003.
Interest and Other Income. Net interest and other income in the first
six months of 2004 increased $0.4 million to $1.9 million compared to $1.5
million in the same period in 2003 due primarily to an increase in interest
income from equipment leases during the first quarter of 2004, partially offset
by a decrease in lease interest income during the second quarter of 2004.
Income Tax. We recorded a tax benefit of $1.9 million for the first six
months of 2004 based on our expected annual effective tax rate of approximately
39.5% compared to a tax benefit of $0.4 million in the same period last year.
Seasonal Fluctuations and Other Factors
GTSI has historically experienced and expects to continue to experience
significant seasonal fluctuations in our operations as a result of government
buying and funding patterns, which also affect the buying patterns of our 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
to us, have occurred (all of which are also likely to occur in the future) and
have adversely affected our 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. Our 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.
- 13 -
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities ("FIN
46"). FIN 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 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 was GTSI's first quarter
of fiscal year 2004. The adoption of FIN 46 did not have a material impact on
our condensed consolidated financial statements.
Liquidity and Capital Resources
Cash flows for the six months ended June 30, 2004 and 2003
Six Months Ended June 30,
--------------------------------
(in millions) 2004 2003 Change
-------- -------- --------
Cash provided by operating activities $ 43.3 $ 15.5 $ 27.8
Cash used in investing activities $ (3.8) $ (4.8) $ (1.0)
Cash used in financing activities $ (11.8) $ (10.7) $ 1.1
Cash provided by operating activities for the six months ended June 30,
2004 was $43.3 million, an increase of $27.8 million from cash provided for the
six months ended June 30, 2003. This increase was primarily due to the increased
collections of accounts receivable.
Investing activities used cash of approximately $3.8 million during the
six months ended June 30, 2004, compared to $4.8 million for the same period in
2003 reflecting our investment in software for a new fulfillment system,
intended to improve efficiency throughout GTSI. As of June 30, 2004, we have
capitalized approximately $7.0 million under this project and we intend to
continue our investment in this project throughout 2004.
During the six months ended June 30, 2004, GTSI's financing activities
used cash of $11.8 million principally to repay borrowings under our credit
facilities.
Bank Credit Facility
In addition to our cash balance of $27.8 million at June 30, 2004, we
have a $125 million credit facility with a group of banks (the "Credit
Facility"). The 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. The
Revolver is secured by substantially all of GTSI's assets. Borrowing under the
Wholesale Financing Facility is limited to 100% of the value of our inventory.
The Wholesale Financing Facility is secured by the underlying inventory. The
Credit Facility carries an interest rate indexed to LIBOR plus 1.75 percentage
points. The Credit Facility also contains certain covenants as well as
provisions specifying compliance with certain quarterly and annual financial
ratios. At June 30, 2004, we were in compliance with all financial covenants set
forth in the Credit Facility and had additional available credit on the Credit
Facility of $37.3 million.
We anticipate that we will continue to rely primarily on operating cash
flow, bank loans and vendor credit to finance our operating cash needs. We
believe that such funds should be sufficient to satisfy our near term
anticipated cash requirements for operations. Nonetheless, we may seek
additional
- 14 -
sources of capital, including permanent financing over a longer term at fixed
rates, to finance our working capital requirements. GTSI believes that such
capital sources will be available to us on acceptable terms, if needed.
Sarbanes-Oxley Section 404
GTSI is working to comply with the requirements of Section 404 of SOX
404. Under SOX 404, management is required to attest to the effectiveness of
GTSI's internal controls as of December 31, 2004. At this time it is not clear
as to the total cost we will incur as a result of this compliance effort. During
the first half of 2004, we expensed approximately $0.5 million on activities
directly attributed to this effort and incurred other indirect expenses and we
expect costs to increase during the third and fourth quarters of 2004.
"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 the cost of and compliance with Sarbanes-Oxley Section 404,
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. We undertake 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 GTSI files from time to
time with the Securities and Exchange Commission, including Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and our Annual Report on Form 10-K to be
filed subsequent to this Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is hereby incorporated by
reference to GTSI's Annual Report on Form 10-K for the year ended December 31,
2003. There have been no material changes in our market risk from that disclosed
in our Form 10-K.
- 15 -
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the 90 day period covered by this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended). Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in ensuring that information required to be disclosed
in the Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
date of their evaluation.
- 16 -
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its annual meeting of stockholders on April 29, 2004.
(b) Set forth below are the three matters that were presented to and voted
upon by the Company's stockholders, and the results of such stockholders' votes.
1. Election of Directors
Votes
Nominees Votes For Withheld
-------- --------- --------
Daniel R. Young 7,958,415 195,914
M. Dendy Young 7,958,791 195,538
Joseph "Keith" Kellogg, Jr. 7,958,415 195,914
Lawrence J. Schoenberg 7,958,273 196,056
2. The approval of an Amendment to the Company's 1991 Employee Stock
Purchase Plan to increase by 850,000 the number of shares of the Company's
common stock purchasable thereunder.
Votes For Votes Against Abstention Broker Non-Votes
--------- ------------- ---------- ----------------
4,975,735 1,798,243 6,758 1,373,593
3. The approval of the Company's 2004 Long-Term Incentive Plan.
Votes For Votes Against Abstention Broker Non-Votes
--------- ------------- ---------- ----------------
5,725,471 1,047,321 7,944 1,373,593
4. The approval of amendments to the Company's 1996 Stock Option Plan to
(a) provide for the annual issuance of an option to the Company's Lead
Independent Director to purchase up to 2,000 shares of our common stock and (b)
subject to the approval of the Compensation Committee (or the Board of
Directors), to permit the payment for the common stock to be issued upon
exercise of one or more options granted to a non-employee director with common
stock held by such director for at least six months.
Votes For Votes Against Abstention Broker Non-Votes
--------- ------------- ---------- ----------------
5,858,768 915,397 6,571 1,373,593
- 17 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The Exhibits set forth in the Exhibit Index are filed as part
of this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K:
On April 29, 2004, GTSI filed a report on Form 8-K under Item
12 relating to its press release of financial information for
the three month period ending March 31, 2004, and monthly
sales information.
- 18 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on August 9, 2004 on its
behalf by the undersigned thereunto duly authorized.
GTSI Corp.
/s/ DENDY YOUNG
-------------------------------------------------
Dendy Young
Chairman and Chief Executive Officer
/s/ THOMAS A. MUTRYN
-------------------------------------------------
Thomas A. Mutryn
Senior Vice President and Chief Financial Officer
- 19 -
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation (2)
3.2 Bylaws, as amended (filed herewith)
10.1 Employee Stock Purchase Plan, as amended to date (filed
herewith)(1)
10.2 1994 Stock Option Plan, as amended to date (1)(3)
10.3 1997 Non-Officer Stock Option Plan, as amended to date (1)(3)
10.4 1996 Stock Option Plan, as amended to date (filed herewith)(1)
10.5 Employment Agreement dated January 1, 2001 between the
Registrant and M. Dendy Young (1)(2)
10.6 Offer letter dated June 28, 2001 between Registrant and Terri
Allen(1)(4)
10.7 Non-Qualified Stock Option Agreement effective July 31, 2001
between the Registrant and Terri Allen (1)(3)
10.8 Offer letter dated May 21, 2002 between the Registrant and Dr.
Jack Littley III (1)(3)
10.9 Offer letter dated December 31, 2002 between the Registrant
and Thomas Mutryn (1)(3)
10.10 Memorandum Regarding Promotion to Senior Vice President dated
February 20, 2003 between the Registrant and Dr. John Littley
III (1)(3)
10.11 Non-Qualified Stock Option Agreement effective January 28,
2003 between the Registrant and Thomas Mutryn(1)(3)
31.1 Section 302 Certification of Chief Executive Officer (filed
herewith)
31.2 Section 302 Certification of Chief Financial Officer (filed
herewith)
32 Section 906 Certification of Chief Executive Officer and Chief
Financial Officer(filed herewith)
(1) Constitutes a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form 10-K.
(2) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000.
(3) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2002.
(4) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2001.
- 20 -