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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 JUNE 30, 2002
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 July 31, 2002
- ---------------------------------- ---------------------------------------
Common Stock, $0.005 par value 8,249,180
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GTSI CORP. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2002
TABLE OF CONTENTS PAGE
COVER PAGE.................................................................................1
TABLE OF CONTENTS..........................................................................2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS -
Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001..................................3
Consolidated Statements of Operations for the
Three Months Ended June 30, 2002 and 2001............................4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended June 30, 2002 and 2001............................5
Notes to Consolidated Condensed Financial Statements.....................6
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..............16
PART II - OTHER INFORMATION...............................................................17
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. OTHER INFORMATION
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES................................................................................18
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GTSI CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In thousands, except share data) 2002 2001
(Unaudited) (Audited)
------------------ -----------------
ASSETS
Current assets:
Cash $ 12,063 $ 114
Accounts receivable, net 130,913 138,385
Lease receivables, current 511 11,781
Merchandise inventories 60,490 61,434
Other current assets 24,648 10,238
------------------ -----------------
Total current assets 228,625 221,952
Property and equipment, net 11,588 11,974
Lease receivables, net of current portion - 17,378
Other assets 1,159 1,148
------------------ -----------------
Total assets $ 241,372 $ 252,452
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ - $ 20,186
Accounts payable 156,845 151,379
Accrued liabilities 10,396 8,977
Accrued warranty liabilities 5,593 6,442
------------------ -----------------
Total current liabilities 172,834 186,984
Other liabilities 3,020 2,403
------------------ -----------------
Total liabilities 175,854 189,387
------------------ -----------------
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 8,333,180 outstanding at June 30, 2002;
and 20,000,000 shares authorized; 9,806,084 issued and 8,162,612
outstanding at December 31, 2001 49 49
Capital in excess of par value 43,725 43,434
Retained earnings 28,731 27,419
Treasury stock, 1,472,904 shares at June 30, 2002 and
1,643,472 shares at December 31, 2001, at cost (6,987) (7,837)
------------------ -----------------
Total stockholders' equity 65,518 63,065
------------------ -----------------
Total liabilities and stockholders' equity $ 241,372 $ 252,452
================== =================
The accompanying notes are an integral part of these consolidated financial
statements.
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GTSI CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In thousands, except share information) 2002 2001 2002 2001
------------------- ------------------ ----------------- -----------------
Sales $ 200,992 $ 151,090 $ 377,735 $ 300,379
Cost of sales 185,883 138,250 348,115 274,773
------------------- ------------------ ----------------- -----------------
Gross margin 15,109 12,840 29,620 25,606
Operating expenses 14,427 15,697 29,813 31,056
------------------- ------------------ ----------------- -----------------
Income (loss) from operations 682 (2,857) (193) (5,450)
------------------- ------------------ ----------------- -----------------
Interest and other income 650 733 2,636 1,639
Interest expense (39) (54) (255) (305)
------------------- ------------------ ----------------- -----------------
Interest and other income, net 611 679 2,381 1,334
------------------- ------------------ ----------------- -----------------
Income (loss) before income taxes 1,293 (2,178) 2,188 (4,116)
Income tax provision (benefit) 521 (839) 875 (1,586)
------------------- ------------------ ----------------- -----------------
Net income (loss) $ 772 $ (1,339) $ 1,313 $ (2,530)
=================== ================== ================= =================
Basic net income (loss) per share $ 0.09 $ (0.16) $ 0.16 $ (0.31)
=================== ================== ================= =================
Diluted net income (loss) per share $ 0.08 $ (0.16) $ 0.14 $ (0.31)
=================== ================== ================= =================
Basic weighted average shares outstanding 8,265 8,157 8,225 8,099
=================== ================== ================= =================
Diluted weighted average shares outstanding 9,582 8,157 9,555 8,099
=================== ================== ================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
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GTSI CORP. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
(In thousands) 2002 2001
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,313 $ (2,530)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities 32,068 24,498
-------------------- --------------------
Net cash provided by operating activities 33,381 21,968
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of property and equipment (2,154) (1,527)
-------------------- --------------------
Net cash used in investing activities (2,154) (1,527)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of bank notes, net (20,186) (11,925)
Payments of note payable - (500)
Common stock repurchases (26) (159)
Proceeds from exercises of stock options 512 1,177
Proceeds from Employee Stock Purchase Plan 422 183
-------------------- --------------------
Net cash used in financing activities (19,278) (11,224)
-------------------- --------------------
Net increase in cash 11,949 9,217
Cash at beginning of period 114 79
-------------------- --------------------
Cash at end of period $ 12,063 $ 9,296
==================== ====================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 380 $ 501
Income taxes $ 445 $ -
The accompanying notes are an integral part of these consolidated financial
statements.
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GTSI CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited, 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, 2001 and the accompanying Notes to
the Financial Statements, contained in the Company's 2001 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 consolidated
financial statements are not necessarily indicative of results expected for the
full year, or future periods.
NEW ACCOUNTING PRONOUNCEMENTS.
In June 2001, the Financial Accounting Standards Board (FASB) approved
Statement of Financial Accounting Standard (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 prospectively prohibits the pooling of interest method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 142 requires
companies to cease amortizing goodwill that existed at June 30, 2001. The
amortization of existing goodwill ceased on December 31, 2001. Any goodwill
resulting from acquisitions completed after June 30, 2001 will not be amortized.
SFAS No. 142 also establishes a new method of testing goodwill and certain
intangibles for impairment on an annual basis or on an interim basis if an event
occurs or circumstances change that would reduce the fair value of a reporting
unit below its carrying value. The adoption of these standards did not have a
material effect on the Company's consolidated financial statements or results of
operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The purpose of this statement
is to develop consistent accounting for asset retirement obligations and related
costs in the financial statements and provide more information about future cash
outflows, leverage and liquidity regarding retirement obligations and the gross
investment in long-lived assets. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
will be required to implement SFAS No. 143 on January 1, 2003. The Company does
not believe that adoption of this standard will have a material effect on its
consolidated financial statements or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Though it retains the basic requirements of SFAS No. 121
regarding when and how to measure an impairment loss, SFAS No. 144 provides
additional implementation guidance. SFAS No. 144 applies to long-lived assets to
be held and used or to be disposed of, including assets under capital leases of
lessees; assets subject to operating leases of lessors; and prepaid assets. SFAS
No. 144 also expands the scope of a discontinued operation to include a
component of an entity, and eliminates the current exemption to consolidation
when control over a subsidiary is likely to be temporary. This statement is
effective for fiscal years beginning after December 15, 2001. The adoption of
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this standard did not have a material effect on the Company's consolidated
financial statements or results of operations.
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
Serving of Financial Assets and Extinguishments of Liabilities - a Replacement
of FASB Statement No. 125." In accordance with the criteria set forth in SFAS
No. 140, lease receivables amounting to $33.4 million were sold during the
Company's first quarter ending March 31, 2002. A $500,000 gain on the sales of
certain of the Company's lease receivables is included in interest and other
income in the accompanying statements of operations for the six months ended
June 30, 2002. No such sales occurred during the second quarter of 2002.
3. NOTES PAYABLE TO BANKS
In 1996, the Company executed a three-year credit facility with a bank
(the "Principal Lender") for $40.0 million and a one-year credit facility with
other lenders (collectively, the "Lenders") for an additional $55.0 million
(collectively, the "Credit Facility"). Additionally, in 1996, the Company
executed a separate $10.0 million facility with the Principal Lender for
inventory financing of vendor products (the "Wholesale Financing Facility").
In 1997, the Company and its banks executed the Second Amended and
Restated Business Credit and Security Agreement (the "Credit Agreement") to
modify the Credit Facility and the Wholesale Financing Facility. These
modifications included the revision of the Credit Facility's term to one year
with a one-year automatic renewal.
In 1999, the 1997 Credit Agreement was amended to make the Tangible Net
Worth requirement for the Company an amount no less than $40 million at all
times beginning the calendar quarter ending March 31, 1999 and each calendar
quarter thereafter.
In 1999, the Company and its banks executed separate amendments, effective
December 1, 1999, for the continuation of the Credit Agreement through November
30, 2000 with an automatic one year renewal, and adjusting, among other things,
the seasonality of the amount available under the Credit Facility. The limit of
the Credit Facility is $50 million during the period July 1 through January 31.
During the period February 1 through April 30, the total amount available under
the Credit Facility is limited to $30 million. During the period May 1 though
June 30, the total amount available under the Credit Facility is $20 million. In
addition, the interest rate under the Credit Facility is a rate of the London
Interbank Offered Rate (LIBOR) plus 1.75 percentage points. The Wholesale
Financing Facility was also amended effective December 1, 1999 to $50.0 million
throughout the fiscal year.
In 2000, the Company and its banks executed an amendment, effective
December 1, 2000, for the continuation of the Credit Agreement with a 90-day
written termination notice upon receipt by either party and, among other things,
increased the Company's Stock Repurchase authorization from third-party
stockholders to $6.1 million, up from $5.25 million in the previous Amendment.
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In 2001, the Company and its banks executed the fifth amendment, effective
March 7, 2001, which gave SunTrust Bank the right to establish a $7.5 million
reserve to facilitate Automated Clearing House ("ACH") transfers. Consent was
also given to authorize the Company's stock repurchase from third-party
stockholders in an additional amount not to exceed $4.7 million provided the
aggregate amount of stock held by the Company did not exceed $12.9 million.
On February 26, 2002 the Company and the Lenders modified the Credit
Facility such that the period of the $50.0 million amount available under the
facility was temporarily extended through March 31, 2002.
On March 27, 2002 the Company and the Principal Lender modified the
Wholesale Financing Facility to provide that during any nine month period
between December 1 through August 31 the total amount available under the
facility is limited to $35 million and during the three month period from
September 1 through November 30 the amount of credit available is increased to a
$60 million limit. In addition, the Principal Lender agreed to temporarily
extend the period of the $60 million facility through May 31, 2002. As of June
30, 2002 the credit limit for the Wholesale Financing Facility is limited to $35
million.
Borrowing is limited to 85% of eligible accounts receivable. The Credit
Facility is secured by substantially all of the Company's operating assets.
Current obligations are first funded and then all cash receipts are
automatically applied to reduce outstanding borrowings. The Credit Facility also
contains certain covenants that include restrictions on the payment of dividends
and the repurchase of the Company's Common Stock, as well as provisions
specifying compliance with certain quarterly and annual financial statistical
ratios. At June 30, 2002, the Company was in compliance with all financial
covenants set forth in the Credit Facility.
4. PROPERTIES
The Company's executive offices are located in an approximately
100,500-square foot facility in Chantilly, Virginia under a lease expiring in
November 2009, with one five-year option. GTSI's warehousing and distribution
operations are also located in Chantilly, Virginia in a separate 200,000-square
foot facility under a lease expiring in December 2006. The Company has a branch
sales office occupying 139 square meters in Mannheim, Germany. The Company
leases a 20,000-square foot distribution center in Chattanooga, Tennessee under
a one-year renewable option, exercised and effective April 1, 2002.
5. 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.
As of June 30, 2002 the Company reflects in its inventory approximately
$1.4 million of business intelligence software, net of reserves. Contractually,
the Company has the right to sell this business intelligence software to certain
Government agencies through June 30, 2003. The Company purchased this software
in December 1999. Through June 30, 2002, the Company has made no sales of this
product. However, subsequent to June 30, 2002 the Company received a purchase
order from the government for approximately $150,000 of this inventory. While
management currently believes that the Company will recover the cost of the
business intelligence software inventory through sales in the normal course of
business, if the Company is unable to do so, all or a portion of the $1.4
million inventory balance would be impaired.
-8-
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 Consolidated
Financial Statements and Notes 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,
2001. 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 nearly two decades GTSI has served the public sector by
teaming up with global IT leaders such as Hewlett - Packard, Compaq, Panasonic,
Microsoft, IBM, Sun and Cisco. GTSI seeks to deliver maximum value through its
broad range of products, extensive contract portfolio, and ISO 9000-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, web portals, 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, microcomputers and networking, Unix
servers/workstation and internet products), to the addition/removal of vendors
(e.g., the addition of Cisco, EMC, Tachyon, RIM, and the removal of Nexar and
Everex), and to the addition or expiration of sales contract vehicles (e.g., the
addition of the SEWP III, ADMC, IT2 and the MMAD Contracts, and the expiration
of the SEWP II, PC-3, SII PC/LAN, and Portables 3 Contracts). 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 and adversely affected the
first two calendar quarters.
The Company's business strategy is to continue to focus on higher-end
product-based solutions, to broaden its product offering, and to remain a
low-cost, and high-reliability provider of commodity products. The Company also
focuses on bringing new technologies to government customers.
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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
CHANGE
PERCENTAGE OF SALES --------------------------
----------------------------------------------- THREE SIX
MONTHS MONTHS
THREE SIX ENDED ENDED
MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30,
JUNE 30, JUNE 30, 2001 TO 2001 TO
2002 2001 2002 2001 2002 2002
------------------------ ---------------------- --------------------------
Sales 100.0% 100.0% 100.0% 100.0% 33.0% 25.8%
Cost of sales 92.5 91.5 92.2 91.5 34.5% 26.7%
----------- ------------ ----------- ----------
Gross margin 7.5 8.5 7.8 8.5 17.7% 15.7%
----------- ------------ ----------- ----------
Operating expenses:
Selling, general, and administrative 6.7 9.7 7.4 9.6 -7.8% -3.6%
Depreciation and amortization 0.5 0.7 0.5 0.7 -12.4% -25.9%
----------- ------------ ----------- ----------
Total operating expenses 7.2 10.4 7.9 10.3 -8.1% -4.0%
----------- ------------ ----------- ----------
Income (loss) from operations 0.3 (1.9) (0.1) (1.8) 123.9% 96.5%
Interest (income) expense, net (0.3) (0.4) (0.6) (0.4) -10.0% 78.5%
----------- ------------ ----------- ----------
Income (loss) before taxes 0.6 (1.5) 0.5 (1.4) 159.3% 153.1%
Income tax provision (benefit) 0.2 (0.6) 0.2 (0.5) 162.1% 155.2%
----------- ------------ ----------- ----------
Net income (loss) 0.4 (0.9) 0.3 (0.9) 157.7% 151.9%
=========== ============ =========== ==========
The following table sets forth, for the periods indicated, the approximate
sales by category, along with the related percentages of total sales:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
-------------------------- ---------------------- -------------------------- ----------------------
GSA Schedules $ 63,978 31.8% $ 35,723 23.6% $ 98,970 26.2% $ 61,687 20.5%
IDIQ Contracts 80,558 40.1% 78,940 52.2% 142,728 37.8% 171,866 57.2%
Open Market 16,682 8.3% 23,691 15.7% 35,639 9.4% 46,747 15.6%
Subcontracts and
Other Contracts 39,773 19.8% 12,736 8.4% 100,398 26.6% 20,079 6.7%
-------------------------- ---------------------- -------------------------- ----------------------
Total $ 200,991 100.0% $ 151,090 100.0% $ 377,735 100.0% $ 300,379 100.0%
========================== ====================== ========================== ======================
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THREE MONTHS ENDED JUNE 30, 2002 COMPARED
WITH THE THREE MONTHS ENDED JUNE 30, 2001
SALES. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. Revenues for the
second quarter of 2002 were $201.0 million, compared to $151.1 million in the
first quarter of 2001, or an increase of 33.0%. The increase in sales for the
three months ending June 30, 2002 over the same period of 2001 is related to
increased sales of enterprise software licenses and sales to prime contractors.
BACKLOG. At June 30, 2002 the Company's total backlog of orders was
approximately $108.3 million as compared with approximately $48.6 million at
June 30, 2001. Total backlog consists of written purchase orders received and
accepted by GTSI but not yet recognized as revenue. Backlog fluctuates
significantly from quarter to quarter because of the seasonality of government
ordering patterns and the periodic inventory shortages resulting from
constrained 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 current quarter declined 1 percentage point to 7.5%, compared to a gross
margin of 8.5% in the second quarter of 2001. The decrease in gross margin for
the second quarter 2002 is primarily due to larger sales volume on lower margin
contracts, enterprise software licenses sales and sales to prime contractors,
which generally carry lower margins than direct government sales.
OPERATING EXPENSES. Net operating expenses for the three months ended June
30, 2002 decreased $1.3 million to $14.4 million for the second quarter 2002
compared to $15.7 million in the same period in 2001. Expressed as a percentage
of total sales, net operating expenses decreased to 7.2% from 10.4% in the same
quarter last year. The decrease in operating expenses reflects the favorable
impact of increased vendor sales support funds. Before the application of these
funds, operating expenses during the second quarter were $19.3 million, or 9.6%
of sales, as compared to $17.4 million, or 11.5% of sales, in the same quarter
of 2001.
INTEREST AND OTHER INCOME. Net interest and other income in the second
quarter of 2002 was $611,000, which was comparable to $679,000 in the same
period in 2001.
INCOME TAX. The Company recorded a tax provision of $521,000 for the
second quarter of 2002 based on its expected effective tax rate of approximately
40% for the year compared to a tax benefit of $839,000 in the same period last
year.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED
WITH THE SIX MONTHS ENDED JUNE 30, 2001
SALES. In the six-month period ended June 30, 2002, revenues grew $77.3
million, or 25.8 percent, to $377.7 million, compared to $300.4 million in the
same period in 2001. The Company's revenues in the first six months of 2002
benefited from the value added servicing of IT solutions contracts, notably the
FBI's Trilogy contract which, post 9/11, saw fulfillment accelerated into 2002
from future periods. The Company is a subcontractor on the Trilology contract,
which explains the majority of the increase in the Subcontract and Other
contract category year over year.
-11-
GROSS MARGIN. Gross margin in the six-month period ended June 30, 2002 was
7.8%, compared to gross margin of 8.5% for the first six months of 2001. The
decrease in gross margin for the first six months 2002 is primarily due to
larger sales volume on lower margin contracts, enterprise software licenses
sales and sales to prime contractors, which generally carry lower margins than
direct government sales.
OPERATING EXPENSES. Net operating expenses for the six months ended June
30, 2002 decreased $1.3 million to $29.8 million for the second quarter 2002
compared $31.1 million in the same period in 2001. Expressed as a percentage of
total sales, net operating expenses decreased to 7.9% from 10.3% in the same
quarter last year. The decrease in operating expenses reflects the favorable
impact of increased vendor sales support funds. Before the application of these
funds, operating expenses for the first six months of 2002 were $35.7 million,
or 9.5% of sales, as compared to $33.8 million, or 11.3% of sales, in the same
period of 2001.
INTEREST AND OTHER INCOME. Net interest and other income in the first six
months of 2002 increased $1.1 million to $2.4 million compared to $1.3 million
in the same period in 2001 due primarily to a higher interest income from
equipment leases, an increase in prompt payment discounts related to strategic
inventory purchases, and a $500,000 gain on the sale of equipment leases in the
first quarter of 2002.
INCOME TAX. The Company recorded a tax provision of $875,000 for the first
six months of 2002 based on its expected effective tax rate for the year of
approximately 40% compared to a tax benefit of $1.6 million 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 microcomputer and workstation industries, the addition
of personnel or other expenses in anticipation of sales growth, product line
changes and expansions, and the timing and costs of changes in customer and
product mix. In addition, customer order deferrals in anticipation of new
product releases by leading microcomputer and workstation hardware and software
manufacturers, delays in vendor shipments of new or existing products, a shift
in sales mix to more complex requirements contracts with more complex service
costs, and vendor delays in the processing of incentives and credits due GTSI,
have occurred (all of which are also likely to occur in the future) and have
adversely affected the Company's operating performance in particular periods.
The seasonality and the unpredictability of the factors affecting such
seasonality make GTSI's quarterly and yearly financial results difficult to
predict and subject to significant
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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. 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.
As of June 30, 2002 the Company reflects in its inventory approximately
$1.4 million of business intelligence software, net of reserves. Contractually,
the Company has the right to sell this business intelligence software to certain
Government agencies through June 30, 2003. The Company purchased this software
in December 1999. Through June 30, 2002, the Company has made no sales of this
product. However, subsequent to June 30, 2002 the Company received a purchase
order from the government for approximately $150,000 of this inventory. While
management currently believes that the Company will recover the cost of the
business intelligence software inventory through sales in the normal course of
business, if the Company is unable to do so all or a portion of the $1.4 million
inventory balance would be impaired.
NEW ACCOUNTING PRONOUNCEMENTS.
In June 2001, the Financial Accounting Standards Board (FASB) approved
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest
method of accounting for business combinations initiated after June 30, 2001.
SFAS No. 142 requires companies to cease amortizing goodwill that existed at
June 30, 2001. The amortization of existing goodwill ceased on December 31,
2001. Any goodwill resulting from acquisitions completed after June 30, 2001
will not be amortized. SFAS No. 142 also establishes a new method of testing
goodwill and certain intangibles for impairment on an annual basis or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. The adoption of these
standards did not have a material effect on the Company's consolidated financial
statements or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The purpose of this statement
is to develop consistent accounting for asset retirement obligations and related
costs in the financial statements and provide more information about future cash
outflows, leverage and liquidity regarding retirement obligations and the gross
investment in long-lived assets. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
will be required to implement SFAS No. 143 on January 1, 2003. The Company does
not believe that adoption of this standard will have a material effect on its
consolidated financial statements or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets," which supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Though it retains the basic requirements of SFAS No. 121
regarding when and how to measure an impairment loss, SFAS No. 144 provides
additional implementation guidance. SFAS No. 144 applies to long-lived assets to
be held and used or to be disposed of, including assets under capital leases of
lessees; assets subject to operating leases of lessors; and prepaid assets. SFAS
No. 144 also expands the scope of a discontinued operation to include a
component of an entity, and eliminates the current exemption to consolidation
when control over a subsidiary is likely to be
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temporary. This statement is effective for fiscal years beginning after December
15, 2001. The adoption of this standard did not have a material effect on the
Company's consolidated financial statements or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 2002, the Company's operating activities
provided $33.4 million of cash flow, compared to the $22.0 million of cash flow
provided during the same period in 2001. The increase in cash flow relates
primarily to the Company's sale of equipment leases during the first quarter of
2002 and faster collection of trade and vendor receivables in the first quarter
of 2002 versus the same period in 2001. This increase was partially offset by a
strategic inventory buy in at the end of the second quarter of 2002.
Investing activities used cash of approximately $2.2 million during the
six months ended June 30, 2002, compared to $1.5 million for the same period in
2001 reflecting the Company's developement of information technology for its
next generation fulfillment system.
During the six months ended June 30, 2002, the Company's financing
activities used cash of approximately $19.3 million, primarily related to
repayment of borrowings under the Company's Credit Facilities. At June 30, 2002,
the Company had approximately $20.0 million available for borrowing under its
credit facility.
In 1996, the Company executed a three-year credit facility with a bank
(the "Principal Lender") for $40.0 million and a one-year credit facility with
the other lenders (collectively, the "Lenders") for an additional $55.0 million
(collectively, the "Credit Facility"). Additionally, in 1996, the Company
executed a separate $10.0 million facility with the Principal Lender for
inventory financing of vendor products (the "Wholesale Financing Facility").
In 1997, the Company and its banks executed the Second Amended and
Restated Business Credit and Security Agreement (the "Credit Agreement") to
modify Credit Facility and the Wholesale Financing Facility. These modifications
included the revision of the Credit Facility's term to one year with a one-year
automatic renewal.
In 1999, the 1997 Credit Agreement was amended to make the Tangible Net
Worth requirement for the Company an amount no less than $40 million at all
times beginning the calendar quarter ending March 31, 1999 and each calendar
quarter thereafter.
In 1999, the Company and its banks executed separate amendments, effective
December 1, 1999, for the continuation of the Credit Agreement through November
30, 2000 with an automatic one year renewal, and adjusting, among other things,
the seasonality of the amount available under the Credit Facility. The limit of
the Credit Facility is $50 million during the period July 1 through January 31.
During the period February 1 through April 30, the total amount available under
the Credit Facility is limited to $30 million. During the period May 1 though
June 30, the total amount available under the Credit Facility is $20 million. In
addition, the interest rate under the Credit Facility is a rate of the London
Interbank Offered Rate (LIBOR) plus 1.75 percentage points. The Wholesale
Financing Facility was also amended effective December 1, 1999 to $50.0 million
throughout the fiscal year.
In 2000, the Company and its banks executed an amendment, effective
December 1, 2000, for the continuation of the Credit Agreement with a 90-day
written termination notice upon receipt by either party and, among other things,
increased the Company's Stock Repurchase authorization from third-party
stockholders to $6.1 million, up from $5.25 million in the previous Amendment.
In 2001, the Company and its banks executed the fifth amendment, effective
March 7, 2001, which gave SunTrust Bank the right to establish a $7.5 million
reserve to facilitate Automated Clearing House ("ACH") transfers. Consent was
also given to authorize the Company's stock repurchase from third-party
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stockholders in an additional amount not to exceed $4.7 million provided the
aggregate amount of stock held by the Company did not exceed $12.9 million.
On February 26, 2002 the Company and the Lenders modified the Credit
Facility such that the period of the $50.0 million amount available under the
facility was temporarily extended through March 31, 2002.
On March 27, 2002 the Company and the Principal Lender modified the
Wholesale Financing Facility to provide that during any nine month period
between December 1 through August 31 the total amount available under the
facility is limited to $35 million and during the three month period from
September 1 through November 30 the amount of credit available is increased to a
$60 million limit. In addition, the Principal Lender agreed to temporarily
extend the period of the $60 million facility through May 31, 2002. As of June
30, 2002 the credit limit for the Wholesale Financing Facility is limited to $35
million.
Borrowing is limited to 85% of eligible accounts receivable. The Credit
Facility is secured by substantially all of the operating assets of the Company.
Current obligations are first funded and then all cash receipts are
automatically applied to reduce outstanding borrowings. The Credit Facility also
contains certain covenants that include restrictions on the payment of dividends
and the repurchase of the Company's Common Stock, as well as provisions
specifying compliance with certain quarterly and annual financial statistical
ratios. At June 30, 2002, the Company was in compliance with all financial
covenants set forth in the Credit Facility.
The Company anticipates that it will continue to rely primarily on
operating cash flow, bank 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. The Company believes that such capital sources will be available
to it on acceptable terms, if needed.
"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
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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 has a $50.0 million Credit Facility indexed at LIBOR plus
1.75%. This variable rate Credit Facility subjects the Company to potential
borrowing costs exposure resulting from changes in interest rates.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Inapplicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - Inapplicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on May 9, 2002.
(b) At the Annual Meeting, the Company's stockholders: (1) elected two
members to serve on the Company's Board of Directors.
- --------------------------------------------- ----------- -------------------
VOTES FOR VOTES WITHHELD OR
AGAINST
- --------------------------------------------- ----------- -------------------
DIRECTORS:
- --------------------------------------------- ----------- -------------------
Lee Johnson 7,106,698 65,503
- --------------------------------------------- ----------- -------------------
James J. Leto 7,109,170 63,031
- --------------------------------------------- ----------- -------------------
ITEM 5. OTHER INFORMATION - Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
99.1 Written Statement of Chief Executive Officer and Chief
Financial Officer.
(B) REPORTS ON FORM 8-K:
Registrant did not file any reports on Form 8-K during the quarter for
which this Report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 14, 2002
GTSI CORP.
By: /s/ DENDY YOUNG
-------------------------------------
Dendy Young
Chairman and Chief Executive Officer
By: /s/ QUANG LE
-------------------------------------
Quang Le
Acting Chief Financial Officer and
Controller
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