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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 SEPTEMBER 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 October 24, 2002
- ----------------------- --------------------------------------------
Common Stock, par value 8,349,430
$0.005 per share
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GTSI CORP. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS PAGE
COVER PAGE...........................................................................1
TABLE OF CONTENTS....................................................................2
PART I - FINANCIAL INFORMATION (Unaudited)
ITEM 1. FINANCIAL STATEMENTS -
Consolidated Balance Sheets as of
September 30, 2002 and December 31, 2001.......................3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2002 and 2001........4
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 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
ITEM 4. CONTROLS AND PROCEDURES...........................................16
PART II - OTHER INFORMATION.........................................................16
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES..........................................................................18
CEO CERTIFICATION...................................................................19
CFO CERTIFICATION...................................................................20
WRITTEN STATEMENT OF CEO AND CFO....................................................21
-2-
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(In thousands, except share data) 2002 2001
(Unaudited) (Audited)
------------------ ------------------
ASSETS
Current assets:
Cash $ 87 $ 114
Accounts receivable, net 171,071 138,385
Lease receivables, current 376 11,781
Merchandise inventories 86,268 61,434
Other current assets 21,595 10,238
------------------ ------------------
Total current assets 279,397 221,952
Property and equipment, net 12,004 11,974
Lease receivables, net of current portion - 17,378
Other assets 1,456 1,148
------------------ ------------------
Total assets $ 292,857 $ 252,452
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 20,317 $ 20,186
Accounts payable 180,156 151,379
Accrued liabilities 15,342 8,977
Accrued warranty liabilities 5,551 6,442
------------------ ------------------
Total current liabilities 221,366 186,984
Other liabilities 2,969 2,403
------------------ ------------------
Total liabilities 224,335 189,387
------------------ ------------------
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 8,344,180 outstanding at September 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 43,869 43,434
Retained earnings 31,873 27,419
Treasury stock, 1,461,904 shares at September 30, 2002 and
1,643,472 shares at December 31, 2001, at cost (7,269) (7,837)
------------------ ------------------
Total stockholders' equity 68,522 63,065
------------------ ------------------
Total liabilities and stockholders' equity $ 292,857 $ 252,452
================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In thousands, except share information) 2002 2001 2002 2001
------------- --------------- -------------- ---------------
Sales $ 276,846 $ 203,077 $ 654,581 $ 503,455
Cost of sales 254,485 186,899 602,600 461,672
------------- --------------- -------------- ---------------
Gross margin 22,361 16,178 51,981 41,783
Operating expenses 18,414 14,853 48,227 45,908
------------- --------------- -------------- ---------------
Income (loss) from operations 3,947 1,325 3,754 (4,125)
------------- --------------- -------------- ---------------
Interest and other income 1,506 2,036 4,142 3,675
Interest expense (218) (91) (473) (396)
------------- --------------- -------------- ---------------
Interest and other income, net 1,288 1,945 3,669 3,279
------------- --------------- -------------- ---------------
Income (loss) before income taxes 5,235 3,270 7,423 (846)
Income tax provision (benefit) 2,094 1,260 2,969 (326)
------------- --------------- -------------- ---------------
Net income (loss) $ 3,141 $ 2,010 $ 4,454 $ (520)
============= =============== ============== ===============
Basic net income (loss) per share $ 0.38 $ 0.24 $ 0.54 $ (0.06)
============= =============== ============== ===============
Diluted net income (loss) per share $ 0.32 $ 0.22 $ 0.46 $ (0.06)
============= =============== ============== ===============
Basic weighted average shares outstanding 8,316 8,256 8,256 8,153
============= =============== ============== ===============
Diluted weighted average shares outstanding 9,723 9,225 9,608 8,153
============= =============== ============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
4
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
(In thousands) 2002 2001
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,454 $ (520)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities (2,267) (185)
------------------- -------------------
Net cash provided by operating activities 2,187 (705)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,349) (2,530)
------------------- -------------------
Net cash used in investing activities (3,349) (2,530)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of bank notes, net 131 4,599
Payments of note payable - (1,500)
Common stock repurchases (797) (1,399)
Proceeds from exercises of stock options 901 1,410
Proceeds from Employee Stock Purchase Plan 900 183
------------------- -------------------
Net cash provided in financing activities 1,135 3,293
------------------- -------------------
Net (decrease) increase in cash (27) 58
Cash at beginning of period 114 79
------------------- -------------------
Cash at end of period $ 87 $ 137
=================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 523 $ 566
Income taxes $ 1,122 $ -
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
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;
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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 this standard did not have a material effect on the
Company's consolidated financial statements or results of operations.
In July of 2002, the FASB issued SFAS No, 146 "Accounting for Costs
Associated with Exit or Disposal Activities". This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The principal difference between Statement
146 and Issue 94-3 relates to Statement 146's requirements for recognition of a
liability for a cost associated with an exit or disposal activity. Statement 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as generally defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. A fundamental conclusion in
this Statement is that an entity's commitment to a plan, by itself, does not
create an obligation that meets the definition of a liability. Therefore, this
Statement eliminates the definition and requirements for recognition of exit
costs in Issue 94-3. This Statement also establishes that fair value is the
objective for initial measurement of the liability. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of this standard is not expected to have a
material impact on the consolidated financial statements of the Company.
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 nine months ended
September 30, 2002. No such sales have occurred subsequent to the first quarter
of 2002.
3. NOTES PAYABLE TO BANKS
The Company has a credit facility with a bank (the "Principal Lender"),
which allows for borrowings up to $50.0 million during its highest seasonal
period. Additionally, the Company has a separate facility with the Principal
Lender for inventory financing of vendor products (the "Wholesale Financing
Facility"), which allows for borrowings up to $60.0 million during its highest
seasonal period. Combined the credit facility and the Wholesale Financing
Facility (the "Credit Facilities") allow the Company to borrow from $55.0
million to $110.0 million depending on the seasonal period. The seasonal
structure of the Credit Facilities coincides with the seasonality of the
Company's business and allows the Company to minimize banking fees. The interest
rate under the Credit Facilities is a rate indexed to the
7
London Interbank Offered Rate (LIBOR). There were no significant amendments to
the Credit Facilities during the three months ending September 30, 2002. As of
September 30, 2002 the Company is in compliance with all of its covenants under
the credit facility and has available credit of $29.7 million.
Subsequent to September 30, 2002 another financial institution acquired the
division of the "Principal Lender" that serviced the Company's Credit
Facilities. The Company does not anticipate any material changes in its Credit
Facilities as a result of this acquisition.
4. INTERNAL SOFTWARE
The Company is internally developing software to replace its current
fulfillment system. Subsequent to September 30, 2002, management has retained
consultants to review the progress of the software development project and make
recommendations as to the continued direction of this project. As of the date of
this filing, the consulting group has made no recommendations to management. As
of September 30, 2002 the Company has capitalized approximately $4.5 million
dollars under this project. If management determines that the direction of the
program needs to change and thus the company will not use portions of the
internally developed software, the amount previously capitalized associated with
that portion of the software will be charged to expense.
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 September 30, 2002 the Company reflects in its inventory
approximately $925,000 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. During the quarter ending September
30, 2002 the Company shipped its first significant order for this business
intelligence software since December 1999. 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 $925,000 inventory balance will be
impaired.
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
8
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.
9
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 NINE
------------------------------------------------
------------------------ -----------------------
MONTHS MONTHS
THREE NINE ENDED ENDED
MONTHS ENDED MONTHS ENDED SEPT 30, SEPT 30,
SEPTEMBER 30, SEPTEMBER 30, 2001 TO 2001 TO
2002 2001 2002 2001 2002 2002
------------------------ ----------------------- --------------------------
Sales 100.0% 100.0% 100.0% 100.0% 36.3% 30.0%
Cost of sales 91.9 92.0 92.1 91.7 36.2% 30.5%
----------- ----------- ----------- -----------
Gross margin 8.1 8.0 7.9 8.3 38.2% 24.4%
----------- ----------- ----------- -----------
Operating expenses:
Selling, general, and 6.4 6.8 7.0 8.5 28.5% 6.7%
administrative
Depreciation and amortization 0.3 0.6 0.4 0.7 -31.3% -16.8%
----------- ----------- ----------- -----------
Total operating expenses 6.7 7.4 7.4 9.2 24.0% 5.0%
----------- ----------- ----------- -----------
Income (loss) from operations 1.4 0.6 0.5 (0.9) 197.8% 191.0%
Interest and other income, net (0.5) (1.0) (0.7) (0.7) -33.8% 11.9%
----------- ----------- ----------- -----------
Income (loss) before taxes 1.9 1.6 1.2 (0.2) 60.1% 977.6%
Income tax provision (benefit) 0.8 0.6 0.5 (0.1) 66.1% 1010.8%
----------- ----------- ----------- -----------
Net income (loss) 1.1 1.0 0.7 (0.1) 56.3% 956.7%
=========== =========== =========== ===========
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2002 2001 2002 2001
-------------------------- ----------------------- --------------------------- ---------------------
GSA Schedules $ 88,253 31.9% $ 76,885 37.8% $ 187,223 28.6% $ 138,748 27.6%
IDIQ Contracts 113,826 41.1% 80,375 39.6% 256,554 39.2% 251,257 49.9%
Open Market 33,414 12.1% 28,339 14.0% 69,264 10.6% 75,407 15.0%
Subcontracts and
Other Contracts 41,353 14.9% 17,478 8.6% 141,540 21.6% 38,043 7.5%
-------------------------- ----------------------- --------------------------- ---------------------
Total $ 276,846 100.0% $ 203,077 100.0% $ 654,581 100.0% $ 503,455 100.0%
========================== ======================= =========================== =====================
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED
WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2001
SALES. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. Revenues for the
third quarter of 2002 were $276.8 million, compared to $203.1 million in the
third quarter of 2001, or an increase of 36.3%. The increase in sales in the
IDIQ contracts category is primarily related to sales on an established
Contract, which the Company has exclusive pricing from one of its major vendor
partners. Sales under new IDIQ contracts also contributed to the increase during
the quarter. The increase in sales in the Subcontracts and Other Contracts
category is due primarily to sales on the FBI's Trilogy contract.
BACKLOG. At September 30, 2002 the Company's total backlog of orders was
approximately $181.3 million as compared with approximately $130.6 million at
September 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 periodic inventory shortages resulting from constrained
products.
GROSS MARGIN. Gross margin is sales less cost of goods sold, which includes
product cost,
10
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 increased slightly to 8.1%, compared to a gross margin of 8.0% in the
third quarter of 2001. The increase in gross margin for the third quarter 2002
is due primarily to product mix.
OPERATING EXPENSES. Net operating expenses for the three months ended
September 30, 2002 increased $3.5 million to $18.4 million for the third quarter
of 2002 as compared to $14.9 million in the same period in 2001. The increase in
operating expenses is due to an increase in commission expense as a result of
increases sales; an increase in other performance based incentives; and to cost
related to an increase in sales and technology team personnel. Expressed as a
percentage of total sales, net operating expenses decreased to 6.7% from 7.4% in
the same quarter last year. Operating expenses reflect the favorable impact of
vendor sales support funds. Before the application of these funds, operating
expenses during the third quarter were $22.1 million, or 8.0% of sales, as
compared to $18.0 million, or 8.9% of sales, in the same quarter of 2001.
INTEREST AND OTHER INCOME. Net interest and other income in the third
quarter of 2002 decreased $600,000 to $1.3 million compared to $1.9 million in
the same period in 2001. This decrease is due to the sale, in the first quarter
of 2002, of leases that were generating interest income.
INCOME TAX. The Company recorded a tax provision of $2.1 million for the
third quarter of 2002 based on its expected effective tax rate of approximately
40% for the year compared to a tax provision of $1.3 million in the same period
last year.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED
WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2001
SALES. In the nine-month period ended September 30, 2002, revenues grew
$151.1 million, or 30.0 percent, to a record $654.6 million, compared to $503.5
million in the same period in 2001. The Company's revenues in the first nine
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
Trilogy contract, which explains the majority of the increase in the
Subcontracts and Other Contracts category year over year.
GROSS MARGIN. Gross margin in the nine months ended September 30, 2002 was
7.9%, compared to gross margin of 8.3% for the first nine months of 2001. The
decrease in gross margin for the first nine 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 nine months ended
September 30, 2002 increased $2.3 million to $48.2 million compared to $45.9
million for the first nine months of 2001. Expressed as a percentage of total
sales, net operating expenses decreased to 7.4% from 9.2% in the same period
last year. Operating expenses reflect the favorable impact of vendor sales
support funds. Before the application of these funds, operating expenses for the
first nine months of 2002 were $57.9 million, or
11
8.8% of sales, as compared to $51.8 million, or 10.3% of sales, in the same
period of 2001.
INTEREST AND OTHER INCOME. Net interest and other income in the first nine
months of 2002 increased to $3.7 million compared to $3.3 million in the same
period in 2001 due primarily to 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 $3.0 million for the
first nine months of 2002 based on its expected effective tax rate for the year
of approximately 40% compared to a tax benefit of $326,000 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 preexisting 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 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 or
buying patterns of the Government, either alone or in combination with
competitive conditions or other factors, could adversely affect future results.
As of September 30, 2002 the Company reflects in its inventory
approximately $925,000 of
12
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. During the quarter ended September 30, 2002 the Company shipped its first
significant order for this business intelligence software since December 1999.
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 $925,000
inventory balance will be impaired.
The Company is internally developing software to replace its current
fulfillment system. Subsequent to September 30, 2002, management has retained
consultants to review the progress of the software development project and make
recommendations as to the continued direction of this project. As of the date of
this filing, the consulting group has made no recommendations to management. As
of September 30, 2002 the Company has capitalized approximately $4.5 million
dollars under this project. If management determines that the direction of the
program needs to change and thus the Company will not use any portions of the
internally developed software, the amount previously capitalized associated with
that portion of the software will be charged to expense.
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
13
subsidiary is likely to be 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.
In July of 2002, the FASB issued SFAS No, 146 "Accounting for Costs
Associated with Exit or Disposal Activities". This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The principal difference between Statement
146 and Issue 94-3 relates to Statement 146's requirements for recognition of a
liability for a cost associated with an exit or disposal activity. Statement 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as generally defined in Issue 94-3 was recognized at
the date of an entity's commitment to an exit plan. A fundamental conclusion in
this Statement is that an entity's commitment to a plan, by itself, does not
create an obligation that meets the definition of a liability. Therefore, this
Statement eliminates the definition and requirements for recognition of exit
costs in Issue 94-3. This Statement also establishes that fair value is the
objective for initial measurement of the liability. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of this standard is not expected to have a
material impact on the consolidated financial statements of the Company.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2002, the Company's operating activities
provided $2.2 million of cash flow, compared to using $705,000 of cash flow
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. This
increase was partially offset by the use of cash needed to increase the volume
of prompt payment discounts taken and strategic inventory buy-ins.
Investing activities used cash of approximately $3.3 million during the
nine months ended September 30, 2002, compared to $2.5 million for the same
period in 2001 reflecting the Company's development of information technology
for its next generation fulfillment system.
During the nine months ended September 30, 2002, the Company's financing
activities provided cash of approximately $1.1 million, primarily related to the
proceeds from the exercising of stock options and from stock issued under the
Company's Employee Stock Purchase Plan; net of the payment for shares
repurchased by the Company. At September 30, 2002, the Company had approximately
$29.7 million available for borrowing under its credit facility.
The Company has a credit facility with a bank (the "Principal Lender"),
which allows for borrowings up to $50.0 million during its highest seasonal
period. Additionally, the Company has a separate facility with the Principal
Lender for inventory financing of vendor products (the "Wholesale Financing
Facility"), which allows for borrowings up to $60.0 million during its highest
seasonal period. Combined the credit facility and the Wholesale Financing
Facility (the "Credit Facilities") allow the Company to borrow from $55.0
million to $110.0 million depending on the seasonal period. The seasonal
structure of the Credit Facilities coincides with the seasonality of the
Company's business and allows the Company to minimize banking fees. The interest
rate under the Credit Facilities is a rate indexed to the London Interbank
Offered Rate (LIBOR). There were no significant amendments to the Credit
Facilities during the three months ending September 30, 2002. As of September
30, 2002 the Company is in compliance with all of its covenants under the credit
facility and has available credit of $29.7 million.
14
Subsequent to September 30, 2002 another financial institution acquired the
division of the "Principal Lender" that serviced the Company's Credit
Facilities. The Company does not anticipate any material changes in its Credit
Facilities as a result of this acquisition.
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. If needed, the Company believes that such capital sources will be
available to it on acceptable terms.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Except for historical information, all of the statements, expectations,
beliefs, anticipations, intentions, and assumptions contained in the foregoing
material are "forward-looking statements" (within the meaning of the Private
Securities Litigation Reform Act of 1995, as amended) that involve a number of
risks and uncertainties. All such forward-looking statements are intended to be
subject to the safe harbor protection provided by the Private Securities Reform
Act of 1995, as amended, and by other applicable securities laws. It is possible
that the assumptions made by management -- including, but not limited to, those
relating to favorable gross margins, a favorable mix of contracts, benefits of a
more efficient operation, future contract awards, returns on new product
programs, profitability, recovery of the costs of inventory, and increased
control of operating costs -- may not materialize. Actual results may differ
materially from those projected or implied in any forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation to revise publicly the forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the risks factors described in other documents
the Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on the Form 10-Q to be filed by the Company
subsequent to this Annual Report on Form 10-K and any Current Reports on Form
8-K filed by the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has a $50.0 million Credit Facility indexed to LIBOR. This
variable rate Credit Facility subjects the Company to potential borrowing costs
exposure resulting from changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2002, an evaluation was performed under the supervision and
with the participation of the Company's management, including the CEO and CFO,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures were effective as of September 30, 2002. There have been no
significant changes in the
15
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to September 30, 2002.
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 5. OTHER INFORMATION - Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
None
(b) REPORTS ON FORM 8-K:
On July 16, 2002, Registrant filed a report on Form 8-K concerning our
replacement of our independent auditor.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 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
17
WRITTEN CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
I, Dendy Young, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GTSI Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
GTSI Corp.
By: /s/ Dendy Young
-------------------------------------
Dendy Young
Chairman and Chief Executive Officer
18
I, Quang Le, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GTSI Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
GTSI Corp.
By: /s/ Quang Le
-------------------------------------------------
Quang Le
Acting Chief Financial Officer and Controller
19
WRITTEN STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
The undersigned hereby certify that the Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002 filed by GTSI Corp. with the Securities and
Exchange Commission fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and that information contained in
the report fairly presents, in all material respects, the financial condition
and results of operations of GTSI Corp.
Dated: November 14, 2002 /s/ Dendy Young
-------------------------------
Dendy Young
Chairman and Chief Executive Officer
The undersigned hereby certify that the Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002 filed by GTSI Corp. with the Securities and
Exchange Commission fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and that information contained in
the report fairly presents, in all material respects, the financial condition
and results of operations of GTSI Corp.
Dated: November 14, 2002 /s/ Quang Le
--------------------------------
Quang Le
Acting Chief Financial Officer and
Controller
20