Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - GTSI CORP | c17019exv31w2.htm |
EX-32 - EXHIBIT 32 - GTSI CORP | c17019exv32.htm |
EX-31.1 - EXHIBIT 31.1 - GTSI CORP | c17019exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34871
GTSI CORP.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
54-1248422 (I.R.S. Employer Identification No.) |
|
2553 Dulles View Drive, Suite 100, Herndon, VA (Address of principal executive offices) |
20171-5219 (Zip Code) |
703-502-2000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting Company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of common stock, $0.005 par value, outstanding as May 9, 2011 was 9,662,328.
GTSI Corp.
Form 10-Q for the Quarter Ended March 31, 2011
INDEX
Form 10-Q for the Quarter Ended March 31, 2011
INDEX
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GTSI CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 39,112 | $ | 4,049 | ||||
Accounts receivable, net |
74,796 | 154,891 | ||||||
Inventory |
6,389 | 13,708 | ||||||
Deferred costs |
2,793 | 6,991 | ||||||
Other current assets |
4,090 | 2,462 | ||||||
Total current assets |
127,180 | 182,101 | ||||||
Depreciable assets, net |
6,588 | 7,452 | ||||||
Long-term receivables and other assets |
18,845 | 14,291 | ||||||
Total assets |
$ | 152,613 | $ | 203,844 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 34,098 | $ | 50,870 | ||||
Accounts payable floor plan |
8,462 | 35,172 | ||||||
Accrued liabilities |
9,958 | 14,887 | ||||||
Deferred revenue |
3,714 | 3,661 | ||||||
Total current liablilites |
56,232 | 104,590 | ||||||
Other liabilities |
3,063 | 3,044 | ||||||
Total liabilities |
59,295 | 107,634 | ||||||
Commitments and contingencies (See Note 12) |
||||||||
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; 10,056,650 issued and 9,635,664
outstanding at March 31, 2011; and 10,056,650 issued and 9,625,728 outstanding at December 31,
2010 |
50 | 50 | ||||||
Capital in excess of par value |
53,870 | 53,985 | ||||||
Retained earnings |
41,322 | 43,995 | ||||||
Treasury stock, 366,504 shares at March 31, 2011 and 346,119 shares at December 31, 2010, at cost |
(1,924 | ) | (1,820 | ) | ||||
Total stockholders equity |
93,318 | 96,210 | ||||||
Total liabilities and stockholders equity |
$ | 152,613 | $ | 203,844 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
Table of Contents
GTSI CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
SALES |
||||||||
Product |
$ | 58,538 | $ | 88,714 | ||||
Service |
7,886 | 10,716 | ||||||
Financing |
3,911 | 2,384 | ||||||
70,335 | 101,814 | |||||||
COST OF SALES |
||||||||
Product |
49,967 | 80,454 | ||||||
Service |
5,973 | 6,980 | ||||||
Financing |
1,406 | 861 | ||||||
57,346 | 88,295 | |||||||
GROSS MARGIN |
12,989 | 13,519 | ||||||
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES |
18,295 | 22,214 | ||||||
LOSS FROM OPERATIONS |
(5,306 | ) | (8,695 | ) | ||||
INTEREST AND OTHER INCOME, NET |
||||||||
Interest and other income |
30 | 155 | ||||||
Equity income from affiliates |
1,104 | 1,472 | ||||||
Interest expense |
(150 | ) | (178 | ) | ||||
Interest and other income, net |
984 | 1,449 | ||||||
LOSS BEFORE INCOME TAXES |
(4,322 | ) | (7,246 | ) | ||||
INCOME TAX BENEFIT |
1,649 | 2,658 | ||||||
NET LOSS |
$ | (2,673 | ) | $ | (4,588 | ) | ||
LOSS PER SHARE |
||||||||
Basic |
$ | (0.28 | ) | $ | (0.48 | ) | ||
Diluted |
$ | (0.28 | ) | $ | (0.48 | ) | ||
WEIGHTED AVERAGE SHARES OUTSTANDING |
||||||||
Basic |
9,632 | 9,617 | ||||||
Diluted |
9,632 | 9,617 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Table of Contents
GTSI CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (2,673 | ) | $ | (4,588 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities |
||||||||
Depreciation and amortization |
929 | 962 | ||||||
Loss on sale of depreciable assets |
| 12 | ||||||
Stock-based compensation |
(192 | ) | 453 | |||||
Equity income, net of distributions in 2011
and 2010 of $0 and $868, respectively |
(1,104 | ) | (604 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
80,096 | 96,574 | ||||||
Inventory |
7,319 | 4,219 | ||||||
Other assets |
(899 | ) | (738 | ) | ||||
Accounts payable |
(16,772 | ) | (52,002 | ) | ||||
Accrued liabilities |
(4,929 | ) | (8,700 | ) | ||||
Other liabilities |
71 | (881 | ) | |||||
Net cash provided by operating activities |
61,846 | 34,707 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of depreciable assets |
(46 | ) | (147 | ) | ||||
Net cash used in investing activities |
(46 | ) | (147 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITES: |
||||||||
Payments on floor plan, net |
(26,710 | ) | (18,395 | ) | ||||
Common stock purchases |
(27 | ) | (433 | ) | ||||
Net cash used in financing activities |
(26,737 | ) | (18,828 | ) | ||||
NET INCREASE IN CASH |
35,063 | 15,732 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
4,049 | 7,894 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 39,112 | $ | 23,626 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Table of Contents
GTSI CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and First Quarter 2011 Results of Operations
Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements include the accounts of
GTSI Corp. and its wholly owned subsidiaries (GTSI or the Company). Intercompany accounts and
transactions have been eliminated in consolidation. The statements have been prepared in conformity
with accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. The year-end condensed balance
sheet data was derived from audited financial statements. Because the accompanying condensed
consolidated financial statements do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America, they should be read in
conjunction with the financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2010. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates. Cost of sales in the accompanying Unaudited Condensed Consolidated
Statements of Operations is based on the full cost method.
The results of operations for the three months ended March 31, 2011 are not necessarily indicative
of the results that may be expected for the full year, or future periods. GTSI has historically
experienced seasonal fluctuations in operations as a result of government buying and funding
patterns.
First Quarter 2011 Results of Operations
Our results for the three months ended March 31, 2011, include reductions to loss before income
taxes of approximately $0.4 million primarily as a result of out-of-period stock compensation
adjustments of $0.1 million, accrual adjustments of $0.2 million and equity income adjustments of
$0.1 million recorded during the first three months of 2011 that should have been recorded as an
increase of pre-tax income during the three months ended December 31, 2010.
We have determined that the impact of these out-of-period adjustments recorded during the three
months ended March 31, 2011, were immaterial, individually and in aggregate, to all current and
prior periods and we expect them to be immaterial to our full year 2011 results.
2. New Accounting Pronouncements
In October 2009, the FASB issued amendments to the accounting and disclosure for revenue
recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010,
modify the criteria for recognizing revenue in multiple element arrangements and the scope of what
constitutes a non-software deliverable. The guidance relates to the determination of when the
individual deliverables included in a multiple-element arrangement may be treated as separate units
of accounting and modifies the manner in which the transaction consideration is allocated across
the individual deliverables. Also, the guidance expands the disclosure requirements for revenue
arrangements with multiple deliverables. This guidance removes tangible products from the scope of
the software revenue guidance if the products contain both software and non-software components
that function together to deliver a products essential functionality and provides guidance on
determining whether software deliverables in an arrangement that includes a tangible product are
within the scope of the software revenue guidance. The guidance must be applied as of the beginning
of each reporting entitys first annual reporting period that begins after June 15, 2010, and may
be applied retrospectively for all periods presented or prospectively to arrangements entered into
or materially modified after the adoption date.
4
Table of Contents
Effective January 1, 2011 the Company adopted on a prospective basis for all new or materially
modified arrangements entered into on or after January 1, 2011, the new accounting guidance for
multiple-deliverable revenue arrangements and the new guidance related to the scope of existing
software revenue recognition guidance. The guidance does not generally
change the units of accounting for the Companys revenue transactions. Most of the Companys
products and services qualify as separate units of accounting. The new guidance changes the level
of evidence of standalone selling price required to separate deliverables in a multiple deliverable
revenue arrangement by allowing a company to make its best estimate of the selling price of
deliverables when more objective evidence of selling price is not available and eliminates the use
of the residual method. The guidance applies to multiple deliverable revenue arrangements that are
not accounted for under other accounting pronouncements and retains the use of vendor specific
objective evidence of selling price if available and third-party evidence of selling price, when
vendor specific objective evidence is unavailable. Under the new guidance, the Company uses the margin approach to determine the best
estimate of selling price. The adoption of this guidance did not have a
material impact on the accompanying Unaudited Condensed Consolidated Financial Statements.
3. Accounts Receivable
Accounts receivable consists of the following as of (in thousands):
March 31, 2011 | December 31, 2010 | |||||||
Trade accounts receivable |
$ | 52,149 | $ | 103,800 | ||||
Unbilled trade accounts receivable |
8,548 | 21,948 | ||||||
Lease receivables, net |
2,241 | 2,478 | ||||||
Finance receivables, net |
8,772 | 23,351 | ||||||
Vendor and other receivables |
3,785 | 4,027 | ||||||
Total accounts receivable |
$ | 75,495 | $ | 155,604 | ||||
Less: Allowance for doubtful
accounts |
(112 | ) | (98 | ) | ||||
Sales return allowance |
(587 | ) | (615 | ) | ||||
Accounts receivable, net |
$ | 74,796 | $ | 154,891 | ||||
4. Long-term receivables and other assets
The Companys long-term receivables and other assets were as follows as of (in thousands):
March 31, 2011 | December 31, 2010 | |||||||
Lease receivables, net |
$ | 1,862 | $ | 1,062 | ||||
Finance receivables, net |
3,721 | 1,123 | ||||||
Equity Investment in EyakTek |
11,719 | 10,615 | ||||||
Other Assets |
1,543 | 1,491 | ||||||
Long-term receivables and
other assets |
$ | 18,845 | $ | 14,291 | ||||
5. Lease and Finance Receivables
The Company leases computer hardware to customers generally under sales-type leases that are
classified as lease receivables in the accompanying Unaudited Condensed Consolidated Balance
Sheets, in accordance with FASB ASC 840 Leases. In connection with those leases, the Company may
sell related services, software and maintenance to its customers, which are classified as finance
receivables in the accompanying Unaudited Condensed Consolidated Balance Sheets. The terms of the
receivables from the sale of these related services are often similar to the terms of the leases of
computer hardware; that is, receivables are interest bearing and are often due over a period of
time that corresponds with the terms of the leased computer hardware.
The Company recognized revenue of $22.7 million and $9.4 million for the three months ended March
31, 2011 and 2010, respectively, from sales-type leases and related transactions. As of March 31,
2011, the Company had current and long-term outstanding lease and finance receivables of $19.3
million, compared with $29.1 million as of December 31, 2010.
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The Companys investments in lease receivables were as follows as of (in thousands):
March 31, 2011 | December 31, 2010 | |||||||
Future minimum lease
payments receivable |
$ | 4,723 | $ | 3,673 | ||||
Unearned income |
(620 | ) | (133 | ) | ||||
$ | 4,103 | $ | 3,540 | |||||
The Companys investment in finance receivables was as follows as of (in thousands):
March 31, 2011 | December 31, 2010 | |||||||
Future minimum finance
payments receivable |
$ | 14,535 | $ | 25,382 | ||||
Unearned income |
(2,042 | ) | (908 | ) | ||||
$ | 12,493 | $ | 24,474 | |||||
6. Transferred Receivables and Financed Lease Debt
The Company transferred gross financing receivables of $18.3 million and $8.5 million for the three
months ended March 31, 2011 and 2010, to third parties that meet the sale criteria under FASB ASC
860, Transfers and Servicing. In exchange, for the three months ended March 31, 2011 and 2010, the
Company received cash of $17.8 million and $8.0 million and recorded a profit on the sales of $0.5
million and $0.5 million, respectively. The receivables are transferred non-recourse to third
parties which accept all credit, interest, and termination risk from the underlying issuer.
Continuing involvement with the transferred assets is limited only to billing and remitting
payments on behalf of some third parties at the specific direction of the third parties.
7. Credit Agreement and Amended Credit Agreement
On May 27, 2009, we entered into a $135 million credit agreement with Castle Pines Capital LLC
(CPC) and other lenders (the Credit Agreement). The Credit Agreement provides a vendor and
distributor program under which we receive financing for inventory purchases from several of our
largest vendors with extended payment terms.
In connection with the agreement that GTSI entered into with the United States Small Business
Administration on October 19, 2010, GTSI entered into the Amended Credit Agreement, dated as of
October 19, 2010, with its lenders to amend the Credit Agreement by reducing the total facility
limit from an aggregate principal amount of $135 million to $100 million and the aggregate
revolving loan facility limit from $60 million to $45 million (Amended Credit Agreement). The
Amended Credit Agreement carries an interest rate indexed at 1-Month LIBOR plus 300 basis points
for revolving loan advances and 1-Month LIBOR plus 350 basis points for floor plan loans. Borrowing
under the Amended Credit Agreement at any time is limited to the lesser of (a) $100 million or (b)
a collateral-based borrowing base (eligible accounts receivable and inventory balances) less
outstanding obligations relating to any borrowings, floor plan loans and stand-by letters of
credits.
As of March 31, 2011, borrowing capacity and availability under the Amended Credit Agreement was as
follows (in thousands):
Total Credit Agreement |
$ | 100,000 | ||
Borrowing base limitation |
(62,132 | ) | ||
Total borrowing capacity |
37,868 | |||
Less: non-interest bearing advances (floor plan loans) |
(8,462 | ) | ||
Less: letters of credit |
(5,115 | ) | ||
Total unused availability |
$ | 24,291 | ||
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As of March 31, 2011, the Company had no outstanding loan balance (other than non-interest
bearing floor plan loans) under the Amended Credit Agreement and as reflected above, unused
available credit thereunder of $24.3 million.
The Amended Credit Agreement contains customary covenants limiting our ability to, among other
things (a) incur debt; (b) make guarantees or grant or suffer liens; (c) repurchase our common
stock, (d) make certain restricted payments (including cash dividends), purchase other businesses
or make investments; (e) enter into transactions with affiliates; (f) dissolve, change names, merge
or enter into certain other material agreement regarding changes to the corporate entities; (g)
acquire real estate; and (h) enter into sales and leaseback transactions.
The financial covenants of the Amended Credit Agreement require us, among other restrictions, to:
| Maintain Tangible Net Worth not less than or equal to $45 million as of the end of each fiscal month |
| Maintain Ratio of Total Liabilities to Tangible Net Worth not greater than 5.25 to 1.00 as of the end of each fiscal month |
| Maintain Current Ratio not less than (i) 1.20 to 1.00 as of the last business day of the fiscal months of January, February, March, April, May, June, October, November and December and (ii) 1.15 to 1.00 as of the last business day of the fiscal months of July, August and September |
| Maintain minimum Total Debt Service Coverage Ratio of 1.25 to 1.00 as of the end of each fiscal month |
The Amended Credit Agreement provides that the existence of a material proceeding against the
Company or the Companys failure to be in compliance with all material laws constitutes an event of
default under the agreement. Furthermore, the Amended Credit Agreement contains information
covenants requiring the Company to provide the lenders certain information. The Company was in
compliance with all financial and informational covenants in the Amended Credit Agreement as of
March 31, 2011. If the Company fails to comply with any material provision or covenant of our
Amended Credit Agreement, it would be required to seek a waiver or amendment of covenants.
The Company defers loan financing costs and recognizes these costs throughout the term of the
loans. The Company deferred $0.1 million of loan financing costs related to the Credit Agreement in
2009. Deferred financing costs were less than $0.1 million as of March 31, 2011 and December 31,
2010.
On February 24, 2011, GTSI entered into an agreement with CPC and Wells Fargo Capital Finance,
LLC., extending from May 27, 2011 to May 27, 2012 the maturity date of CPCs 74.08% pro-rata share
of the total loan commitment under the Amended Credit Agreement and also allowing the acquisition
of its common stock related to net share settlements. GTSI and CPC are currently in discussions
with another lender to participate in the Amended Credit Agreement in respect of a 25.92% pro-rata
share of the total loan commitment thereunder until May 27, 2012. If the other lender does not
participate in the Amended Credit Agreement, our total facility limit will be reduced from an
aggregate principal amount of $100 million to $74.08 million and the aggregate revolving loan
facility limit would be reduced from $45 million to $33.34 million.
8. Stockholders Equity
Purchase of Capital Stock
On June 8, 2009, the Companys Board of Directors (the Board of Directors) authorized a program
for periodic purchases of common stock through May 27, 2011 for an aggregate purchase price not to
exceed $5 million. During the three months ended March 31, 2010, under the repurchase program, the
Company purchased 60,407 shares of its common stock.
Under the Amended Credit Agreement the Company is prohibited from purchasing its common stock
except for certain rights to purchase a limited number of shares related to net share settlements
and therefore the Company had no purchases under the repurchase program during the three months
ended March 31, 2011.
In addition, during the three months ended March 31, 2011 and 2010, the Company acquired 5,650 and
17,707, respectively, of its common stock related to restricted stock lapses to cover tax
withholdings.
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Table of Contents
Stock-Based Compensation
Stock Incentive Plans
The Company has one stockholder approved combination incentive and non-statutory stock incentive
plan, which is named the Amended and Restated 2007 Stock Incentive Plan (2007 Plan). The 2007
Plan provides for the granting of options to employees and non-employee directors to purchase up to
4,500,000 shares of the Companys common stock. The 2007 Plan also permits the grant of restricted
stock and restricted stock units to its employees and non-employee directors as well as stock
appreciation rights (SARs).
Under the 2007 Plan, options have a term of up to ten years, generally vest over four years and
option prices are required to be at not less than 100% of the fair market value of the Companys
common stock at the date of grant and, except in the case of non-employee directors, must be
approved by the Board of Directors or its Compensation Committee. The vesting period for
restricted stock and restricted stock units is determined by the Compensation Committee on an
individual award basis. GTSI recognizes stock-based compensation expense for these graded vesting
awards on a straight-line basis over the requisite service period for the entire award, which is
equal to the vesting period specified in the option agreement.
Stock Options
A summary of option activity under the Companys stock incentive plans as of March 31, 2011 and
changes during the three months then ended is presented below:
Weighted Average | Aggregate | |||||||||||||||
Shares | Weighted Average | Remaining | Intrinsic Value | |||||||||||||
(in thousands) | Exercise Price | Contractual Term | (in thousands) | |||||||||||||
Outstanding at
January 1, 2011 |
964 | $ | 7.79 | |||||||||||||
Granted |
100 | 4.73 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(40 | ) | 6.28 | |||||||||||||
Expired |
(276 | ) | 8.75 | |||||||||||||
Outstanding at
March 31, 2011 |
748 | $ | 7.12 | 3.59 | $ | 1,000 | ||||||||||
Exercisable at
March 31, 2011 |
471 | $ | 8.32 | 2.05 | $ | | ||||||||||
There were 100,000 and 155,000 stock options granted during the three months ended March 31,
2011 and 2010, respectively. There were no stock options exercised under the Companys stock option
plans during the three months ended March 31, 2011 and 2010. The Company has historically reissued
treasury stock or authorized common stock to satisfy stock option exercises, restricted stock
grants, and employee stock purchases. A tax benefit for the exercise of stock options and the
vesting on restricted stock (including elections under Internal Revenue Service section 83(b)) in
the amount of $0.1 million was recognized for the three months ended March 31, 2011. A tax expense
for the exercise of stock options and the vesting on restricted stock (including elections under
Internal Revenue Service section 83(b)) in the amount of $0.1 million was recognized for the three
months ended March 31, 2010.
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Table of Contents
Restricted Shares
During the three months ended March 31, 2011 and 2010, no restricted stock awards were granted.
The fair value of nonvested restricted stock is determined based on the closing trading price of
the Companys shares on the grant date. A summary of the status of Companys nonvested restricted
stock as of March 31, 2011, and changes during the three months then ended is presented below:
Weighted Average | ||||||||
Shares | Grant-Date Fair | |||||||
(in thousands) | Value | |||||||
Nonvested at January 1, 2011 |
85 | $ | 8.35 | |||||
Granted |
| | ||||||
Vested |
(16 | ) | 11.94 | |||||
Forfeited |
(15 | ) | 7.40 | |||||
Nonvested at March 31, 2011 |
54 | $ | 7.59 | |||||
Stock
Appreciation Rights (SARs)
A summary of SARs activity under the 2007 Plan as of March 31, 2011 and changes during the three
months then ended is presented below:
Weighted Average | Aggregate | |||||||||||||||
Shares | Weighted Average | Remaining | Intrinsic Value | |||||||||||||
(in thousands) | Exercise Price | Contractual Term | (in thousands) | |||||||||||||
Outstanding at
January 1, 2011 |
381 | $ | 9.60 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(37 | ) | 9.60 | |||||||||||||
Expired |
(84 | ) | 9.60 | |||||||||||||
Outstanding at
March 31, 2011 |
260 | $ | 9.60 | 2.87 | $ | | ||||||||||
Exercisable at
March 31, 2011 |
186 | $ | 9.60 | 2.52 | $ | | ||||||||||
During the three months ended March 31, 2011 and 2010,
no SARs were granted. All SARs are to be settled in Company stock.
Stock Compensation Expense and Unrecognized Compensation
For the three months ended March 31, 2011, stock compensation expense for stock options, restricted
stock awards and stock appreciation rights were $0.1 million, a credit of $0.2 million and a credit
of $0.1 million, respectively, due to out-of-period adjustments. For the three months ended March
31, 2010, stock compensation expense for stock options, restricted stock awards and stock
appreciation rights were $0.2 million, $0.1 million and $0.1 million, respectively.
As of March 31, 2011, there was $1.0 million of total unrecognized compensation cost related to
nonvested stock-based awards, which consisted of unrecognized compensation of $0.5 million related
to stock options, $0.2 million related to restricted stock awards and $0.3 million related to stock
appreciation rights. The cost for unrecognized compensation related to stock options, restricted
stock awards and stock appreciation rights is expected to be recognized over a weighted average
period of 2.5 years, 1.0 years and 1.9 years, respectively.
9. Accrued Liabilities
Accrued liabilities consist of the following as of (in thousands):
March 31, 2011 | December 31, 2010 | |||||||
Accrued commissions and
bonuses |
$ | 772 | $ | 3,805 | ||||
Accrued income taxes |
| 254 | ||||||
Future contractual lease
obligations |
3,720 | 4,733 | ||||||
Other |
5,466 | 6,095 | ||||||
Total accrued liabilities |
$ | 9,958 | $ | 14,887 | ||||
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10. Loss Per Share
Basic loss per share is calculated by dividing net loss by the weighted average shares outstanding
during the period, which includes shares of restricted stock that are fully vested. Diluted loss
per share is computed similarly to basic loss per share, except that the weighted average shares
outstanding are increased to include equivalents, when their effect is dilutive. In periods of net
loss, all dilutive shares are considered anti-dilutive.
For the three months ended March 31, 2011 and 2010, anti-dilutive employee stock options and SARs
totaling 481 and 14,721 weighted-shares, respectively, were excluded from the calculation. Weighted
unvested restricted stock awards totaling 27,724 and 31,025, respectively, have been excluded for
the three months ended March 31, 2011 and 2010.
The following table sets forth the computation of basic and diluted loss per share (in thousands
except per share data):
Three months ended | ||||||||
March 31 | ||||||||
2011 | 2010 | |||||||
Basic loss per share |
||||||||
Net loss |
$ | (2,673 | ) | $ | (4,588 | ) | ||
Weighted average shares outstanding |
9,632 | 9,617 | ||||||
Basic loss per share |
$ | (0.28 | ) | $ | (0.48 | ) | ||
Diluted loss per share: |
||||||||
Net loss |
$ | (2,673 | ) | $ | (4,588 | ) | ||
Weighted average shares outstanding |
9,632 | 9,617 | ||||||
Incremental shares attributable to the
assumed
exercise of outstanding stock options |
N/A | N/A | ||||||
Weighted average shares and equivalents |
9,632 | 9,617 | ||||||
Diluted loss per share |
$ | (0.28 | ) | $ | (0.48 | ) | ||
11. Income Taxes
The effective income tax rate benefit was 38.2% and 36.7% for the three months ended March 31, 2011
and 2010, respectively. The increase in the tax rate benefit from 2010 to 2011 was due to the
write-off of deferred tax assets of $0.1 million in 2011 vs. $0.3 million in 2010 on expired or
cancelled stock options.
As of March 31, 2011 and December 31, 2010, GTSI had $0.1 million and $0.1 million, respectively,
of total unrecognized tax benefits most of which would reduce its effective tax rate if recognized.
The Company does not believe that the total amount of unrecognized tax benefits will significantly
change within 12 months of the reporting date.
GTSIs practice is to recognize interest and/or penalties related to uncertain tax positions in
income tax expense. The Company had less than $0.1 million accrued for interest and less than $0.1
million accrued for penalties as of March 31, 2011 and December 31, 2010. During the first three
months of 2011, the amount accrued for interest increased by less than $0.1 million relating to the
expiration of applicable statutes of limitations and increased by an immaterial amount for the
remaining issues. Interest will continue to accrue on certain issues for the remainder of 2011 and
beyond.
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12. Commitments and Contingencies
Product Warranties
GTSI offers extended warranties on certain products which are generally covered for three or five
years beyond the warranty provided by the manufacturer. Products under extended warranty require
repair or replacement of defective parts at no cost to the customer. The Company records warranty
liabilities at the time of sale for the estimated costs that may be incurred under its extended
warranty contracts. The following table summarizes the activity related to product warranty
liabilities for the period ending March 31, 2011 (in thousands):
Three months ended | ||||||||
March 31 | ||||||||
2011 | 2010 | |||||||
Accrued warranties at beginning of period |
$ | 229 | $ | 215 | ||||
Charges made against warranty liabilities |
(0 | ) | (0 | ) | ||||
Adjustments to warranty reserves |
(24 | ) | (1 | ) | ||||
Accruals for additional warranties sold |
5 | 8 | ||||||
Accrued warranties at end of period |
$ | 210 | $ | 222 | ||||
Maintenance Warranties
Revenue and cost of sales from extended warranty contracts is recorded as deferred revenue and
deferred costs, respectively, and subsequently recognized over the term of the contract. The
following table summarizes the activity related to the deferred warranty revenue for the period
ending March 31, 2011 (in thousands):
Three months ended | ||||||||
March 31 | ||||||||
2011 | 2010 | |||||||
Deferred warranty revenue at beginning of period |
$ | 1,883 | $ | 798 | ||||
Deferred warranty revenue recognized |
(873 | ) | (181 | ) | ||||
Revenue deferred for additional warranties sold |
183 | 12 | ||||||
Deferred warranty revenue at end of period |
$ | 1,193 | $ | 629 | ||||
Letters of Credit
The Company provided a letter of credit in the amount of $2.4 million as of March 31, 2011 and
December 31, 2010 for its office space lease signed in December 2007.
As of March 31, 2011 and December 31, 2010, the Company had an outstanding letter of credit in the
amount of $2.7 million to guarantee the performance of the Companys obligations under customer
contracts.
Employment Agreements
At March 31, 2011, GTSI has change in control agreements with 10 executives and key employees and
severance agreements with six executives. These arrangements provide for payments of as much as 15
months of total target compensation and continuation of benefits upon the occurrence of specified
events. As of March 31, 2011, no accruals have been recorded for these agreements.
Contingencies
On October 1, 2010, GTSI received notice from the United States Small Business Administration
(SBA) that GTSI was temporarily suspended from any future Federal Government contracting. The
suspension notice cited that it was based on alleged evidence of the commission of fraud or a
criminal offense in connection with GTSI obtaining, attempting to obtain and performing certain
subcontracts with small businesses in 2007 and a lack of business integrity or business honesty
that seriously or directly affected the responsibility of GTSI as a government contractor. On
October 19, 2010, GTSI entered into an administrative agreement with the SBA pursuant to which the
SBA lifted its temporary federal contract suspension on GTSI (the SBA Agreement). As a result,
GTSI is, subject to the SBA Agreement, engaged in its business with most of its existing clients
and pursuing new Federal Government contracts.
Pursuant to the SBA Agreement, GTSI agreed that it will not obtain or attempt to obtain any new
Federal Government contracts, subcontracts or any business, which in any capacity, whether directly
or indirectly is intended to benefit small businesses, including task orders and options on
existing contracts. This includes benefits involving small businesses serving as prime contractors,
joint ventures with small businesses and participation in the SBAs mentor-protégé program. As
also required by the SBA Agreement, GTSI has retained Debarment Solutions Institute, LLC, a
SBA-approved monitor, to report regularly to the SBA on GTSIs compliance with the SBA Agreement
and applicable Federal Government contracting laws and regulations. The SBA Agreement will
terminate on the earlier of (a) October 19, 2013, (b) the 90th day after the SBAs Office of
Inspector Generals notification of the completion of its continuing investigation of GTSI, or (c)
the notification date of any proposed debarment of GTSI by the SBA.
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In connection with the SBA Agreement, GTSI accepted the voluntary resignations of its chief
executive officer and general counsel, effective as of October 26, 2010 and entered into separation
agreements with the resigning officers. GTSI also suspended three other employees, who
subsequently resigned. GTSI has conducted a review of its business ethics program that covers all
employees and created a position and designated an employee as GTSIs ethics officer, who is
responsible for managing GTSIs business ethics program. At least once each year, GTSI will conduct
an internal audit of its business practices, procedures, policies and internal controls for
compliance with the SBA Agreement, GTSIs code of business ethics and the special requirements
regarding government contracting and report the results of such audit to the SBA and Debarment
Solutions Institute, LLC.
The U.S. Attorneys Office is reviewing the same subject matter that led to the SBAs temporary
suspension of GTSI from Federal Government contracting and the resulting SBA Agreement. GTSI has
provided information in response to that inquiry.
GTSI will continue to cooperate with the continuing investigations of GTSIs conduct as a
subcontractor for certain small businesses. The continuing investigations of GTSI by the Federal
Government may result in administrative, civil or criminal penalties, including a recommendation
that may adversely affect or terminate GTSIs ability to serve as a government contractor.
Legal Proceedings
In addition to the matters discussed above, we have, in the normal course of business, certain
claims, including legal proceedings, against us and against other parties. We believe the
resolution of these other claims that we have in the normal course of our business will not have a
material adverse effect on our results of operations or financial position. However, the results of
any legal proceedings cannot be predicted with certainty. Further, from time-to-time, agencies of
the Federal Government, including the SBA and the U.S. Attorneys Office as discussed above,
investigate whether our operations are being conducted in accordance with applicable regulatory
requirements. Federal Government investigations of us, whether relating to government contracts or
conducted for other reasons, may result in administrative, civil or criminal liabilities, including
repayments, fines or penalties being imposed upon us, or may lead to suspension or debarment from
future Federal Government contracting. Federal Government investigations often take years to
complete.
13. Related Party Transactions
In 2002, GTSI made a $0.4 million investment in Eyak Technology, LLC (EyakTek) and acquired a 37%
ownership of EyakTek. GTSI is not the primary beneficiary of this variable interest entity
because the Company does not control, through voting rights or other means, EyakTek. The investment
balance is included in the long-term receivables and other assets in the accompanying Unaudited
Condensed Consolidated Balance Sheets and represents the maximum exposure to the Company. The
investment in EyakTek is accounted for under the equity method and adjusted for earnings or losses
as reported in the financial statements of EyakTek and dividends received from EyakTek. At March
31, 2011 and December 31, 2010, our investment balance for EyakTek was $11.7 million and $10.6
million, respectively, and for the three months ended March 31, 2011 and 2010, our equity in
earnings was $1.1 million and $1.5 million, respectively.
GTSI recognized sales to EyakTek and its subsidiary of $4.9 million and $5.1 million for the three
months ended March 31, 2011 and 2010, respectively. GTSI receives a fee from EyakTek based on sales
from products sold at cost by GTSI to EyakTek. Fees recorded by the Company, which are recognized
when EyakTek sells to third party customers, are less than $0.1 million and $0.1 million for the
three months ended March 31, 2011 and 2010, respectively, which are included in sales in the
accompanying Unaudited Condensed Consolidated Statements of Operations.
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The following table summarizes EyakTeks unaudited financial information for the periods presented
in the accompanying Unaudited Condensed Statement of Operations (in thousands):
Three Months ended March 31, | ||||||||
2011 | 2010 | |||||||
Revenues |
$ | 66,882 | $ | 94,485 | ||||
Gross margin |
$ | 8,562 | $ | 9,192 | ||||
Net income |
$ | 2,984 | $ | 3,979 |
By letter dated May 24, 2010 the SBA advised EyakTek that its request for a voluntary early
graduation from the SBAs Business Development Program under Section 8(a) of the Small Business Act
(Section 8(a) BD Program) was approved, effective May 10, 2010. EyakTeks Operating Agreement
provides that EyakTek shall dissolve and commence winding up and liquidating upon its graduation
from the Section 8(a) BD Program, unless EyakTeks members by an affirmative vote of at least 65%
of the membership interests decide to continue EyakTeks business operations. While GTSI has not
voted its 37% EyakTek membership interests to continue EyakTeks business operations, such
operations have continued since EyakTeks graduation from the Section 8(a) BD Program.
In September 2010, GTSI filed a complaint in the Chancery Court of Delaware against EyakTek; two of
EyakTeks three owner/membersThe Eyak Corporation (Eyak Corp.), which owns 51% of EyakTek, and
Global Technology LLC, which owns 12% of EyakTek, (collectively, the Member Defendants); and
several of EyakTeks directors and officers (the Individual Defendants). GTSI is the third member
of EyakTek, as noted above GTSI owns 37% of EyakTek. GTSIs complaint alleged that EyakTek and the
Member Defendants had breached EyakTeks Operating Agreement by taking certain actions without
GTSIs approval, which is required under the Operating Agreement, including actions leading to the
making of an unsolicited offer to acquire GTSI and the continuation of the business operations of
EyakTek after its graduation from the Section 8(a) BD Program. The complaint further alleged that
the Individual Defendants had breached their fiduciary duties and the implied covenant of good
faith and fair dealing by allowing EyakTek to take these actions. The complaint requested
declaratory and injunctive relief, plus attorneys fees, against all of the defendants. On November
3, 2010, GTSI filed an amended complaint in the Chancery Court, which clarified the nature of
relief sought and added an additional claim for breach of EyakTeks Operating Agreement based upon
EyakTeks refusal to recognize GTSIs designated director to EyakTeks board of directors, among
other matters.
In September 2010, EyakTek, the Member Defendants and Individual Defendants filed an arbitration
demand with the American Arbitration Association asserting that GTSIs claims in the Delaware
Chancery Court are subject to arbitration under EyakTeks Operating Agreement. The arbitration
demand also asserted that GTSIs filing of the Delaware complaint violated EyakTeks Operating
Agreement and constituted a breach of fiduciary duty and the implied covenant
of good faith and fair dealing that GTSI allegedly owes to EyakTek as an EyakTek member. The
arbitration demand seeks declaratory relief, damages, and attorneys fees against GTSI.
GTSI filed a motion in the Delaware Chancery Court to dismiss or stay the above-referenced
arbitration. EyakTek, the Member Defendants and Individual Defendants filed a motion to dismiss or
stay GTSIs lawsuit. The Delaware Chancery Court heard both sets of motions in November 2010 and
subsequently, based primarily on its interpretation of the arbitration provision of EyakTeks
Operating Agreement, determined that the arbitrator and not the court must decide whether the
matter is to proceed in court or in arbitration. Thus, the court granted the defendants request
to stay GTSIs lawsuit. GTSIs appeal of such decision was not successful.
Thereafter, GTSI submitted before the above-referenced arbitrator claims against and request for
relief from EyakTek, the Member Defendants and Individual Defendants similar to GTSIs
above-referenced claims and request for relief denied by the Delaware Chancery Court. In addition,
GTSI requested the arbitrator to enforce the above-referenced provisions of EyakTeks Operating
Agreement requiring the dissolution of EyakTek because of its graduation from Section 8(a) BD
Program. While the outcome of these continuing disputes with EyakTek, the Member Defendants and
Individual Defendants is currently unknown, such outcome may include a buyout of GTSIs ownership
in EyakTek, the dissolution of EyakTek, the continuation of EyakTek under its current Operating
Agreement or under a modified Operating Agreement or some other alternative agreed upon by the
various parties involved or ruled by the arbitrator.
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By letter dated November 1, 2010, Eyak Corp., through the same counsel that represents EyakTek,
advised GTSI that Eyak Corp. was the owner of 100 shares of GTSIs common stock, and as a GTSI
stockholder Eyak Corp. was demanding that GTSI investigate and take actions on matters set forth in
the letter, including matters that were the subject of GTSIs claims before the Delaware Chancery
Court. Eyak Corp. alleged that GTSIs failure to approve the continuation of EyakTeks business
operations constitutes a breach of fiduciary duties by GTSIs directors and officers and demands
that they cure this breach by approving the continuation of EyakTeks business operations. Eyak
Corp. also demanded that, if the alleged breach is not cured, GTSI investigate its prior disclosure
related to GTSIs disputes and litigation with EyakTek, make appropriate disclosures, including to
the SBA and GTSIs lenders, and investigate GTSIs financial statements and account balances in
respect of GTSIs 37% interest in EyakTek. Further, EyakTek demanded that GTSI bring action against
GTSIs employees, officers and directors responsible for the foregoing alleged actions to recover
damages for GTSI. GTSIs board of directors and a special committee of the board of directors are
investigating this matter and will take such action as they deem necessary or appropriate and in
the best interest of GTSI and its stockholders, in accordance with Delaware law.
14. Subsequent Event
In April 2011, the Company eliminated approximately 50 non-sales related positions, which included
the termination of 33 employees and the elimination of approximately 15 open positions. The
Company will record $0.4 million of severance related expense during the three months ended June
30, 2011.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis is provided to increase the understanding of, and should be
read in conjunction with, our unaudited condensed consolidated financial statements and notes
included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our consolidated financial
statements and notes in our Annual Report on Form 10-K for the year ended December 31, 2010. We use
the terms GTSI, we, the Company, our, and us to refer to GTSI Corp. and its subsidiaries.
Disclosure Regarding Forward-Looking Statements
Readers are cautioned that this Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, relating to our operations that are based on our
current expectations, estimates, forecasts and projections. Words such as expect, plan,
believe, anticipate, intend and similar expressions are intended to identify these
forward-looking statements. These statements are not guarantees of future performance and are
subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual
results in future periods may differ materially from those expressed or projected in any
forward-looking statements because of a number of risks and uncertainties, including:
| GTSIs ability to comply with its obligations under the October 19, 2010 administrative agreement with the SBA and the outcome of the continuing related Federal Government investigations |
| Adverse effects of possible increased governmental and regulatory scrutiny or negative publicity |
| Our continuing disputes with EyakTek and its other members |
| Possible future reduction of EyakTeks financial performance |
| Adverse effects of possible delay in the Federal Budget process or a Federal Government shutdown |
| Our ability to retain or attract key management personnel |
| Changes in Federal government fiscal spending |
| Our ability to comply with our Amended Credit Agreement may impact our ability to continue to operate our business |
| Our reliance on a small number of large transactions for significant portions of our sales and gross margins |
| Our ability to shift our business model from a reseller of products to a high-end solutions provider |
| Any issue that compromises our relationship with agencies of the Federal government would cause serious harm to our business |
| Our ability to meet the covenants under our Amended Credit Agreement in future periods |
| Negativity to our business due to the current global economic and credit conditions |
| Possible infrastructure failures |
| Any material weaknesses in our internal control over financial reporting |
| Possible changes in accounting standards and subjective assumptions may significantly affect our financial results |
| Continued net losses, if we fail to align costs with our sales levels |
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| Our quarterly sales and cash flows are volatile, which makes our future financial results difficult to forecast |
| Unsatisfactory performance by third parties with which we work could hurt our reputation, operating results and competitiveness |
| Our ability to adapt to consolidation within the OEM market place |
| Our ability to remain compliant with OEM certification requirements |
| Our dependence on certain strategic partners |
| Our ability to integrate any potential future acquisitions, strategic investments or mergers |
| Our ability to enter new lines of business |
For a detailed discussion of risk factors affecting GTSIs business and operations, see Item 1A,
Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010 and Item 1A,
Risk Factors in Part II of this report. We undertake no obligation to revise or update any
forward-looking statements for any reason.
Overview
GTSI has nearly three decades of experience in selling information technology (IT) products and
solutions to U.S. Federal, state and local governments and to prime contractors that are working
directly on government contracts. During this period, our customers have come to rely on GTSI to
translate business challenges into practical technology solutions for todays government. We
believe our key differentiators to be our strong brand among government customers, extensive
contract portfolio, close relationships with a wide variety of vendors, and a technology lifecycle
management framework approach.
The IT solutions we offer to our customers are enterprise product-based, with many including a
service component. Enterprise product-based components are identified and purchased by government
procurement officers under standard government contracts, ranging from single agency contracts to
those that are available to the entire U.S. Federal Government or state government contracts such
as U.S. Communities. In March 2011, GTSI was awarded by the General Services Administration a GSA
IT Schedule 70 Contract for the sale of IT products and services. GTSI is classified as a large
business on this schedule which covers the base period of March 21, 2011 through March 20, 2016,
plus one five-year extension period.
We connect ITs leading vendors, products and services inside the core technology areas critical to
government success by partnering with global IT leaders such as Cisco, Microsoft, Oracle, Hewlett
Packard, Panasonic, Net App, Dell, Citrix, VMware and Hitachi. GTSI has strong strategic
relationships with hardware and software industry leading OEMs and includes these products in the
solutions provided to our customers.
We continue to align our solutions with the IT infrastructure needs and requirements of our
customers in the areas of Client End-Points, Networking, Data Center and Security. GTSI has
embraced the evolving government requirements in IT Infrastructure such as collaboration,
virtualization and security and developed innovative approaches to Desktop & Server Virtualization,
Unified Communications and Physical Security.
To help our customers acquire, manage and refresh this technology in a strategic and
application-appropriate manner, GTSI has created a mix of professional and financial services
capable of managing and funding the entire technology lifecycle. Additionally, GTSI financial
services provides flexible financing options for the entire technology lifecycle and such options
may be a better fit for an agencys operating and maintenance budget than a capital expenditure.
We believe this model represents a distinctive advantage to our customers.
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SBA Agreement
On October 1, 2010, GTSI received notice from the SBA that GTSI had been temporarily suspended from
any future Federal Government contracting. On October 19, 2010, GTSI entered into an
administrative agreement with the SBA
pursuant to which, among other things, the SBA lifted the suspension it had imposed on GTSI (the
SBA Agreement). Pursuant to the SBA Agreement, GTSI agreed that it will not obtain or attempt to
obtain any new Federal Government contracts, subcontracts or any business, which in any capacity,
whether directly or indirectly is intended to benefit small businesses, including task orders and
options on existing contracts. For a further discussion regarding the SBA Agreement see Item 3
Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2010 and Part
II. Other Information, Item 1. Legal Proceedings of this report.
Possible Material Trends, Demands, Commitments, Events and Uncertainties
Summarized below are some of the possible material trends, demands, commitments, events and
uncertainties currently facing the Company:
| The ramifications of the SBA suspension continued to impact our sales and operating expenses during the three months ended March 31, 2011 and will likely have an adverse effect on our sales and operating expenses during the three months ended June 30, 2011 along with the remainder of 2011; mainly due to open sales positions from the higher than expected rate of voluntary separations over the past six months. Management has taken action in an effort to minimize the adverse effect on our future business including the active recruitment of open sales positions. As of late April 2011, all key open sales positions have been filled with the last two new hires joining the Company by mid May 2011. During the three months ended March 31, 2011, the Company incurred additional SG&A expenses of approximately $0.2 million and $0.6 million related to legal and monitoring expenses, respectively, in connection with the SBA Agreement. If the Company fails to generate additional sales, mitigate impacted opportunities and reduce operating costs to offset for reduced sales and added administrative costs related to our obligations and restrictions under the SBA Agreement it may have a material adverse effect on the Companys business, results of operations and financial condition in future periods. The Company expects to incur additional SG&A expenses during the year ended December 31, 2011 related to legal, professional and monitoring expenses in connection with the SBA Agreement. |
| Resolution of our continuing disputes with EyakTek and its other members may have a material adverse effect on our financial performance, as discussed in Part II. Other Information Item 1 Legal Proceedings. While the outcome of these continuing disputes with EyakTek and its other members is currently unknown, possible outcomes may include a buyout of our equity interests in EyakTek, the dissolution of EyakTek, the continuation of EyakTek under its current Operating Agreement or under a modified Operating Agreement or some other alternative agreed upon by the various parties involved or ruled by the arbitrator. The sale of our equity interest in EyakTek or EyakTeks dissolution would result in GTSI having no future equity income from EyakTek as reported in our unaudited condensed consolidated statements of operations. In the past, including for the years ended December 31, 2010, 2009 and 2008, EyakTeks equity income has had a material positive impact on GTSIs financial performance. We believe that GTSIs continuing disputes with EyakTek and its other members may have a material adverse affect on our financial performance. During the three months ended March 31, 2011, the Company incurred legal fees of approximately $0.3 million related to the various EyakTek legal matters and will continue to incur legal expenses until a resolution is reached. |
| We depend heavily on Federal Government contracts. The Federal Governments delay in passage of the budget for 2011 has delayed the appropriations process for many of the Federal agencies which has negatively impacted our financial results for the three months ended March 31, 2011 and may continue to impact our financial results throughout 2011. |
| In the near term, we face some uncertainties due to the current business environment. We have continued to experience a longer contracting process with DOD agencies, which is one of our traditionally stronger markets. This delay, along with an overall decrease in Federal Government IT spending may have an adverse effect on our financial condition, operating performance, revenue, income or liquidity. |
| A shift of expenditures away from programs that we support may cause Federal Government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty or to decide not to exercise options to renew contracts. |
| With the Sun/Oracle merger and the continued consolidation within the OEM market place, we are likely to see continued pricing pressure from our partners in the market place. |
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The Companys financial results for the three months ended March 31, 2011 were negatively impacted
by the delay in the passage of the Federal Governments budget for 2011, various government
agencies spending trends, continued consolidation within the OEM market place, competitive pricing
pressures and weak sales activity in certain pockets of the hardware business, especially within
the DOD agencies.
In April 2011, the Company eliminated approximately 50 non-sales related positions, which included
the termination of 33 employees and the elimination of approximately 15 open positions. The
Company will record $0.4 million of severance related expense during the three months ended June
30, 2011.
For the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010:
| Total sales decreased $31.5 million. |
| Gross margin decreased $0.5 million. |
| Selling, General & Administrative expenses decreased $3.9 million. |
| Interest and other income decreased $0.5 million. |
| Loss before income taxes decreased $2.9 million. |
| Cash provided by operations increased $27.1 million. |
Critical Accounting Estimates and Policies
Our unaudited condensed consolidated financial statements are based on the selection of accounting
policies and the application of significant accounting estimates, some of which require management
to make significant assumptions. We believe that some of the more critical estimates and related
assumptions that affect our financial condition and results of operations pertain to revenue
recognition, transfer of receivables, valuation of inventory, capitalized internal use software,
accounts payables and income taxes. For more information on critical accounting estimates and
policies see the MD&A discussion included in our Annual Report on Form 10-K for the year ended
December 31, 2010. We have discussed the application of these critical accounting estimates and
policies with the Audit Committee of our Board of Directors.
Historical Results of Operations
The following table illustrates the unaudited percentage of sales represented by items in our
condensed consolidated statements of operations for the periods presented.
Three months ended | ||||||||
March | ||||||||
2011 | 2010 | |||||||
Sales |
100.0 | % | 100.0 | % | ||||
Cost of sales |
81.5 | % | 86.7 | % | ||||
Gross margin |
18.5 | % | 13.3 | % | ||||
Selling, general, and administrative expenses |
26.0 | % | 21.8 | % | ||||
Loss from operations |
(7.5 | )% | (8.5 | )% | ||||
Interest and other income, net |
1.4 | % | 1.4 | % | ||||
Loss before taxes |
(6.1 | )% | (7.1 | )% | ||||
Income tax benefit |
2.3 | % | 2.6 | % | ||||
Net loss |
(3.8 | )% | (4.5 | )% | ||||
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The following tables indicate, for the periods indicated, the approximate sales by type and vendor
along with related percentages of total sales (in millions).
Three months ended | ||||||||||||||||
March | ||||||||||||||||
Sales by Type | 2011 | 2010 | ||||||||||||||
Hardware |
$ | 44.9 | 63.8 | % | $ | 72.8 | 71.5 | % | ||||||||
Software |
13.6 | 19.4 | % | 15.9 | 15.6 | % | ||||||||||
Service |
7.9 | 11.2 | % | 10.7 | 10.5 | % | ||||||||||
Financing |
3.9 | 5.6 | % | 2.4 | 2.4 | % | ||||||||||
Total |
$ | 70.3 | 100.0 | % | $ | 101.8 | 100.0 | % | ||||||||
Three months ended | ||||||||||||||||
March 31, | ||||||||||||||||
Sales by Vendor (based on YTD 2011 sales) | 2011 | 2010 | ||||||||||||||
Cisco |
$ | 11.9 | 17.0 | % | $ | 21.0 | 20.7 | % | ||||||||
Hewlett Packard |
11.3 | 16.1 | % | 13.4 | 13.2 | % | ||||||||||
Dell |
7.0 | 10.0 | % | 12.5 | 12.2 | % | ||||||||||
Microsoft |
6.1 | 8.6 | % | 3.1 | 3.1 | % | ||||||||||
Oracle |
5.0 | 7.1 | % | 6.9 | 6.7 | % | ||||||||||
Others, net of reserves and adjustments |
29.0 | 41.2 | % | 44.9 | 44.1 | % | ||||||||||
Total |
$ | 70.3 | 100.0 | % | $ | 101.8 | 100.0 | % | ||||||||
Three Months Ended March 31, 2011 Compared With the Three Months Ended March 31, 2010
Sales
Total sales, consisting of product, service and financing revenue, decreased $31.5 million, or
30.9% from $101.8 million for the three months ended March 31, 2010 to $70.3 million for the three
months ended March 31, 2011. The sales activity of each of the three product lines are discussed
below.
Product revenue includes the sale of hardware, software and license maintenance on the related
software. Product sales decreased $30.2 million, or 34.0%, from $88.7 million for the three months
ended March 31, 2010 to $58.5 million for the three months ended March 31, 2011. Product revenue as
a percent of total revenue decreased 3.9% from 87.1% for the three months ended March 31, 2010 to
83.2% for the three months ended March 31, 2011. During the three months ended March 31, 2011, the
Company was impacted by the lingering effects of the SBA Agreement, delay in the Federal
Governments passage of the budget for 2011, an overall decrease in hardware and software revenue
due to various government agencies spending trends, the weak economy and weak sales activity in
certain pockets of the hardware and software commodity segments. Overall product revenue was down
34.0%, with hardware revenue declining 38.3% and software revenue decreasing 14.4% for three months
ended March 31, 2011 as compared to the three months ended March 31, 2010. Hardware sales decreased
$27.9 million, from $72.8 million for the three months ended March 31, 2010 to $44.9 million for
the three months ended March 31, 2011. In particular, hardware sales during the three months ended
March 31, 2011 to Intelligence Agencies, Army, Independent Agencies and Air Force decreased by
approximately $10 million, $6 million, $5 million and $3 million, respectively. Software sales
decreased $2.3 million, from $15.9 million for the three months ended March 31, 2010 to $13.6
million for the three months ended March 31, 2011 due to decreased software sales to various
government agencies.
Service revenue includes the sale of professional services, resold third-party service products,
hardware warranties and maintenance on hardware; we net revenues where we are not the primary
obligor, we netted approximately $21.0 million and $34.7 million for the three months ended March
31, 2010 and 2011, respectively. Service revenue decreased $2.8
million, or 26.4% from $10.7 million for the three months ended March 31, 2010 to $7.9 million for
the three months ended March 31, 2011. The decrease in service revenue is a result of decreased
sales of professional services as the number of projects for the three months ended March 31, 2011
has declined as compared to the three months ended March 31, 2010. Professional service revenue
decreased $3.0 million, from $7.9 million for the three months ended March 31, 2010 to $4.9 million
for the three months ended March 31, 2011. Service revenue as a percent of total revenue increased
0.7% from 10.5% for the three months ended March 31, 2010 to 11.2% for the three months ended March 31, 2011.
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Financing revenue consists of lease related transactions and includes the sale of leases that are
properly securitized having met the sale criteria under FASB ASC 860, Transfers and Servicing,
(ASC 860), the annuity streams of in-house leases and leases that are not securitized or have not
met the sale criteria under ASC 860 and the sale of previously leased equipment. Financing revenue
increased $1.5 million, or 64.0%, from $2.4 million for the three months ended March 31, 2010 to
$3.9 million for the three months ended March 31, 2011 due to $1.4 million increase in lease
residual sales.
Although we offer our customers access to products from hundreds of vendors, 58.8% of our total
sales in the first quarter of 2011 were products from five vendors; Cisco was our top vendor in the
first quarter of 2011 with sales of $11.9 million. Sales from these five vendors decreased by $15.5
million, or 27.2% for the three months ended March 31, 2011, mainly due to decreased activity with
Cisco, Hewlett Packard and Dell; partially offset by increased activity with Microsoft. As a
percent of total sales the first quarter of 2011 top five vendors increased 2.9 percentage points
to 58.8% for the three months ended March 31, 2011 from 55.9% for the three months ended March 31,
2010. Our top five vendors may fluctuate between periods because of the timing of certain large
contracts. In 2011, we consider Cisco, Microsoft, Oracle, Hewlett Packard, Panasonic, NetApp, Dell,
Citrix, VMware and Hitachi as our strategic partners.
Gross Margin
Total gross margin, consisting of product, service and financing revenue less their respective cost
of sales, decreased $0.5 million, or 3.9%, from $13.5 million for the three months ended March 31,
2010 to $13.0 million for the three months ended March 31, 2011. As a percentage of total sales,
gross margin for the three months ended March 31, 2011 increased 5.2% percentage points from the
three months ended March 31, 2010. The gross margin activity of each of the three product lines are
discussed below.
Product gross margin increased $0.3 million, or 3.8%, from $8.3 million for the three months ended
March 31, 2010 to $8.6 million for the three months ended March 31, 2011. During the three months
ended March 31, 2011, the Companys gross margin was impacted by lower revenue due to the lingering
effects of the SBA Agreement, delay in the Federal Governments passage of the budget for 2011, an
overall decrease in hardware and software revenue due to various government agencies spending
trends, the weak economy and weak sales activity in certain pockets of the hardware and software
commodity segments. Product gross margin as a percentage of sales increased 5.3 percentage points
from 9.3% for the three months ended March 31, 2010 to 14.6% for the three months ended March 31,
2011. The increase in product gross margin percentage was due to several large projects with
favorable gross margin percentages along with higher software netting for the three months ended
March 31, 2011 as compared to the three months ended March 31, 2010.
Service gross margin decreased $1.8 million, or 48.8%, from $3.7 million for the three months ended
March 31, 2010 to $1.9 million for the three months ended March 31, 2011. Service gross margin as a
percentage of sales decreased 10.6 percentage points from 34.9% for the three months ended March
31, 2010 to 24.3% for the three months ended March 31, 2011. These gross margin decreases were
driven by lower revenue in professional and integration services and a lower gross margin
percentage in professional, integration and support services for the three months ended March 31,
2011 as compared to the same period in 2010.
Financing gross margin increased $1.0 million, or 64.5% from $1.5 million for the three months
ended March 31, 2010 to $2.5 million for the three months ended March 31, 2011 due to $1.4 million
increase in lease residual sales. Gross margin as a percentage of sales increased 0.2 percentage
points from 63.9% for the three months ended March 31, 2010 to 64.1% for the three months ended
March 31, 2011.
Selling, General & Administrative Expenses (SG&A)
During the three months ended March 31, 2011, SG&A expenses decreased $3.9 million, or 17.6% from
the same period in 2010. SG&A as a percentage of sales increased to 26.0% in the first quarter of
2011 from 21.8% for the same period in
2010. The decrease in SG&A expenses was mainly due to lower personnel related costs of $5.1 million
attributed to lower salary and related costs of $4.2 million due to lower headcount in 2010 as
compared to the prior year and lower incentive and commission compensation expense of $1.0 million,
along with lower travel expense of $0.3 million; partially offset by $1.4 million higher
professional fees and consulting expenses, mainly due to the SBA Agreement, during the three months
ended March 31, 2011.
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Interest and Other Income, Net
Interest and other income, net, for the three months ended March 31, 2011 was $1.0 million as
compared $1.4 million for the same period in 2010. The decline in interest and other income, net,
was due to lower equity income from affiliates. Equity income from affiliates related to our
equity investments in Eyak Technology, LLC decreased by $0.4 million for the three months ended
March 31, 2011 as compared to the same period last year.
Income Taxes
GTSI had a loss of $4.3 million and $7.2 million before income taxes for the three months ended
March 31, 2011 and 2010, respectively.
The effective income tax rate was 38.2% and 36.7% for the three months ended March 31, 2011 and
2010, respectively. The increase in the tax rate from 2010 to 2011 was due to non-deductible stock
expense during the three months ended March 31, 2011 that did not occur in the same period in 2010.
For the three months ended March 31, 2011, an income tax benefit of less than $0.1 million was
recognized related to the accrual of interest and penalties for uncertain tax positions and payment
of state income tax notices which was fully offset by a decrease in accrued interest and penalties
due to the expiration of applicable statute of limitations.
For the three months ended March 31, 2010, an income tax benefit of $2.7 million was recognized as
it is managements assessment under ASC 740, Income Taxes (ASC 740) that there is sufficient
evidence to record the tax benefit on the year to date loss. The net income tax benefit includes an
income tax benefit of less than $0.1 million for the decrease in accrued interest and penalties for
uncertain tax positions due to the expiration of applicable statute of limitations.
Seasonal Fluctuations
Historically, over 90% of our annual sales have been earned from departments and agencies of the
Federal government, either directly or indirectly through system integrators for which GTSI is a
subcontractor. We have historically experienced, and expect to continue to experience, significant
seasonal fluctuations in our operations as a result of government buying and funding patterns,
which also affect the buying patterns of GTSIs prime contractor customers. These buying and
funding patterns historically have had a significant positive effect on our bookings in the third
quarter ended September 30 each year (the Federal governments fiscal year end), and consequently
on sales and net income in the third and fourth quarters of each year. Conversely, sales during the
first quarter of our fiscal year have traditionally been the weakest for GTSI, consisting of less
than 20% of our annual sales. Our SG&A expenses are more level throughout the year, although our
sales commissions programs generally result in marginally increased expenses in the fourth quarter
of our fiscal year.
Quarterly financial results are also affected by the timing of contract awards and the receipt of
products by our customers. The seasonality of our business, and the unpredictability of the factors
affecting such seasonality, makes GTSIs quarterly and annual financial results difficult to
predict and subject to significant fluctuation.
Liquidity and Capital Resources
Cash flows for the three months ended March 31,
(in millions) | 2011 | 2010 | Change | |||||||||
Cash provided by operating activities |
$ | 61.8 | $ | 34.7 | $ | 27.1 | ||||||
Cash used in investing activities |
$ | (0.0 | ) | $ | (0.1 | ) | $ | 0.1 | ||||
Cash used by financing activities |
$ | (26.7 | ) | $ | (18.8 | ) | $ | (7.9 | ) |
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During the three months ended March 31, 2011, our cash balance increased $35.1 million from
our December 31, 2010 balance. The non-interest bearing advances under our Amended Credit
Agreement, which are classified as Accounts Payable floor plan on our condensed consolidated
balance sheets, are included as a financing activity on our Unaudited Condensed Consolidated
Statements of Cash Flows.
Cash provided by operating activities for the three months ended March 31, 2011 was $61.8 million,
an improvement of $27.1 million compared to the same period last year. The improvement was
primarily due to a $80.1 million decrease in accounts receivable for the three months ended March
31, 2011; partially offset by a $16.8 million decrease in accounts payable for the three months
ended March 31, 2011.
Cash provided by operating activities for the three months ended March 31, 2010 was $34.7 million.
The 2010 increase was primarily due to a $96.8 million decrease in accounts receivable for the
three months ended March 31, 2010; partially offset by a $52.0 million decrease in accounts payable
and $8.7 million decrease in accrued liabilities.
Cash used in investing activities for the three months ended March 31, 2011 was less than $0.1
million, a decrease of $0.1 million as compared with the same period in 2010. This decrease was due
to lower purchases of assets in 2011 related to GTSIs Enterprise Management System.
Cash used in financing activities for the three months ended March 31, 2011 was $26.7 million, an
increase of $7.9 million as compared to $18.8 million for the same period in 2010. The increase
was due to $26.7 million net of floor plan loans for the three months ended March 31, 2011 as
compared to $18.4 million net of floor plan loans for the same period in 2010; partially offset by
common stock purchases of $0.4 million during the three months ended March 31, 2010.
Amended Credit Agreement
On October 19, 2010, we entered into a $100 million credit agreement with Castle Pines Capital LLC
(CPC) and other lenders (the Amended Credit Agreement), which includes inventory financing. The
Amended Credit Agreement provides a vendor and distributor program under which we receive
financing for inventory purchases from several of our largest vendors with extended payment terms.
Borrowing under the Amended Credit Agreement at any time is limited to the lesser of (a) $100
million or (b) a collateral-based borrowing base (eligible accounts receivable and inventory
balances) less outstanding obligations relating to any borrowings, floor plan loans and stand-by
letters of credits.
As of March 31, 2011, borrowing capacity and availability under the Amended Credit Agreement was as
follows (in thousands):
Total Credit Agreement |
$ | 100,000 | ||
Borrowing base limitation |
(62,132 | ) | ||
Total borrowing capacity |
37,868 | |||
Less: non-interest bearing advances (floor plan loans) |
(8,462 | ) | ||
Less: letters of credit |
(5,115 | ) | ||
Total unused availability |
$ | 24,291 | ||
As of March 31, 2011, the Company had no outstanding loan balance (other than non-interest
bearing floor plan loans) under the Amended Credit Agreement and as reflected above, unused
available credit there under of $24.3 million.
The Amended Credit Agreement contains customary covenants that the Company is required to meet. The
Company was in compliance with all financial and informational covenants in the Credit Agreement as
of March 31, 2011. The Company currently relies on its Amended Credit Agreement as its primary
vehicle to finance its operations. If the Company fails to comply with any material covenant or
other provision of its Amended Credit Agreement, it would be required to seek a waiver or amendment
of covenants.
On February 24, 2011, GTSI entered into an agreement with CPC and Wells Fargo Capital Finance,
LLC., extending from May 27, 2011 to May 27, 2012 the maturity date of CPCs 74.08% pro-rata share
of the total loan commitment under the Amended Credit Agreement and also allowing the acquisition
of its common stock related to net share settlements. GTSI
and CPC are currently in discussions with another lender to participate in the Amended Credit
Agreement in respect of a 25.92% pro-rata share of the total loan commitment thereunder until May
27, 2012. If the other lender does not participate in the Amended Credit Agreement, our total
facility limit will be reduced from an aggregate principal amount of $100 million to $74.08 million
and the aggregate revolving loan facility limit would be reduced from $45 million to $33.34
million.
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Liquidity
Our working capital as of March 31, 2011 decreased approximately $6.6 million from our working
capital at December 31, 2010. GTSIs current assets decreased $54.9 million as of March 31, 2011
when compared to our December 31, 2010 balance. This decrease is due to a decrease in accounts
receivable of $80.1 million and a decrease in inventory of $7.3 million which was partially offset
by an increase in cash of $35.1 million. The decrease in accounts receivable is due to the
seasonality of our business and the lower revenue for the three months ended March 31, 2011 as
compared to the same period in 2010. The increase in cash is due to the use of the Credit
Agreements non-interest bearing floor plan arrangement along with better cash management and
collection efforts. Current liabilities decreased $48.4 million due to a decrease in accounts
payable of $16.8 million and a decrease in accounts payable floor plan of $26.7 million.
During 2009, the Company began using the extended channel financing arrangement in the Credit
Agreement and subsequently under the Amended Credit Agreement for inventory financing and working
capital requirements. Our balance outstanding as of March 31, 2011 under this program was $8.5
million with additional availability of $24.3 million. We also use vendor lines of credit to manage
purchasing and maintain a higher level of liquidity. As of March 31, 2011, the balance outstanding
under these vendor lines of credit, which represent pre-approved purchasing limits with normal
payment terms, was $21.4 million with additional availability of $69.3 million.
The SBA Agreement could have a material adverse effect on our working capital in the future if the
Company is not able to generate additional sales and/or reduce operating costs to offset for lost
sales and administrative costs related to our obligations and restrictions under the SBA Agreement.
Capital Requirements
Our ongoing capital requirements depend on a variety of factors, including the extent to which we
are able to fund the cash needs of our business from operations. On February 24, 2011, GTSI entered
into an agreement with CPC and Wells Fargo Capital Finance, LLC, extending from May 27, 2011 to May
27, 2012 the maturity date of CPCs 74.08% pro-rata share of the total loan commitment under the
Amended Credit Agreement. GTSI and CPC are currently in discussions with another lender to
participate in the Amended Credit Agreement in respect of a 25.92% pro-rata share of the total loan
commitment thereunder until May 27, 2012. If the other lender does not participate in the Amended
Credit Agreement, the total facility limit would be reduced from an aggregate principal amount of
$100 million to $74.08 million and the aggregate revolving loan facility limit will be reduced from
$45 million to $33.34 million.
We anticipate that we will continue to rely primarily on operating cash flow, vendor lines of
credit and our Amended Credit Agreement to finance our operating cash needs. We believe that such
funds should be sufficient to satisfy our anticipated cash requirements for operations over the
next 12 months.
New Accounting Pronouncements
In October 2009, the FASB issued amendments to the accounting and disclosure for revenue
recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010,
modify the criteria for recognizing revenue in multiple element arrangements and the scope of what
constitutes a non-software deliverable. The guidance relates to the determination of when the
individual deliverables included in a multiple-element arrangement may be treated as separate units
of accounting and modifies the manner in which the transaction consideration is allocated across
the individual deliverables. Also, the guidance expands the disclosure requirements for revenue
arrangements with multiple deliverables. This guidance removes tangible products from the scope of
the software revenue guidance if the products contain both software and non-software components
that function together to deliver a products essential functionality and provides guidance on
determining whether software deliverables in an arrangement that includes a tangible product are
within the scope of the software revenue guidance. The guidance must be applied as of the beginning
of each reporting entitys first annual reporting period that begins after June 15, 2010, and may
be applied retrospectively for all periods presented or
prospectively to arrangements entered into or materially modified after the adoption date. The
adoption of this guidance did not have a material impact on the accompanying Unaudited Condensed
Consolidated Financial Statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
GTSI is exposed to interest rate risk through the investment of our cash and cash equivalents. We
invest our cash in short-term investments with maturities of three months or less with high credit
quality financial institutions. Changes in interest rates affect the interest income we earn, and
therefore impact our cash flows and results of operations. At times such investments may be in
excess of the Federal Deposit Insurance Corporation insurance limit. Management monitors balances
in excess of insured limits and believes they do not represent a significant credit risk to the
Company.
In connection with the SBA Agreement, GTSI entered into the Amended Credit Agreement, dated as of
October 19, 2010, with its lenders to amend the Credit Agreement by reducing the total facility
limit from an aggregate principal amount of $135 million to $100 million and the aggregate
revolving loan facility limit from $60 million to $45 million (Amended Credit Agreement). The
Amended Credit Agreement carries an interest rate indexed at 1-Month LIBOR plus 300 basis points
for revolving loan advances and 1-Month LIBOR plus 350 basis points for floor plan loans. On
February 24, 2011, GTSI entered into an agreement with CPC and another lender extending from May
27, 2011 to May 27, 2012 the maturity date of CPCs 74.08% pro-rata share of the total loan
commitment under the Amended Credit Agreement. GTSI and CPC are currently in discussions with
another lender to participate in the Amended Credit Agreement in respect of a 25.92% pro-rata share
of the total loan commitment thereunder until May 27, 2012. If the other lender does not
participate in the Amended Credit Agreement, our total facility limit would be reduced from an
aggregate principal amount of $100 million to $74.08 million and the aggregate revolving loan
facility limit will be reduced from $45 million to $33.34 million.
This Amended Credit Agreement exposes us to market risk from changes in interest rates. For
purposes of specific risk analysis, we use sensitivity analysis to determine the effects that
market risk exposures may have.
Our results of operations may be affected by changes in interest rates due to the impact those
changes have on any borrowings under our Amended Credit Agreement. If interest rates increase, our
debt service obligations on the variable rate indebtedness would increase even though the amount
borrowed remained the same, which would require more cash to service our indebtedness. As of March
31, 2011 and December 31, 2010, the Company had no outstanding loan balance (other than
non-interest bearing floor plan loans) and an available credit of $24.3 million and $49.9 million,
respectively. We have not used derivative instruments to alter the interest rate characteristics of
our borrowings.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of our management,
including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as of
March 31, 2011. Based on this evaluation, our CEO and CFO concluded that our disclosure controls
and procedures were effective to provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms
and to provide reasonable assurance that such information is accumulated and communicated to our
management, including our CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving
their objectives as specified above. Management does not expect, however, that our disclosure
controls and procedures will prevent or detect all error and fraud. Any control system, no matter
how well designed and operated, is based upon certain assumptions and can provide only reasonable,
not absolute, assurance that its objectives will be met. Further, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the Company have been detected.
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Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the three months ended
March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 1, 2010, GTSI received notice from the SBA that GTSI was temporarily suspended from any
future Federal Government contracting. The suspension notice cited that it was based on alleged
evidence of the commission of fraud or a criminal offense in connection with GTSI obtaining,
attempting to obtain and performing certain subcontracts with small businesses in 2007 and a lack
of business integrity or business honesty that seriously or directly affected the responsibility of
GTSI as a government contractor. On October 19, 2010, GTSI entered into an administrative agreement
with the SBA pursuant to which, among other things, the SBA lifted its temporary federal contract
suspension on GTSI (the SBA Agreement). As a result, GTSI is, subject to the SBA Agreement,
engaged in its business with most of its existing clients and pursuing new Federal Government
contracts.
Pursuant to the SBA Agreement, GTSI agreed that it will not obtain or attempt to obtain any new
Federal Government contracts, subcontracts or any business, which in any capacity, whether directly
or indirectly is intended to benefit small businesses, including task orders and options on
existing contracts. This includes benefits involving small businesses serving as prime contractors,
joint ventures with small businesses and participation in the SBAs mentor-protégé program. As
also required by the SBA Agreement, GTSI has retained Debarment Solutions Institute, LLC, a
SBA-approved monitor, to report regularly to the SBA on GTSIs compliance with the SBA Agreement
and applicable Federal Government contracting laws and regulations. The SBA Agreement will
terminate on the earlier of (a) October 19, 2013, (b) the 90th day after the SBAs Office of
Inspector Generals notification of the completion of its continuing investigation of GTSI, or (c)
the notification date of any proposed debarment of GTSI by the SBA.
In connection with the SBA Agreement, GTSI accepted the voluntary resignations of its chief
executive officer and general counsel, effective as of October 26, 2010. GTSI also suspended three
other employees, who subsequently resigned. GTSI has conducted a review of its business ethics
program that covers all employees and created a position and designated an employee as GTSIs
ethics officer who is responsible for managing GTSIs business ethics program. At least once each
year, GTSI will conduct an internal audit of its business practices, procedures, policies and
internal controls for compliance with the SBA Agreement, GTSIs code of business ethics and the
special requirements regarding government contracting and report the results of such audit to the
SBA and Debarment Solutions Institute, LLC.
The U.S. Attorneys Office is reviewing the same subject matter that led to the SBA temporary
suspension of GTSI from Federal Government contracting and the resulting SBA Agreement. GTSI has
provided information in response to that inquiry.
GTSI will continue to cooperate with the continuing investigations of GTSIs conduct as a
subcontractor for certain small businesses. The continuing investigations of GTSI by the Federal
Government may result in administrative, civil or criminal penalties, including a recommendation
that may adversely affect or terminate GTSIs ability to serve as a government contractor.
EyakTek Arbitration and Certain Related Matters
By letter dated May 24, 2010 the SBA advised Eyak Technology, LLC (EyakTek) that its request for
a voluntary early graduation from the SBAs Business Development Program under Section 8(a) of the
Small Business Act (Section 8(a) BD Program) was approved, effective May 10, 2010. EyakTeks
Operating Agreement provides that EyakTek shall dissolve and commence winding up and liquidating
upon its graduation from the Section 8(a) BD Program, unless EyakTeks members by an affirmative
vote of at least 65% of the membership interests decide to continue EyakTeks business operations.
While GTSI has not voted its 37% EyakTek membership interests to continue EyakTeks business
operations, such operations have continued since EyakTeks graduation from the Section 8(a) BD
Program.
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In September 2010, GTSI filed a complaint in the Chancery Court of Delaware against EyakTek; two of
EyakTeks three owner/membersThe Eyak Corporation (Eyak Corp.), which owns 51% of EyakTek, and
Global Technology LLC,
which owns 12% of EyakTek, (collectively, the Member Defendants); and several of EyakTeks
directors and officers (the Individual Defendants). GTSI is the third member of EyakTek, as noted
above GTSI owns 37% of EyakTek. GTSIs complaint alleged that EyakTek and the Member Defendants
had breached EyakTeks Operating Agreement by taking certain actions without GTSIs approval, which
is required under the Operating Agreement, including actions leading to the making of an
unsolicited offer to acquire GTSI and the continuation of the business operations of EyakTek after
its graduation from the Section 8(a) BD Program. The complaint further alleged that the Individual
Defendants had breached their fiduciary duties and the implied covenant of good faith and fair
dealing by allowing EyakTek to take these actions. The complaint requested declaratory and
injunctive relief, plus attorneys fees, against all of the defendants. On November 3, 2010, GTSI
filed an amended complaint in the Chancery Court, which clarified the nature of relief sought and
added an additional claim for breach of EyakTeks Operating Agreement based upon EyakTeks refusal
to recognize GTSIs designated director to EyakTeks board of directors, among other matters.
In September 2010, EyakTek, the Member Defendants and Individual Defendants filed an arbitration
demand with the American Arbitration Association asserting that GTSIs claims in the Delaware
Chancery Court are subject to arbitration under EyakTeks Operating Agreement. The arbitration
demand also asserted that GTSIs filing of the Delaware complaint violated EyakTeks Operating
Agreement and constituted a breach of fiduciary duty and the implied covenant of good faith and
fair dealing that GTSI allegedly owes to EyakTek as an EyakTek member. The arbitration demand
seeks declaratory relief, damages, and attorneys fees against GTSI.
GTSI filed a motion in the Delaware Chancery Court to dismiss or stay the above-referenced
arbitration. EyakTek, the Member Defendants and Individual Defendants filed a motion to dismiss or
stay GTSIs lawsuit. The Delaware Chancery Court heard both sets of motions in November 2010 and
subsequently, based primarily on its interpretation of the arbitration provision of EyakTeks
Operating Agreement, determined that the arbitrator and not the court must decide whether the
matter is to proceed in court or in arbitration. Thus, the court granted the defendants request
to stay GTSIs lawsuit. GTSIs appeal of such decision was not successful.
Thereafter, GTSI submitted before the above-referenced arbitrator claims against and request for
relief from EyakTek, the Member Defendants and Individual Defendants similar to GTSIs
above-referenced claims and request for relief denied by the Delaware Chancery Court. In addition,
GTSI requested the arbitrator to enforce the above-referenced provisions of EyakTeks Operating
Agreement requiring the dissolution of EyakTek because of its graduation from Section 8(a) BD
Program. While the outcome of these continuing disputes with EyakTek, the Member Defendants and
Individual Defendants is currently unknown, such outcome may include a buyout of GTSIs ownership
in EyakTek, the dissolution of EyakTek, the continuation of EyakTek under its current Operating
Agreement or under a modified Operating Agreement or some other alternative agreed upon by the
various parties involved or ruled by the arbitrator.
By letter dated November 1, 2010, Eyak Corp., through the same counsel that represents EyakTek,
advised GTSI that Eyak Corp. was the owner of 100 shares of GTSIs common stock, and as a GTSI
stockholder Eyak Corp. was demanding that GTSI investigate and take actions on matters set forth in
the letter, including matters that were the subject of GTSIs claims before the Delaware Chancery
Court. Eyak Corp. alleged that GTSIs failure to approve the continuation of EyakTeks business
operations constitutes a breach of fiduciary duties by GTSIs directors and officers and demands
that they cure this breach by approving the continuation of EyakTeks business operations. Eyak
Corp. also demanded that, if the alleged breach is not cured, GTSI investigate its prior disclosure
related to GTSIs disputes and litigation with EyakTek, make appropriate disclosures, including to
the SBA and GTSIs lenders, and investigate GTSIs financial statements and account balances in
respect of GTSIs 37% interest in EyakTek. Further, EyakTek demanded that GTSI bring action against
GTSIs employees, officers and directors responsible for the foregoing alleged actions to recover
damages for GTSI. GTSIs board of directors and a special committee of the board of directors are
investigating this matter and will take such action as they deem necessary or appropriate and in
the best interest of GTSI and its stockholders, in accordance with Delaware law.
Other Matters
In addition to the matters discussed above, we have, in the normal course of business, certain
claims, including legal proceedings, against us and against other parties. We believe the
resolution of these other claims that we have in the normal course of our business will not have a
material adverse effect on our results of operations or financial position. However, the results of
any legal proceedings cannot be predicted with certainty. Further, from time-to-time, agencies of
the Federal Government, including the SBA and the U.S. Attorneys Office as discussed above,
investigate whether our operations are being conducted in accordance with applicable regulatory
requirements. Federal Government
investigations of us, whether relating to government contracts or conducted for other reasons, may
result in administrative, civil or criminal liabilities, including repayments, fines or penalties
being imposed upon us, or may lead to suspension or debarment from future Federal Government
contracting. Federal Government investigations often take years to complete.
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Item 1A. Risk Factors
In addition to the other information set forth in this Form 10-Q and our 2010 Form 10-K, you should
carefully consider the risk factors associated with our business discussed under the heading Risk
Factors in Part I, Item 1A of our 2010 Form 10-K. Since the filing of our 2010 Form 10-K, the
Company has identified an additional factor that may cause actual results to differ materially from
those in forward-looking statements and form historical trends.
Compliance with OEM certification requirements may have a material adverse effect on the Company.
Our OEM agreements provide the Company with the ability to sell OEM products and to obtain
preferred pricing. These agreements require a certain number of employees to maintain various
certifications, some of which are usually very technical in nature. If we are not able to remain
compliant with the various OEM certification requirements, it could have an impact on our OEM
preferred pricing and have a material adverse effect on the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Recent Sales of Unregistered Sales
None.
(b) Use of Proceeds
None.
(c) Issuer Purchases of Equity Securities
On June 8, 2009, GTSIs board of directors authorized a program for periodic purchases of GTSI
common stock through May 27, 2011 for an aggregate purchase price not to exceed $5 million,
replacing GTSIs stock repurchase program announced in December 2008. In connection with the SBA
Agreement, GTSI Corp. entered into the Amended Credit Agreement with its lenders, dated October 19,
2010, which, among other things, prohibits GTSI from purchasing any of its common stock. The
Company did not purchase any of its common stock during the three months ended March 31, 2011,
except for 5,650 shares acquired through net share settlements to cover tax withholdings in
connection with restricted stock issuances as permitted by the Amended Credit Agreement.
Item 3. Defaults Upon Senior Securities
None.
Item 4. RESERVED
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits set forth in the Exhibit Index are filed as part of this Quarterly Report on Form
10-Q.
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Table of Contents
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.
GTSI Corp. | ||||
Date: May 12, 2011
|
/s/ STERLING E. PHILLIPS, JR.
|
|||
Chief Executive Officer | ||||
Date: May 12, 2011
|
/s/ PETER WHITFIELD
|
|||
Senior Vice President and Chief Financial Officer |
28
Table of Contents
Exhibit | ||||
Number | Description | |||
10.1 | Employment Agreement dated January 24, 2011 between the Registrant
and Sterling Phillips * (1) |
|||
10.2 | Board appointment dated January 26, 2011 * (2) |
|||
10.3 | Bonus arrangement dated February 11, 2011 between the Registrant and
Peter Whitfield * (3) |
|||
10.4 | First and second amendment to the Amended and Restated Credit
Agreement with Castle Pines Capital LLC and Wells Fargo Capital
Finance, LLC (4) |
|||
31.1 | Section 302 Certification of Chief Executive Officer (filed herewith) |
|||
31.2 | Section 302 Certification of Chief Financial Officer (filed herewith) |
|||
32 | Section 906 Certification of Chief Executive Officer and Chief
Financial Officer (filed herewith) |
* | Management contracts and compensatory plans and arrangements required to be filed pursuant to Item 15 (c). | |
(1) | Incorporated by reference to the Registrants current report on Form 8-K dated January 24, 2011 | |
(2) | Incorporated by reference to the Registrants current report on Form 8-K dated January 26, 2011 | |
(3) | Incorporated by reference to the Registrants current report on Form 8-K dated February 11, 2011 | |
(4) | Incorporated by reference to the Registrants current report on Form 8-K dated February 24, 2011 |
29