GTSI 10Q 2010 Q2 Quarterly report

UNITED STATES
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 June 30, 2010


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: 0-19394

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
(Registrant’s telephone number, including area code)

N/A
(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. Yesþ Noo

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). Yeso Noo

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 filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(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). Yeso Noþ

The number of shares of common stock, $0.005 par value, outstanding as July 30, 2010 was 9,614,127.

GTSI Corp.
Form 10-Q for the Quarter Ended June 30, 2010
INDEX


	Page

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements —

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009		1

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009		2

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009		3

Notes to Unaudited Condensed Consolidated Financial Statements		4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3. Quantitative and Qualitative Disclosures About Market Risk		23

Item 4. Controls and Procedures		23

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		24

Item 1A. Risk Factors		24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		24

Item 3. Defaults Upon Senior Securities		25

Item 4. Reserved		25

Item 5. Other Information		25

Item 6. Exhibits		25

SIGNATURES		26

Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

GTSI CORP.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	June 30,			December 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	33,462		$	7,894
Accounts receivable, net		143,037			209,595
Inventory		8,555			13,477
Deferred costs		1,970			1,807
Other current assets		7,607			4,140

Total current assets		194,631			236,913
Depreciable assets, net		9,259			10,960
Long-term receivables and other assets		41,377			40,758

Total assets	$	245,267		$	288,631


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	60,468		$	109,723
Accounts payable — floor plan		51,939			34,889
Financed lease debt, current portion		338			831
Accrued liabilities		18,678			26,127
Deferred revenue		4,472			3,176

Total current liablilites		135,895			174,746
Other liabilities		18,587			17,598

Total liabilities		154,482			192,344


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; 10,119,038 issued and 9,622,036 outstanding at June 30, 2010; and 10,119,038 issued and 9,637,676 outstanding at December 31, 2009		50			50
Capital in excess of par value		53,584			52,698
Retained earnings		39,101			44,925
Treasury stock, 348,110 shares at June 30, 2010 and 277,850 shares at December 31, 2009, at cost		(1,950	)		(1,386	)

Total stockholders’ equity		90,785			96,287

Total liabilities and stockholders’ equity	$	245,267		$	288,631

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

GTSI CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
SALES
Product	$	120,944		$	149,869		$	209,659		$	277,589
Service		11,958			12,576			22,674			26,850
Financing		2,145			2,156			4,528			4,234

		135,047			164,601			236,861			308,673

COST OF SALES
Product		109,287			133,217			189,740			252,016
Service		7,623			7,640			14,603			16,924
Financing		688			724			1,550			1,050

		117,598			141,581			205,893			269,990


GROSS MARGIN		17,449			23,020			30,968			38,683

SELLING, GENERAL & ADMINISTRATIVE EXPENSES		21,646			24,428			43,860			47,291

LOSS FROM OPERATIONS		(4,197	)		(1,408	)		(12,892	)		(8,608	)


INTEREST AND OTHER INCOME, NET
Interest and other income (expense)		(81	)		777			74			843
Equity income from affiliates		2,386			2,114			3,859			2,940
Interest expense		(178	)		(1,949	)		(357	)		(2,513	)

Interest and other income, net		2,127			942			3,576			1,270


LOSS BEFORE INCOME TAXES		(2,070	)		(466	)		(9,316	)		(7,338	)

INCOME TAX BENEFIT		834			156			3,492			3,148


NET LOSS	$	(1,236	)	$	(310	)	$	(5,824	)	$	(4,190	)


LOSS PER SHARE
Basic	$	(0.13	)	$	(0.03	)	$	(0.61	)	$	(0.43	)

Diluted	$	(0.13	)	$	(0.03	)	$	(0.61	)	$	(0.43	)


WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		9,593			9,700			9,605			9,781

Diluted		9,593			9,700			9,605			9,781

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

GTSI CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Six Months Ended
	June 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,824	)	$	(4,190	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		1,935			1,917
Loss on sale of depreciable assets		34			135
Stock-based compensation		1,127			1,046
Tax impact from stock-based compensation		—			116
Equity income, net of distributions in 2010 and 2009 of $1,908 and $1,946, respectively		(1,951	)		(994	)
Changes in operating assets and liabilities:
Accounts receivable		66,065			34,957
Inventory		4,922			(5,299	)
Other assets		(2,337	)		(31,858	)
Accounts payable		(49,255	)		(4,699	)
Accrued liabilities		(7,449	)		2,893
Other liabilities		2,284			23,923

Net cash provided by operating activities		9,551			17,947


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of depreciable assets		(228	)		(705	)

Net cash used in investing activities		(228	)		(705	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under credit facility, net		—			(22,387	)
Payments on floor plan, net		17,050			29,239
Payment of deferred financing costs		—			(50	)
Common stock purchases		(889	)		(1,430	)
Proceeds from common stock issued		84			378

Net cash provided by financing activities		16,245			5,750


NET INCREASE IN CASH		25,568			22,992

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		7,894			—


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	33,462		$	22,992

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

GTSI CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2009. 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 direct cost method.

The results of operations for the three and six months ended June 30, 2010 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.

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 product’s 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 entity’s 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 Company is currently evaluating the potential impact on its financial position and results of operations.

3. Stock-Based Compensation

Stock Incentive Plans

The Company has three stockholder approved stock incentive plans: the 1994 Stock Option Plan, as amended; the Amended and Restated 2007 Stock Incentive Plan; and the 1997 Non-Officer Stock Option Plan, which provides for the granting of non-qualified stock options to employees (other than officers and directors).

Stock Options

A summary of option activity under the Company’s stock incentive plans as of June 30, 2010 and changes during the six months then ended is presented below:


						Weighted Average		Aggregate
	Shares			Weighted Average		Remaining Contractual		Intrinsic Value
	(in thousands)			Exercise Price		Term		(in thousands)
Outstanding at January 1, 2010		1,505		$	7.83
Granted		55			5.66
Exercised		(30	)		2.81
Forfeited		(70	)		6.40
Expired		(72	)		11.12

Outstanding at June 30, 2010		1,388		$	7.75		2.09	$	7

Exercisable at June 30, 2010		1,144		$	7.99		1.40	$	7

There were 55,000 stock options granted during the six months ended June 30, 2010. No options were granted during the six months ended June 30, 2009. During the six months ended June 30, 2010 and 2009, 30,000 and 45,000 stock options were exercised under the Company’s stock option plans during each period. The total intrinsic value of options exercised during the six months ended June 30, 2010 and 2009 was $0.1 million and less than $0.1 million, respectively. The Company has historically reissued shares from treasury stock or registered shares from 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 lapse of restrictions on restricted (including elections under Internal Revenue Service section 83(b)) in the amount of $0.1 million was recognized for the six months ended June 30, 2010. A tax benefit for the exercise of stock options in the amount of $0.2 million was recognized for the six months ended June 30, 2009. Less than $0.1 million was recorded for excess tax benefits to capital in excess of par for the six months ended June 30, 2009. For the six months ended June 30, 2010 and 2009, stock compensation expense for stock options was $0.4 million and $0.3 million, respectively.

Restricted Shares

During the six months ended June 30, 2010 and 2009, 26,664 and 37,795 restricted stock awards were granted. For the six months ended June 30, 2010 and 2009, stock compensation expense for restricted stock was $0.3 million for each period.

The fair value of nonvested restricted stock is determined based on the closing trading price of the Company’s shares on the grant date. A summary of the status of Company’s nonvested restricted stock as of June 30, 2010, and changes during the six months then ended is presented below:


	Shares			Weighted Average
	(in thousands)			Grant-Date Fair Value
Nonvested at January 1, 2010		215		$	9.91
Granted		27			5.61
Vested		(75	)		9.13
Forfeited		(48	)		11.49

Nonvested at June 30, 2010		119		$	8.80

Stock Appreciation Rights (“SAR”s)

A summary of SARs activity under the Company’s stock incentive plans as of June 30, 2010 and changes during the six months then ended is presented below:


						Weighted Average		Aggregate
	Shares			Weighted Average		Remaining Contractual		Intrinsic Value
	(in thousands)			Exercise Price		Term		(in thousands)
Outstanding at January 1, 2010		717		$	9.60
Granted		—			—
Exercised		—			—
Forfeited		(109	)		9.60
Expired		—			—

Outstanding at June 30, 2010		608		$	9.60		3.01	$	—

Exercisable at June 30, 2010		377		$	9.60		2.13	$	—

There were no SARS granted during the six months ended June 30, 2010. There were 8,719 SARs granted during the six months ended June 30, 2009. All SARs are to be settled in Company stock. For the six months ended June 30, 2010 and 2009, stock compensation expenses for SARs were $0.4 million for each period.

Unrecognized Compensation

As of June 30, 2010, there was $3.5 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, $1.7 million related to stock appreciation rights and $1.3 million related to restricted stock awards. The cost for unrecognized compensation related to stock options, stock appreciation rights and restricted stock awards is expected to be recognized over a weighted average period of 1.95 years, 2.61 years, and 2.14 years, respectively.

4. Accounts Receivable

Accounts receivable consists of the following as of (in thousands):


	June 30,			December 31,
	2010			2009
Trade accounts receivable	$	108,106		$	143,541
Unbilled trade accounts receivable		13,456			32,784
Lease receivables, net		5,302			6,149
Finance receivables, net		12,951			21,626
Vendor and other receivables		3,576			6,392

Total accounts receivable	$	143,391		$	210,492
Less: Allowance for doubtful accounts		(109	)		(223	)
Sales return allowance		(245	)		(674	)

Accounts receivable, net	$	143,037		$	209,595

5. Long-term receivables and other assets

The Company’s long-term receivables and other assets were as follows as of (in thousands):


	June 30,		December 31,
	2010		2009
Lease receivables, net	$	3,264	$	3,531
Finance receivables, net		27,127		28,041
Equity Investment in EyakTek		9,906		7,956
Other Assets		1,080		1,230

Long-term receivables and other assets	$	41,377	$	40,758

6. Lease and Other Receivables

The Company leases computer hardware generally under sales-type leases, which are classified as lease receivables in the accompanying Unaudited Condensed Consolidated Balance Sheets, in accordance with FASB ASC 840Leases. 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 $16.9 million and $16.7 million for the three months ended June 30, 2010 and 2009, respectively, from sales-type leases and related transactions and $26.4 million and $32.7 million for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010, the Company had current and long-term outstanding lease and finance receivables of $52.8 million, compared with $63.3 million as of December 31, 2009.

The Company’s investments in lease receivables were as follows as of (in thousands):


	June 30,			December 31,
	2010			2009
Future minimum lease payments receivable	$	9,702		$	10,719
Unearned income		(1,136	)		(1,039	)

	$	8,566		$	9,680

The Company’s investment in finance receivables was as follows as of (in thousands):


	June 30,			December 31,
	2010			2009
Future minimum payments receivable	$	43,101		$	52,625
Unearned income		(3,023	)		(2,958	)

	$	40,078		$	49,667

7. Transferred Receivables and Financed Lease Debt

For the three months ended June 30, 2010 and 2009, the Company transferred gross financing receivables of $12.3 million and $6.6 million and $20.8 million and $9.1 million for the six months ended June 30, 2010 and 2009, respectively, to third parties that meet the sale criteria under FASB ASC 860,Transfers and Servicing. In exchange, for the three months ended June 30, 2010 and 2009, the Company received cash of $11.7 million and $5.2 million and recorded a gain on the sales of $0.5 million and $0.5 million, respectively. For the six months ended June 30, 2010 and 2009, the Company received cash of $19.7 million and $7.6 million and recorded a gain on the sales of $1.4 million and $0.5 million, respectively. The receivables are transferred non-recourse to third parties who 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.

8. Credit Facility and Credit Agreement

In 2006, the Company entered into a $135 million credit agreement with a group of lenders (the “Credit Facility”). This Credit Facility was terminated on May 27, 2009 and the related unamortized deferred financing costs of $1.5 million were written-off.

On May 27, 2009, we entered into a $135 million credit agreement with Castle Pines Capital LLC (“CPC”) and other lenders (the “Credit Agreement”), which includes inventory financing. The Credit Agreement provides a “vendor and distributor program” under which we receive financing for inventory purchases from several of our largest CPC approved vendors with extended payment terms. The Credit Agreement, which matures on May 27, 2011, 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 Credit Agreement at any time is limited to the lesser of (a) $135 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 June 30, 2010, borrowing capacity and availability under the Credit Agreement was as follows (in thousands):


Total Credit Agreement	$	135,000
Borrowing base limitation		(38,763	)

Total borrowing capacity		96,237
Less: interest-bearing borrowings		—
Less: non-interest bearing advances (floor plan loans)		(51,939	)
Less: letters of credit		(2,432	)

Total unused availability	$	41,866

As of June 30, 2010, the Company had no outstanding loan balance (other than non-interest bearing floor plan loans) under the Credit Agreement and as reflected above, unused available credit thereunder of $41.9 million.

The Credit Agreement contains customary covenants limiting our ability to, among other things (a) incur debt; (b) make guarantees or grant or suffer liens; (c) purchase of our common stock for an aggregate purchase price in excess of $5 million, (d) make certain restricted payments (including cash dividends), purchase of other businesses or 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 Credit Agreement require us, among other covenants, to:

	•		Maintain Tangible Net Worth not less than or equal to $45 million as dated the end of each fiscal month

	•		Maintain Ratio of Total Liabilities to Tangible Net Worth not greater than 5.25 to 1.00 as dated 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 dated the end of each fiscal month.

Furthermore, the 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 as set forth in the Credit Agreement as of June 30, 2010. The Company currently relies on its Credit Agreement as its primary vehicle to finance its operations. If the Company fails to comply with any material provision or covenant of our 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. During 2009, unamortized deferred financing costs of $1.5 million related to the terminated Credit Facility were written-off and recorded to interest expense. Also, the Company deferred $0.1 million of loan financing costs related to the new Credit Agreement in 2009. Deferred financing costs as of June 30, 2010 and December 31, 2009 were less than $0.1 million and $0.1 million, respectively.

9. Accrued Liabilities

Accrued liabilities consist of the following as of (in thousands):


	June 30,		December 31,
	2010		2009
Accrued commissions and bonuses	$	1,680	$	6,113
Accrued income taxes		—		2,864
Future contractual lease obligations		10,730		10,079
Other		6,268		7,071

Total accrued liabilities	$	18,678	$	26,127

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 June 30, 2010 and 2009, anti-dilutive employee stock options and SARs totaling 6,556 and 24,657 weighted-shares, respectively, were excluded from the calculation. Weighted unvested restricted stock awards totaling 16,887 and 25,007, respectively, have been excluded for the three months ended June 30, 2010 and 2009.

For the six months ended June 30, 2010 and 2009, anti-dilutive employee stock options and SARs totaling 10,649 and 29,450 weighted-shares, respectively, were excluded from the calculation. Weighted unvested restricted stock awards totaling 28,768 and 29,812, respectively, have been excluded for the six months ended June 30, 2010 and 2009.

The following table sets forth the computation of basic and diluted loss per share (in thousands except per share data):


	Three months ended						Six months ended
	June 30,						June 30,
	2010			2009			2010			2009
Basic loss per share
Net loss	$	(1,236	)	$	(310	)	$	(5,824	)	$	(4,190	)
Weighted average shares outstanding		9,593			9,700			9,605			9,781

Basic loss per share	$	(0.13	)	$	(0.03	)	$	(0.61	)	$	(0.43	)


Diluted loss per share:
Net loss	$	(1,236	)	$	(310	)	$	(5,824	)	$	(4,190	)
Weighted average shares outstanding		9,593			9,700			9,605			9,781
Incremental shares attributable to the assumed exercise of outstanding stock options		N/A			N/A			N/A			N/A

Weighted average shares and equivalents		9,593			9,700			9,605			9,781

Diluted loss per share	$	(0.13	)	$	(0.03	)	$	(0.61	)	$	(0.43	)

11. Income Taxes

The effective income tax rate benefit was 37.5% and 42.9% for the six months ended June 30, 2010 and 2009. The reduction in the tax rate benefit from 2009 to 2010 was due to non-deductible stock expense during the six months ended June 30, 2010 that did not occur in the same period in 2009.

As of June 30, 2010 and December 31, 2009, GTSI had $0.1 million and $0.2 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.

GTSI’s 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 June 30, 2010 and December 31, 2009. During the first six months of 2010, the amount accrued for interest decreased 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 2010 and beyond.

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 (in thousands):


	Six Months Ended
	June 30,
	2010			2009
Accrued warranties at beginning of period	$	215		$	155
Charges made against warranty liabilities		(15	)		(3	)
Adjustments to warranty reserves		(1	)		(4	)
Accruals for additional warranties sold		8			24

Accrued warranties at end of period	$	207		$	172

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 (in thousands):


	Six Months Ended
	June 30,
	2010			2009
Deferred warranty revenue at beginning of period	$	798		$	221
Deferred warranty revenue recognized		(419	)		(221	)
Revenue deferred for additional warranties sold		445			269

Deferred warranty revenue at end of period	$	824		$	269

Letters of Credit

The Company provided a letter of credit in the amount of $2.4 million as of June 30, 2010 and December 31, 2009 for its office space lease signed in December 2007.

As of December 31, 2009, the Company had an outstanding letter of credit in the amount of $2.7 million to guarantee the performance by the Company of its obligations under specific customer contracts. During the three months ended June 30, 2010, this letter of credit was no longer required and was returned to the financial institution.

Employment Agreements

GTSI has change in control agreements with 12 executives and key employees, and severance agreements with 6 executives. These arrangements provide for payments of as much as 18 months of total target compensation and continuation of benefits upon the occurrence of specified events. As of June 30, 2010, no accruals have been recorded for these agreements.

Contingencies

Currently, and from time to time, GTSI is involved in litigation incidental to the conduct of its business. As of June 30, 2010, GTSI is not a party to any lawsuit or proceeding that, in management’s opinion, is likely to have a material adverse effect on GTSI’s financial position or results of operations.

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 VIE 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 June 30, 2010 and December 31, 2009, the investment balance for EyakTek was $9.9 million and $8.0 million, respectively, and for the six months ended June 30, 2010 and 2009, equity in earnings was $3.9 million and $2.9 million, respectively.

GTSI recognized sales to Eyak and its wholly owned subsidiary of $13.3 million and $0.3 million for the three months ended and $18.4 million and $0.7 million for the six months ended June 30, 2010 and 2009, respectively. GTSI receives a fee from Eyak based on sales from products sold at cost by GTSI to Eyak. Fees recorded by the Company, which are recognized when Eyak sells to third party customers, are less than $0.1 million and $0.1 million for the three months ended and $0.1 million and $0.2 million for the six months ended June 30, 2010 and 2009, respectively, which are included in sales in the accompanying Unaudited Condensed Consolidated Statements of Operations.

The following table summarizes EyakTek’s unaudited financial information for the periods presented in the accompanying Statement of Operations (in thousands):


	Three Months June 30,				Six Months ended June 30,
	2010		2009		2010		2009
Revenues	$	106,769	$	91,096	$	201,254	$	161,819
Gross margin	$	13,150	$	11,667	$	22,342	$	18,544
Net income	$	6,449	$	5,715	$	10,428	$	7,882

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, 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, 2009. 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:

	•		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

	•		Changes in Federal government fiscal spending

	•		Our ability to meet the covenants under our 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

	•		Continued net losses, if we fail to align costs with our sales levels

	•		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 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 GTSI’s business and operations, see Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009. We undertake no obligation to revise or update any forward-looking statements for any reason.

Overview

GTSI has over 26 years of experience in selling IT products and solutions primarily to U.S. Federal, state and local governments and to prime contractors that are working directly under government contracts. We believe our key differentiators to be our strong brand among government customers, extensive contract portfolio, close relationships with wide variety of vendors, and a technology lifecycle management framework approach.

The IT solutions we offer to our customers have a strong product component, along with a services component on many solutions. We connect IT’s leading vendors, products and services inside the core technology areas most critical to government success by partnering with global IT leaders such as Cisco, Microsoft, Oracle, Hewlett Packard, Panasonic and Network Appliance. GTSI has strong strategic relationships with hardware and software industry leading OEMs and includes these products in the solutions provided to our customers.

During the past several years, we have continued our realignment around solutions that we believe will provide us with a greater opportunity for sustained return on investment. We have directed our attention to government solutions, including mobile evidence capture, unified communications, mobile clinical applications, green IT, virtualization and cloud computing.

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 offers leasing arrangements to allow government agencies to acquire access to technology as an evenly distributed operating expense, rather than the much more budget-sensitive and discontinuous capital expenses. We believe this model represents a distinctive advantage to our customers.

Summarized below are some of the possible material trends, demands, commitments, events and uncertainties currently facing the Company:

•

In the near term, we face some uncertainties due to the current business environment. We have experienced a longer contracting process with Federal Government’s Department of Defense agencies, which is one of our traditionally stronger markets. This delay, along with an overall decrease in Federal Government IT spending could have a negative impact on our financial condition, operating performance, revenue, income or liquidity.

•

A shift of expenditures away from programs that we support could 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.

The Company’s financial results for the six months ended June 30, 2010 were negatively impacted by various government agencies spending trends, the weak economy, continued consolidation within the OEM market place, competitive pricing pressures and weak sales activity in certain pockets of the hardware and software commodity segments. During the second quarter of 2010, the Company continued reducing its exposure to costs in non-core assets by terminating its healthcare solutions and human resource practices.

During the six months ended June 30, 2010, the Company has been reviewing the organization’s various divisions and departments and reducing/adding personnel as the Company determines the right level of employees to support the business operations. Management feels that the current employee level of 550 employees, as of July 30, 2010, is the appropriate level at this time. The Company had 615 employees as of February 26, 2010. For the three and six months ended June 30, 2010, the Company recorded severance related costs, which are included in SG&A, of $0.3 million and $0.4 million, respectively. As of June 30, 2010, the Company had $0.1 million in accrued severance, which is expected to be paid out during the three months ended September 30, 2010. We will continue to aggressively manage and reduce operating expenses where possible.

For the quarter ended June 30, 2010 compared to the quarter ended June 30, 2009:

	•		Total sales decreased $29.6 million.

	•		Gross margin decreased $5.6 million.

	•		Selling, General & Administrative expenses decreased $2.8 million.

	•		Interest and other income increased $1.2 million.

	•		Loss before income taxes increased $1.6 million.

	•		Cash used in operations increased $11.7 million.

For the six months ended June 30, 2010 compared to the six months ended June 30, 2009:

	•		Total sales decreased $71.8 million.

	•		Gross margin decreased $7.7 million.

	•		Selling, General & Administrative expenses decreased $3.4 million.

	•		Interest and other income increased $2.3 million.

	•		Loss before income taxes increased $2.0 million.

	•		Cash provided by operations decreased $8.4 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, financing receivables, valuation of inventory, capitalized internal use software, estimated 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, 2009. 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						Six months ended
	June 30,						June 30,
	2010			2009			2010			2009
Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		87.1	%		86.0	%		86.9	%		87.5	%

Gross margin		12.9	%		14.0	%		13.1	%		12.5	%
Selling, general, and administrative expenses		16.0	%		14.8	%		18.5	%		15.3	%

Loss from operations		(3.1	)%		(0.8	)%		(5.4	)%		(2.8	)%
Interest and other income, net		1.6	%		0.6	%		1.4	%		0.4	%

Loss before taxes		(1.5	)%		(0.2	)%		(4.0	)%		(2.4	)%
Income tax benefit		0.6	%		0.1	%		1.5	%		1.0	%

Net loss		(0.9	)%		(0.1	)%		(2.5	)%		(1.4	)%

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								Six months ended
	June 30,								June 30,
Sales by Type	2010				2009				2010				2009
Hardware	$	95.1	70.4	%	$	114.1	69.4	%	$	167.9	70.9	%	$	192.6	62.4	%
Software		25.8	19.1	%		35.7	21.7	%		41.8	17.6	%		85.0	27.5	%
Service		12.0	8.9	%		12.6	7.6	%		22.7	9.6	%		26.9	8.7	%
Financing		2.1	1.6	%		2.2	1.3	%		4.5	1.9	%		4.2	1.4	%

Total	$	135.0	100.0	%	$	164.6	100.0	%	$	236.9	100.0	%	$	308.7	100.0	%


	Three months ended								Six months ended
Sales by Vendor	June 30,								June 30,
(based on YTD 2010 sales)	2010				2009				2010				2009
Cisco	$	35.4	26.2	%	$	24.2	14.7	%	$	56.4	23.8	%	$	36.1	11.7	%
Oracle		23.0	17.0	%		23.9	14.5	%		32.1	13.6	%		30.9	10.0	%
Dell		14.2	10.5	%		9.3	5.7	%		26.7	11.3	%		21.9	7.1	%
Hewlett Packard		9.9	7.3	%		9.1	5.5	%		23.3	9.8	%		19.8	6.4	%
Panasonic		5.3	3.9	%		12.6	7.7	%		10.7	4.5	%		22.8	7.4	%
Others, net of reserves and adjustments		47.2	35.1	%		85.5	51.9	%		87.7	37.0	%		177.2	57.4	%

Total	$	135.0	100.0	%	$	164.6	100.0	%	$	236.9	100.0	%	$	308.7	100.0	%

Three Months Ended June 30, 2010 Compared With the Three Months Ended June 30, 2009

Sales

Total sales, consisting of product, service and financing revenue, decreased $29.6 million, or 18.0% from $164.6 million for the three months ended June 30, 2009 to $135.0 million for the three months ended June 30, 2010. 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 $28.9 million, or 19.3%, from $149.9 million for the three months ended June 30, 2009 to $120.9 million for the three months ended June 30, 2010. Product revenue as a percent of total revenue decreased 1.6% from 91.1% for the three months ended June 30, 2009 to 89.5% for the three months ended June 30, 2010. During the three months ended June 30, 2010, the Company continued to be impacted by an overall decrease in hardware and software revenue due to various government agencies spending trends, the weak economy, weak sales activity in certain pockets of the hardware and software commodity segments, and several large software orders that closed during the three months ended June 30, 2009. Hardware sales decreased $19.0 million, from $114.1 million for the three months ended June 30, 2009 to $95.1 million for the three months ended June 30, 2010. In particular, hardware sales during the three months ended June 30, 2010 to the Army and Navy, decreased by approximately $11 million and $8 million, respectively, two of our largest Department of Defense customers. Software sales decreased $9.9 million, from $35.7 million for the three months ended June 30, 2009 to $25.8 million for the three months ended June 30, 2010, partially due to decreased software sales to the Marines of approximately $5 million during the three months ended June 30, 2010.

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 $31.8 million for the three months ended June 30, 2009 and 2010, respectively. Service revenue decreased $0.6 million, or 4.9% from $12.6 million for the three months ended June 30, 2009 to $12.0 million for the three months ended June 30, 2010. The decrease in service revenue is a result of decreased sales of delivered services, integration and support services. Delivered service revenue decreased $0.2 million, from $9.0 million for the three months ended June 30, 2009 to $8.8 million for the three months ended June 30, 2010. Service revenue as a percent of total revenue increased 1.3% from 7.6% for the three months ended June 30, 2009 to 8.9% for the three months ended June 30, 2010.

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 decreased $0.1 million, or 0.5%, from $2.2 million for the three months ended June 30, 2009 to $2.1 million for the three months ended June 30, 2010.

Although we offer our customers access to products from hundreds of vendors, 64.9% of our total sales in the second quarter of 2010 were products from five vendors; Cisco was our top vendor in the second quarter of 2010 with sales of $35.4 million. Sales from these five vendors increased by $8.7 million, or 11.0% for the three months ended June 30, 2010, mainly due to increased activity with Cisco. As a percent of total sales the second quarter of 2010 top five vendors increased 16.8 percentage points to 64.9% for the three months ended June 30, 2010 from 48.1% for the three months ended June 30, 2009. Our top five vendors may fluctuate between periods because of the timing of certain large contracts. In 2010, we consider Cisco, Microsoft, Oracle, Hewlett Packard, Panasonic, NetApp, Dell, Citrix 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 $5.6 million, or 24.2%, from $23.0 million for the three months ended June 30, 2009 to $17.4 million for the three months ended June 30, 2010. As a percentage of total sales, gross margin for the three months ended June 30, 2010 decreased 1.1% percentage points from the three months ended June 30, 2009. The gross margin activity of each of the three product lines are discussed below.

Product gross margin decreased $5.0 million, or 30.0%, from $16.7 million for the three months ended June 30, 2009 to $11.7 million for the three months ended June 30, 2010. During the three months ended June 30, 2010, the Company’s gross margin was impacted by various government agencies spending trends, an overall decrease in hardware and software revenue, weak sales activity with two of our largest Department of Defense customers, continued pricing pressures from Oracle and our other partners, and several large software orders that closed during the three months ended June 30, 2009. Product gross margin as a percentage of sales decreased 1.5 percentage points from 11.1% for the three months ended June 30, 2009 to 9.6% for the three months ended June 30, 2010. The decrease in product gross margin was negatively impacted by $1.2 million lower gross margin for the three months ended June 30, 2010 from strategic partner programs as compared to the same period of 2009.

Service gross margin decreased $0.6 million, or 12.2%, from $4.9 million for the three months ended June 30, 2009 to $4.3 million for the three months ended June 30, 2010. Service gross margin as a percentage of sales decreased 2.9 percentage points from 39.2% for the three months ended June 30, 2009 to 36.3% for the three months ended June 30, 2010. These gross margin decreases were driven by lower revenue and gross margin in delivery and support services for the three months ended June 30, 2010 as compared to the same period in 2009.

Financing gross margin increased $0.1 million, or 1.7% from $1.4 million for the three months ended June 30, 2009 to $1.5 million for the three months ended June 30, 2010. Gross margin as a percentage of sales increased 1.5 percentage points from 66.4% for the three months ended June 30, 2009 to 67.9% for the three months ended June 30, 2010.

Selling, General & Administrative Expenses (“SG&A”)

During the three months ended June 30, 2010, SG&A expenses decreased $2.8 million, or 11.4% from the same period in 2009. SG&A as a percentage of sales increased to 16.0% in the second quarter of 2010 from 14.8% for the same period in 2009. The decrease in SG&A expenses was mainly due to lower personnel related costs of $2.4 million attributed to lower margins resulting in a $1.6 million reduction of incentive and commission compensation expense and lower salary and related costs of $1.1 million due to lower headcount in 2010 as compared to prior year; partially offset by $0.3 million of severance related costs during the three months ended June 30, 2010.

Interest and Other Income, Net

Interest and other income, net, for the three months ended June 30, 2010 was $2.1 million as compared $0.9 million for the same period in 2009. The improvement in interest income, net, was due to deferred financing costs written off in 2009 and higher equity income from affiliates in 2010; partially offset by a settlement of a legal matter in 2009. During the second quarter of 2009 the old Credit Facility was terminated and the related unamortized deferred financing costs of $1.5 million were written-off to interest expense. Equity income from affiliates related to our equity investments in Eyak Technology, LLC increased by $0.3 million in 2010 compared with prior year.

Income Taxes

GTSI had losses of $2.1 million and $0.5 million before income taxes for the three months ended June 30, 2010 and 2009, respectively.

For the three months ended June 30, 2010, an income tax benefit of $0.8 million was recognized as it is management’s 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 income tax benefit includes less than $0.1 million 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 June 30, 2009, an income tax benefit of $0.2 million was recognized as it is management’s assessment under 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 expense of less than $0.1 million related to the accrual of interest and penalties for uncertain tax positions and payment of state income tax notices. Such benefit was fully offset by the decrease in accrued interest and penalties due to the expiration of applicable statute of limitations.

Six Months Ended June 30, 2010 Compared With the Six Months Ended June 30, 2009

Sales

Total sales, consisting of product, service and financing revenue, decreased $71.8 million, or 23.3% from $308.7 million for the six months ended June 30, 2009 to $236.9 million for the six months ended June 30, 2010. 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 $67.9 million, or 24.5%, from $277.6 million for the six months ended June 30, 2009 to $209.7 million for the six months ended June 30, 2010. Product revenue as a percent of total revenue decreased 1.4% from 89.9% for the six months ended June 30, 2009 to 88.5% for the six months ended June 30, 2010. During the six months ended June 30, 2010, the Company continued to be impacted by an overall decrease in hardware and software revenue due to various government agencies spending trends, the weak economy, weak sales activity in certain pockets of the hardware and software commodity segments, and several large software orders that closed during the six months ended June 30, 2009. Hardware sales decreased $24.7 million, from $192.6 million for the six months ended June 30, 2009 to $167.9 million for the six months ended June 30, 2010. In particular, hardware sales during the six months ended June 30, 2010 to the Army and Navy, decreased by approximately $24 million and $9 million, respectively, two of our largest Department of Defense customers. Software sales decreased $43.2 million, from $85.0 million for the six months ended June 30, 2009 to $41.8 million for the six months ended June 30, 2010, partially due to decreased software sales to the Marines of approximately $19 million during the six months ended June 30, 2010.

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 $49.4 million and $66.0 million for the six months ended June 30, 2009 and 2010, respectively. Service revenue decreased $4.2 million, or 15.6% from $26.9 million for the six months ended June 30, 2009 to $22.7 million for the six months ended June 30, 2010. The majority of the decrease in service revenue is a result of decreased sales of delivered services where we have experienced a more competitive market resulting in less overall projects in 2010. Delivered service revenue decreased $3.4 million, from $20.1 million for the six months ended June 30, 2009 to $16.7 million for the six months ended June 30, 2010. Service revenue as a percent of total revenue increased 0.9% from 8.7% for the six months ended June 30, 2009 to 9.6% for the six months ended June 30, 2010.

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 $0.3 million, or 6.9%, from $4.2 million for the six months ended June 30, 2009 to $4.5 million for the six months ended June 30, 2010; due to increased new lease sales of $1.2 million that were properly securitized under ASC 860; partially offset by $0.6 million decrease in lease residual sales and $0.4 million decrease in annuity streams of in-house leases.

Although we offer our customers access to products from hundreds of vendors, 63.0% of our total sales in the first six months of 2010 were products from five vendors; Cisco was our top vendor in the first six months of 2010 with sales of $56.4 million. Sales from these five vendors increased by $17.7 million, or 13.5%, for the first six months of 2010, mainly due to increased activity with Cisco. As a percent of total sales the first six months of 2010 top five vendors increased 20.4 percentage points to 63.0% for the first six months 2010 from 42.6% for the first six months of 2009.

Gross Margin

Total gross margin, consisting of product, service and financing revenue less their respective cost of sales, decreased $7.7 million, or 19.9%, from $38.7 million for the six months ended June 30, 2009 to $31.0 million for the six months ended June 30, 2010. As a percentage of total sales, gross margin for the six months ended June 30, 2010 increased 0.6% percentage points from the six months ended June 30, 2009. The gross margin activity of each of the three product lines are discussed below.

Product gross margin decreased $5.7 million, or 22.1%, from $25.6 million for the six months ended June 30, 2009 to $19.9 million for the six months ended June 30, 2010. During the six months ended June 30, 2010, the Company’s gross margin was impacted by various government agencies spending trends, an overall decrease in hardware and software revenue, weak sales activity with two of our largest Department of Defense customers, continued pricing pressures from Oracle and our other partners, and several large software orders that closed during the six months ended June 30, 2009. The decrease in product gross margin was negatively impacted by $1.4 million lower gross margin for the six months ended June 30, 2010 from strategic partner programs as compared to the same period of 2009. Product gross margin as a percentage of sales increased 0.3 percentage points from 9.2% for the six months ended June 30, 2009 to 9.5% for the six months ended June 30, 2010.

Service gross margin decreased $1.9 million, or 18.7%, from $9.9 million for the six months ended June 30, 2009 to $8.1 million for the six months ended June 30, 2010. Service gross margin as a percentage of sales decreased 1.4 percentage points from 37.0% for the six months ended June 30, 2009 to 35.6% for the six months ended June 30, 2010. These gross margin decreases were driven by lower revenue and gross margin in delivery and support services for the six months ended June 30, 2010 as compared to the same period in 2009.

Financing gross margin decreased $0.2 million, or 6.5% from $3.2 million for the six months ended June 30, 2009 to $3.0 million for the six months ended June 30, 2010 due to decreased revenue on lease residual sales and lower annuity streams of in-house leases during the six months ended June 30, 2010 as compared to the same period in 2009; partially offset by an increase in the sale of leases that were properly securitized. Gross margin as a percentage of sales decreased 9.4 percentage points from 75.2% for the six months ended June 30, 2009 to 65.8% for the six months ended June 30, 2010, due to an increase in new lease sales for the six months ended June 30, 2010, which generally have a lower gross margin percentage than other financing activities.

Selling, General & Administrative Expenses (“SG&A”)

During the six months ended June 30, 2010, SG&A expenses decreased $3.4 million, or 7.3% from the same period in 2009. SG&A as a percentage of sales increased to 18.5% in the first six month of 2010 from 15.3% for the same period in 2009. The decrease in SG&A expenses was mainly due to lower personnel related costs of $2.8 million attributed to lower margins resulting in a $2.1 million reduction of incentive and commission compensation expense and lower salary and related costs of $0.8 million due to lower headcount in 2010 as compared to prior year; partially offset by $0.4 million of severance related costs during the six months ended June 30, 2010.

Interest and Other Income, Net

Interest and other income, net, for the six months ended June 30, 2010 was $3.6 million as compared $1.3 million for the same period in 2009. The improvement in interest income, net, was due to deferred financing costs written off in 2009 and higher equity income from affiliates in 2010; partially offset by a settlement of a legal matter in 2009. During the second quarter of 2009 the old Credit Facility was terminated and the related unamortized deferred financing costs of $1.5 million were written-off to interest expense. Equity income from affiliates related to our equity investments in Eyak Technology, LLC increased by $0.9 million in 2010 compared with prior year.

Income Taxes

GTSI had losses of $9.3 million and $7.3 million before income taxes for the six months ended June 30, 2010 and 2009, respectively.

For the six months ended June 30, 2010, an income tax benefit of $3.5 million was recognized as it is management’s 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. The $3.5 million tax benefit includes an offset $0.3 million expense for non-deductible stock option expense.

For the six months ended June 30, 2009, an income tax benefit of $3.1 million was recognized as it is management’s assessment under 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 expense of less than $0.1 million related to the accrual of interest and penalties for uncertain tax positions and payment of state income tax notices. Such benefit was fully offset by the decrease in accrued interest and penalties 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 U.S. Federal Government, either directly or indirectly through system integrators for which GTSI is a sub-contractor. 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 GTSI’s 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 government’s 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 GTSI’s quarterly and annual financial results difficult to predict and subject to significant fluctuation.

Liquidity and Capital Resources

Cash flows for the three months ended June 30,


(in millions)	2010			2009			Change

Cash provided by operating activities	$	9.6		$	17.9		$	(8.3	)
Cash used in investing activities	$	(0.2	)	$	(0.7	)	$	0.5
Cash provided by financing activities	$	16.2		$	5.8		$	10.4

During the six months ended June 30, 2010, our cash balance increased $25.6 million from our December 31, 2009 balance. The non-interest bearing advances under our Credit Agreement, which are classified as Accounts Payable — floor plan on our 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 six months ended June 30, 2010 was $9.6 million, a decrease of $8.3 million compared to the same period last year. The decrease was primarily due to a $49.3 million decrease in accounts payable for the six months ended June 30, 2010, as compared to a $4.7 million decrease in accounts payable for the same period in 2009; partially offset by a $66.6 million decrease in accounts receivable for the six months ended June 30, 2010, as compared to a $40.5 million decrease in accounts receivable for the same period in 2009 and a $4.9 million decrease in inventory for the six months ended June 30, 2010, as compared to a $5.3 million increase in inventory for the same period in 2009.

Cash used in investing activities for the six months ended June 30, 2010 was $0.2 million, a decrease of $0.5 million as compared with the same period in 2009. This decrease was due to higher purchases of assets in 2009 related to GTSI’s Enterprise Management System.

Cash used in financing activities for the six months ended June 30, 2010 was $16.2 million, an increase of $10.4 million as compared to $5.8 million for the same period in 2009. The increase was due to $17.1 million net floor plan advances under the Credit Agreement for the six months ended June 30, 2010, $22.4 million net repayments for the six months ended June 30, 2009 under the Credit Facility that was terminated in May 2009; partially offset by $29.2 million net floor plan advances under the Credit Agreement for the six months ended June 30, 2009, and common stock purchases of $0.9 million during the six months ended June 30, 2010 as compared to $1.4 million of common stock purchases during the six months ended June 30, 2009.

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”), which includes inventory financing. The Credit Agreement provides a “vendor and distributor program” under which we receive financing for inventory purchases from several of our largest CPC approved vendors with extended payment terms. Borrowing under the Credit Agreement at any time is limited to the lesser of (a) $135 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 June 30, 2010, borrowing capacity and availability under the Credit Agreement was as follows (in thousands):


Total Credit Agreement	$	135,000
Borrowing base limitation		(38,763	)

Total borrowing capacity		96,237
Less: interest-bearing borrowings		—
Less: non-interest bearing advances (floor plan loans)		(51,939	)
Less: letters of credit		(2,432	)

Total unused availability	$	41,866

The Credit Agreement contains customary covenants that the Company is required to meet. The Company was in compliance with all financial and informational covenants as set forth in the Credit Agreement as of June 30, 2010. The Company currently relies on its Credit Agreement as its primary vehicle to finance its operations. If the Company fails to comply with any material provision or covenant of our Credit Agreement, it would be required to seek a waiver or amendment of covenants.

Liquidity

Our working capital as of June 30, 2010 decreased approximately $3.4 million from our working capital at December 31, 2009. GTSI’s current assets decreased $42.3 million as of June 30, 2010 when compared to our December 31, 2009 balance. This decrease is due to a decrease in accounts receivable of $66.6 million which was partially offset by an increase in cash of $25.6 million. The decrease in accounts receivable is due to the normal seasonality of our business coupled with weaker sales for the six months ended June 30, 2010. The increase in cash is due to the use of the Credit Agreement’s non-interest bearing floor plan arrangement along with better cash management and collection efforts. Current liabilities decreased $38.9 million due to a decrease in accounts payable of $49.3 million partially offset by an increase in accounts payable — floor plan of $17.1 million mainly due to the seasonality of our business.

During the second quarter of 2009, the Company began using the extended channel financing arrangement in the Credit Agreement for inventory financing and working capital requirements. Our balance outstanding as of June 30, 2010 under this program was $51.9 million with additional availability of $41.9 million. We also use vendor lines of credit to manage purchasing and maintain a higher level of liquidity. As of June 30, 2010, the balance outstanding under these vendor lines of credit, which represent pre-approved purchasing limits with normal payment terms, was $30.0 million with additional availability of $51.1 million.

On June 8, 2009, our 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 (the “Program”). During the three months ended June 30, 2010, 76,479 shares have been repurchased under the Program at an average market price of $5.95 per share.

Recent distress in the financial markets has had an adverse impact on financial market activities including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. We have assessed the implications of these factors on our current business and determined the decrease in available funds has resulted in an increase in the cost of funds, negatively impacting the margin percentage, but do not believe will have a material impact to the Company.

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. Our Credit Agreement with CPC matures on May 27, 2011. We are currently discussing an extension with CPC with similar terms and expect to have in place a new agreement or extension to the current agreement in place prior to its maturity in 2011. We anticipate that we will continue to rely primarily on operating cash flow, vendor credit and our 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

SEC Comment Letter

On June 7, 2010, we received a comment letter from the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff”), regarding our Form 10-K for the year ended December 31, 2009, Form 10-Q for the quarterly period ended March 31, 2010 and Form 8-K filed May 11, 2010. The SEC comments included questions regarding: (i) filing of material contracts under Regulation S-K, (ii) management discussion and analysis of overall material trends, demands, commitments, events and uncertainties, along with expanding explanations for changes in revenue and gross margin, (iii) executive compensation and (iv) 8-K filings.

On June 28, 2010, we filed our response. On July 14, 2010, we received a letter from the Staff with one follow-up question for which we filed a response on July 26, 2010. While we do not believe that there are any material open items, since this matter has not been resolved with the Staff we have no assurance that no material open item exists.

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 (“FDIC”) insurance limit. Management monitors balances in excess of insured limits and believes they do not represent a significant credit risk to the Company.

On May 27, 2009, GTSI 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 CPC approved vendors with extended payment terms. The Credit Agreement, which matures on May 27, 2011, 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.

This 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 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 June 30, 2010 and December 31, 2009, the Company had no outstanding loan balance (other than non-interest bearing floor plan loans) and an available credit of $41.9 and $82.9 million, respectively. We have not used derivative instruments to alter the interest rate characteristics of our borrowings.

Long-term debt includes amounts related to lease transactions, which is disclosed in Note 7 as long-term financed lease debt. These amounts will amortize over the period of the lease instruments with no cash affect to the Company. A change in interest rates would result in no additional interest expense related to financed lease debt. We had no long-term debt and long-term financed lease debt as of June 30, 2010 and December 31, 2009.

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 and Chief Financial Officer, 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 June 30, 2010. Based on this evaluation, our chief executive officer and chief financial officer 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 SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, 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.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the three months ended June 30, 2010 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

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 claims 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 U.S. Government investigate whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. Government investigations of us, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or could lead to suspension or debarment from future U.S. Government contracting. U.S. Government investigations often take years to complete and many result in no adverse action against us. We believe, based upon current information, that the outcome of any such government investigations will not have a material adverse effect on our financial position.

Item 1A. Risk Factors

In addition to the other information set forth in this Form 10-Q and our 2009 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 2009 Form 10-K. There has been no material changes to the risk factors discussed in our 2009 Form 10-K. The risks discussed in our 2009 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial also may materially adversely affect our business, financial condition and/or results of operations in the future.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Recent Sales of Unregistered Sales

None.

(b) Use of Proceeds

None.

On December 19, 2008, the Company’s Board of Directors (the “Board”) authorized a program for periodic purchases of GTSI common stock over a 24 month period in an aggregate amount not to exceed two million shares. On June 8, 2009, the Board 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 GTSI’s stock repurchase program announced in December 2008. The following table sets forth the purchases of our common stock we made during the three months ended June 30, 2010:


	(a)				Total Number of		Maximum Dollar
	Total				Shares Purchased		Value of Shares
	Number		Average		as Part of		that May Yet Be
	of Share		Price Paid		Publicly Announced		Purchased Under the
Period	Purchased		per Share		Plans or Programs		Plans or Programs

April 1 to April 30		31,657	$	5.83		31,657	$	2,115,024
May 1 to May 31		27,622	$	6.29		27,328	$	1,943,065
June 1 to June 30		17,494	$	5.64		17,494	$	1,844,384

		76,773	$	5.95		76,479


(a)		The May purchases include 294 shares surrendered to cover the tax withholding obligation with respect to the vesting of 911 restricted stock awards.

Item 3. Defaults Upon Senior Securities

None.

Item 4. RESERVED

Item 5.OtherInformation

None.

Item 6. Exhibits

The exhibits set forth in the Exhibit Index are filed as part of this Quarterly Report on Form 10-Q.

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: August 5, 2010		/s/ SCOTT W. FRIEDLANDER Scott W. Friedlander
		President and Chief Executive Officer

Date: August 5, 2010		/s/ PETER WHITFIELD Peter Whitfield
		Senior Vice President and Chief Financial Officer

EXHIBIT INDEX


Exhibit
Number		Description

	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)

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. sophomore Avg

GTSI (GTSI) Inactive 10-Q2010 Q2 Quarterly report

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