SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
----------------------
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003 Commission File No. 0-19394
GTSI Corp.
(Exact name of registrant as specified in its charter)
Delaware 54-1248422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3901 Stonecroft Boulevard, Chantilly, Virginia 20151-1010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 502-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.005 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Act). [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the Common Stock on June 30,
2003, as reported on The Nasdaq Stock Market, was $71,782,970.
The number of shares outstanding of the registrant's Common Stock on
March 1, 2004, was 8,568,087.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference
to the proxy statement to be filed in connection with the Annual Meeting of
Shareholders to be held on April 29, 2004.
PART I
Item 1. BUSINESS.
This report contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, among others, those
statements including the words "expect," "anticipate," "intend," "believe" and
similar expressions. Our actual results could differ materially from those
discussed in this report. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date filed.
Company Overview
GTSI Corp., a Delaware Corporation ("GTSI" or the "Company"), is a
recognized information technology solutions leader, providing products and
services to U.S. Federal ("Government"), state and local government and systems
integrator customers worldwide. Founded in 1983, GTSI has more than 20 years of
government-focused experience, making it one of the most experienced, stable
information technology ("IT") solutions providers to federal, state and local
agencies. GTSI's complete product and solution offering, technical expertise,
logistics strengths, extensive contracts portfolio, customer relationships, and
proven performance record make GTSI equally valuable to government customers and
technology partners.
GTSI offers its customers a convenient and cost-effective centralized
source for computer, workstation, software, networking and other IT solutions
through GTSI's broad selection of popular products and services at competitive
prices. The Company specializes in understanding both the various IT needs and
the procurement processes of government customers. GTSI sells to most
departments and agencies of the Government, state and local governments and
systems integrators and prime contractors selling to the government market. In
2003, GTSI's sales directly to Government agencies, to prime contractors for
resale to Government agencies and to state and local government agencies
accounted for 85%, 12% and 3% of sales, respectively.
GTSI currently offers access to approximately 400,000 IT products from
over 750 key manufacturers, including HP (Hewlett-Packard), Microsoft,
Panasonic, Sun Microsystems, and Cisco Systems. The Company believes it provides
its vendor partners with a low-cost marketing and distribution channel to the
many end-users constituting the government market, while substantially
insulating these partners from the complex government procurement rules and
regulations.
GTSI fulfills many of its customer orders from its state-of-the-art
200,000 square-foot distribution center located in Chantilly, Virginia. The
Company stocks many popular IT products to enable quick delivery to its
customers. In addition, the Company leverages the distribution center and its
logistics expertise to offer a wide variety of managed fulfillment services to
its customers. Within the distribution center, the Company manages a 30,000
square-foot integration center where it performs a number of value add services
including standard hardware integration, customer image propagation, automated
system diagnostics and data capture, customer asset tagging, and complex
configurations of Voice Operated Internet Protocol or VOIP solutions. The
Company's distribution and integration operations are ISO 9002 certified.
"GTSI" is a registered service mark of GTSI Corp. All other trademarks
and service marks are proprietary to their respective owners.
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Business Strategy
GTSI is committed to, and focused on, the government customer. The
Company's business strategy is to continue to grow GTSI's higher-end enterprise
solutions and to broaden its product offerings, while remaining a low-cost,
reliable provider of commodity products. The Company's strategy is to increase
revenue and market share, while improving operating and net margin percentage.
Federal Government IT spending has grown at a 14% compounded annual rate since
2000, and the Company believes that government IT spending will continue to be
robust in the foreseeable future. The Company plans to increase its work force
and broaden its product and service offerings to take advantage of this growing
market. GTSI has undertaken a number of initiatives consistent with this revenue
and earnings growth strategy.
Focus on the Growing Government IT Market. Because of its historical
focus on the government market, GTSI has developed the expertise and established
the partner and customer relationships necessary to be a leader in this market.
As a result, GTSI's marketing and sales force is effective at reaching and
servicing the government market, which consists of procurement and contracting
officers, information resource managers, CIOs (Chief Information Officer) and
government IT executives, systems integrators, value-added resellers, prime
contractors and a wide array of end-users. The Company continues to increase its
sales organization to widen customer coverage and broaden its product, solutions
and services offerings. In addition, by concentrating on the government market,
the Company has avoided the higher credit risk of commercial customers.
Execute New Government Contracts and Utilize Flexible Contract
Vehicles. The Company holds a wide range of Government contracts, including
multimillion dollar, multiyear contracts with the Department of Defense ("DoD")
and certain civilian agencies, as well as several multiple award schedules and
blanket purchasing agreements with a variety of DoD and civilian agencies. GTSI
also serves as a subcontractor providing products and services to companies
holding Government contracts. The Company intends to continue to identify and
pursue those contract vehicles that best leverage GTSI's broad product
selection, services, distribution capabilities and partner relationships.
Provide a High-Quality Centralized Source for Procuring IT Products and
Services. In addition to offering a full line of computer hardware, software and
peripheral products, GTSI offers its customers pre- and post-sale technical
support and assistance in the selection, configuration, installation and
maintenance of the products and systems that GTSI sells. Furthermore, by
offering a wide range of IT products through a variety of procurement
mechanisms, GTSI offers its customers the convenience, flexibility and cost
savings of purchasing from a centralized source. GTSI believes that its
convenient "one-stop shop" is an important factor in its success in the
government market. In its interactions with its customers, GTSI employees focus
on providing high quality customer service associated with the order, delivery,
installation and repair of its products. In addition to its product offerings,
GTSI now offers service solutions to meet its customers needs in networking and
telecommunications, storage and continuity of operations solutions, enterprise
software deployment and managed logistics support.
Establish and Maintain Strong Partner Relationships. To provide a
centralized source of products and solutions for its customers, GTSI maintains
strong relationships with leading hardware, software and services partners. GTSI
offers its partners a wide range of marketing and sales services, which provide
them with access to the millions of end-users constituting the government
market. In addition, the Company insulates its partners from the procurement
regulatory complexities, costs and complicated billing requirements associated
with the government market.
Improve Internal Efficiencies. GTSI has undertaken a variety of
activities aimed at improving financial performance. The Company believes that
improved product pricing, supply chain management, quality and expense control
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will lead to improved operating and net margins. In addition, efforts to
increase employee productivity, including training and improved technology,
should improve profitability.
Customers
The Company's customers are primarily federal, state and local
government agencies and prime contractors to the Government, including systems
integrators. In 2003, the Company sold products or services to most agencies and
major departments of the Government, to many state governments and to hundreds
of prime contractors. The Company's customer mix in 2003 was 40% Department of
Defense, 33% Civilian agencies and departments, 22% prime contractors, and 5%
state and local government business.
The Company's sales are highly dependent on the Government's demand for
IT products. Although the Company does not believe that the loss of any single
customer would have a materially adverse effect on it, a material decline in its
overall sales to the Government as a whole or to certain key agencies thereof
could have such an effect. Furthermore, changes in the structure, composition or
buying patterns of the Government could affect the Company's future operating
results.
The Government Procurement Process
The Company achieves its sales primarily through contracts with the
Government and through open market sales. Company contracts with the government
include a General Services Administration ("GSA") Schedule contract, indefinite
delivery/indefinite quantity contracts ("IDIQ"), Blanket Purchase Agreements
("BPAs"), state and local contracts and open market procurements.
GTSI pursues formal Government bids for IDIQ contracts and for BPAs.
Substantially all of these bids are awarded on a "best value" to the Government
basis (which, depending on the bid, can be a combination of price, technical
expertise, past performance on other Government contracts and other factors).
GTSI seeks to use its partner contacts, purchasing power, distribution strength
and procurement expertise to compete successfully for the business. These major
procurements may equal millions of dollars in total revenues, span many years,
and provide a purchasing vehicle for many agencies. In some cases, various
government agencies levy a fee on purchases made by departments outside of the
agency that awarded the contract. These fees are collected by the Company and,
as under the GSA Schedule contract, remitted to the respective agency on a
contract specified payment schedule.
GSA Schedule Contracts
GTSI holds a GSA designated Schedule 70 contract for the sale of IT
products and services. Schedule 70 contracts are multi-award schedule contracts
managed by the GSA IT Acquisition Center. In March 2002, the Government formally
exercised its first of three five-year options to extend GTSI's GSA Schedule 70
contract through 2007. GSA Schedule contracts provide all Government agencies,
certain international organizations and authorized prime contractors with an
efficient and cost-effective means for buying commercial products. GSA Schedule
Purchasers may place unlimited orders for products under GSA Schedule contracts.
Products offered under the Schedule 70 contract include workstations,
desktops, laptops, notebooks, servers, laser printers, color printers, scanners,
monitors, modems, hard drives, memory, networking products, facsimile products,
internet and extranet products, video teleconferencing, maintenance, training
and services. Products may be added to the Schedule 70 contract during the term
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under certain circumstances. GSA Schedule contracts include a GSA administrative
fee calculated on the product price. This fee is collected by the Company and is
remitted on a quarterly basis.
GTSI's GSA Schedule 70 contract contains price reduction clauses
requiring that GTSI pass on to Government customers certain reduced prices GTSI
may receive from its partners during a contract's term, but prohibits GTSI from
passing on partner price increases for a period of one year. To mitigate the
potential adverse impact of any such price increase, the Company requires
substantially all partners acting as suppliers to GTSI under its GSA Schedule
contracts to provide GTSI with supply and price protection.
IDIQ Contracts
In 2003, GTSI held seven IDIQ contracts. IDIQ contracts offer greater
flexibility than GSA Schedule contracts as they allow products to be added
expeditiously and allow contractors more pricing flexibility. IDIQ contracts are
pre-competed; therefore, orders placed under these contracts are not subject to
protest unless the order is beyond the scope of the contract. There are three
types of IDIQ contracts, government-wide acquisition contracts ("GWACs"),
multi-agency contracts ("MAC"), and single agency contracts. A GWAC is a
task-order or delivery-order contract for information technology established by
a single federal agency for Government-wide use upon approval by OMB (Office of
Management and Budget), while MACs are task-order or delivery-order contracts
that accept orders from other agencies under the authority of the Economy Act.
Four of GTSI's seven IDIQ contracts are GWACs. They include GTSI's
three contracts with the National Air and Space Administration called Scientific
Engineering Workstation Procurement (SEWP) III contracts. Each of GTSI's SEWP
III contracts relates to a specific category of IT products. GTSI also holds a
contract with the National Institute of Health called the Electronic Commodity
Store (ECS) III contract. GWACs allow all federal agencies to utilize the
contracts. GTSI's Maxi-Minis and Databases ("MMAD") and Information Technology
Enterprise Solutions ("ITES") contracts with the Army are MACs, and GTSI's
Procurement of Computer Hardware and Software-2 contract ("PCHS-2") with the
Veterans Administration ("VA") is a single agency contract that is limited to
the VA.
GTSI's SEWP III contracts expire on July 30, 2006. The ECS III contract
expires on November 26, 2012. The MMAD contract expires on May 25, 2004 and has
two one-year extension options. The ITES contract expires November 1, 2006 and
has two twenty four-month extension options. The PCHS-2 contract expires on
April 2, 2004 and has three one-year extension options. The contract is
currently in its first year of the three one-year extension options and
the Company anticipates the second option year will commence in April 2004.
Products offered under these contracts include workstations, desktops,
laptops, notebooks, servers, printers, scanners, monitors, modems, hard drives,
memory, networking products, facsimile products, internet and intranet products,
video teleconferencing, maintenance, training and services. Products may be
added to the contracts under certain circumstances. The Products are sold under
the contracts at a fixed price; however, the government typically negotiates a
lower price for large quantity or high value orders. In addition, some of these
contracts include an administrative fee calculated on the product price. The
Company collects this fee and remits it on a quarterly basis to the contract's
administering agency.
Blanket Purchase Agreements
Individual GSA ordering agencies may enter into GSA-authorized BPAs
with GSA Schedule contract holders. BPAs are similar to second-tier contracts
under a contractor's GSA Schedule contract. BPAs enable agencies to obtain
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better pricing based on volume ordering and they decrease an agency's
administrative costs by streamlining the ordering process.
GTSI maintains several Federal Schedule Supply BPAs that are authorized
under our GSA Schedule 70 contract. GSA authorized BPAs incorporate many terms
and conditions of the GSA Schedule contracts and incorporate many products
offered on GSA Schedule contracts, often at lower prices than available on the
GSA Schedules. GTSI normally enters into separate agreements with partners to
offer reduced BPA prices to the Government. GTSI's BPAs are agency specific and
allow GTSI to focus specific partner relationships on specific customers.
GTSI maintains BPAs with several Government agencies including the
Federal Railroad Administration, State Department, Treasury Department,
Environmental Protection Agency, U.S. Courts, Army, Navy, Marine Corps and Air
Force. The Company normally enters into separate agreements with partners to
offer reduced BPA prices to these Government agencies.
State and Local Contracts
In 2003, GTSI was awarded U.S. Communities, a multi-state contract
available to cities, counties, special districts (airport, water, etc.), state
agencies, schools and large non-profits, such as hospitals and clinics. In
addition, GSA now allows state and local government agencies to utilize GSA
Schedules. Multi-state contracts enable individual states to utilize the buying
power of multiple states, which results in lower costs based upon volume
purchasing. The initial term of the U.S. Communities contract expires on May 1,
2006 and the contract has three one-year extension options.
Products offered under multi-state contracts include workstations,
desktops, laptops, notebooks, servers, printers, scanners, monitors, modems,
hard drives, memory, networking products, facsimile products, internet and
intranet products, video teleconferencing, maintenance, training and services.
Products may be added to the contract under certain circumstances. The products
are sold under the contract at a fixed price; however, the government typically
negotiates a lower price for large quantity or high value orders. In addition,
these contracts include an administrative fee calculated on the product price.
The Company collects this fee and remits it on a quarterly basis to the
contract's administering agency.
Many purchases in the state and local government market are still made
through individual competitive procurements, although many state and local
governments issue invitations for bid for statewide computer term contracts.
State and local procurements typically require formal responses from a
prospective bidder. Each state maintains a separate code of procurement
regulations that must be understood and complied with to market and sell
successfully to that state. GTSI currently maintains several state and local IT
contracts, regularly submits oral and written bids to state and local
governments and is on a number of state and local government bid lists.
Open Market
GTSI also sells many IT products through open market procurements.
These procurements are separate and apart from GSA Schedules, IDIQs and BPAs.
Open Market procurements include simplified acquisition procedures, requests for
quotes, invitations for bids and requests for proposals. The Company is on most
Government bid lists relevant to its product offerings and responds with
proposals to hundreds of such bid solicitations each year. The Company also
sells to Government prime contractors, including systems integrators, through
open market procurements.
6
Government Market Considerations
A substantial portion of the Company's contracts are fixed-price and
IDIQ. The uncertainties related to future contract performance costs, product
life cycles, quantities to be shipped and delivery dates, among other factors,
make it difficult to predict the future sales and profits, if any, that may
result from such contracts.
GTSI qualified as a "small business" under its ITES, GSA Schedule
contract, and BPAs it held in 2003 based upon GTSI's size status at the time of
the contracts' original award. As a small business, GTSI enjoys a number of
benefits, including being able to compete for small business set-aside
contracts, qualifying as a small business subcontractor, bidding pursuant to
small purchase procedures directed to non-manufacturer small business, and
offering Government Agencies an avenue to meet their internal small business
purchase goals.
A company's size status under a contract is based on the North American
Industry Classification System ("NAICS") Code referenced in the subject
contract's solicitation. Dependent on the NAICS Code referenced in a
solicitation, GTSI may or may not qualify as a small business for new contract
awards. Under a Federal Acquisition Regulation (FAR) Deviation issued by GSA on
October 10, 2002, GTSI will be required to recertify its size status on its GSA
Schedule Contract no later than 2007. At such time, GTSI may not qualify as a
small business for new contract awards under the GSA Schedule. In addition, new
legislation or regulations may require GTSI to recertify its size status on its
GSA Schedule sooner than 2007. GTSI cannot predict whether it would continue to
qualify as a small business at the time of recertification. To mitigate any
potential adverse impact, GTSI has developed strategic relationships with small
minority-owned businesses that benefit from the small business benefits
described above. GTSI acts as both a supplier and prime contractor to these
small minority-owned businesses.
Noncompliance with Government procurement regulations or contract
provisions could result in termination of Government contracts, substantial
monetary fines or damages, suspension or debarment from doing business with the
Government and civil or criminal liability. During the term of any suspension or
debarment by any Government agency, the contractor could be prohibited from
competing for or being awarded any contract by any Government agency. In
addition, substantially all of the Company's Government contracts are terminable
at any time at the Government's convenience or upon default. Upon termination of
a Government contract for default, the Government may also seek to recover from
the defaulting contractor the increased costs of procuring the specified goods
and services from a different contractor. The effect of any of these possible
Government actions or the adoption of new or modified procurement regulations or
practices could adversely affect the Company.
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its operations as a result of
Government buying and funding patterns. Although these patterns have
historically led to sales being concentrated in the Company's third and fourth
quarters, the seasonality and the unpredictability of the factors affecting such
seasonality make GTSI's quarterly and yearly financial results difficult to
predict and subject to significant fluctuation. While government sales are
weaker in the first and second quarter and stronger in the third and fourth
quarter, GTSI's operating expenses are more level throughout the year. As such,
first and second quarter earnings are typically well below those of the third
and fourth quarters.
Products, Solutions and Services
GTSI is the leading, dedicated Business-to-Government provider of IT
solutions. The Company continuously monitors and evaluates existing and emerging
technologies to ensure that it offers its customers state-of-the-art technology
7
products and solutions. A pioneer in government-focused electronic commerce,
GTSI also offers simplified buying through its website, www.gtsi.com.
Hardware. GTSI has strong strategic relationships with established
global market leaders, including Apple, Cisco, EMC, IBM, HP, Panasonic, SONY,
Sun Microsystems, Gateway, and Xerox. In addition to reselling platform
solutions, peripherals resold by the Company include disk drives, CD-ROM and DVD
drives, printers, monitors, modems and related products. GTSI's networking
products, including LANs, WANs, MANs (metropolitan area network) and PANs
(personal area network), are supplemented by the Company's services, which
include assisting customers in selecting, configuring, installing and
maintaining networks.
Software. The Company remarkets computer software solutions from
substantially every leading Windows-based software publisher, as well as leading
UNIX, Linux and Apple products. The Company's software partners include Adobe,
Network Associates, Citrix, IBM/Lotus, Microsoft, MicroStrategy, Sun
Microsystems, Symantec, and Veritas.
Solutions. The Company has eleven technology and solutions teams, each
including technical, business development and management professionals dedicated
to selling and supporting systems and solutions in a specific technology area
(such as enterprise servers and storage, mobile and wireless, enterprise
software, and security) or for a particular partner product line (such as, HP,
Microsoft, Sun Microsystems).
Services. GTSI provides professional management of the creation and
delivery of services to our customers. GTSI's Services Solutions capitalize on
core business capabilities through managed fulfillment and support services,
implementation of technical product services, and technology consulting
services, either through our own business resources or through our alliance with
partners.
Partner Relationships
To offer its customers a centralized source for their IT needs, the
Company establishes and maintains relationships with key partners and offers
them a number of advantages, including:
o Proactive sales of products and solutions
o Access to the government market through a significant number
of diverse contract vehicles and a large and experienced sales
organization;
o Lower costs to comply with procurement regulations involved in
selling directly to the government market;
o Lower operating costs related to reduction or elimination of
selling, marketing and various administrative programs; and
o Participation in value-added services, including numerous
government-specific marketing programs and end-user technical
support.
The terms of the Company's agreements with its partners vary widely,
but typically permit the Company to purchase products for resale to the
government market. Virtually none of the Company's partner agreements requires
the Company to purchase any specified quantities of product. The Company
typically requires partners acting as suppliers to GTSI under its term
Government contracts to provide GTSI with supply and price protection for the
duration of such contracts. Other than supply agreements under term Government
contracts, the Company's partner agreements are typically terminable by the
partner on short notice, at will or immediately upon default by GTSI and may
contain limitations on partner liability. These partner agreements also
generally permit GTSI to return previous product purchases at no charge within
8
certain time limits for a restocking fee or in exchange for other products of
such partner. The Company also purchases some products from independent
distributors.
Partners provide the Company with various forms of marketing and sales
assistance, including sales incentives and market development funds. Partners
provide sell-through and other sales incentives in connection with certain
product promotions. Additionally, key partners participate with the Company in
cooperative advertising and sales events and typically provide funding which
partially offsets the costs of such efforts.
The Company needs to continue to obtain products at competitive prices
from leading partners to provide a centralized source of price-competitive
products for its customers and to be awarded government contracts. GTSI believes
its relationships with its key partners to be good. The Company, however, could
be adversely affected if one or more key partners determined to sell directly to
the Government, to sell their products to GTSI's competitors on more favorable
terms than to GTSI, to allow additional resellers to represent their products,
or to restrict or terminate GTSI's rights to sell their products.
Marketing and Sales
The Company's marketing personnel develop and manage the Company's
marketing, branding and positioning activities on a worldwide basis. These
activities communicate the Company's capabilities and value proposition in an
effort to acquire new customers and improve retention of existing customers.
Most marketing activities are funded by the Company's partners. Each marketing
activity is integrated to provide comprehensive awareness, brand consistency and
maximize return on investment.
The Company's marketing activities include sponsorship of major trade
shows and customer events, advertising in government-focused publications and
broadcast media, solutions focused collateral, management of e-commerce web
sites located at GTSI.COM and GTSIDIRECT.COM, e-mail marketing, outbound
telemarketing and sales-related incentive programs. The Company develops and
distributes two publications, the enterprise solution focused ClarITy and the IT
product focused GTSIDirect.
GTSI recognizes that the size and diversity of the government market
made it imperative for GTSI to identify and understand the needs of customers.
Through years of intensive effort, GTSI has compiled and continuously updates
one of the most comprehensive databases of federal, state and local government
IT decision-makers. The Company conducts frequent customer surveys to assess the
opinions and interests of our customer base. The Company maintains a database
that contains an extensive list of agency procurement and contracting officers,
information resource managers, senior policy makers, technology influencers,
end-users, systems integrators, VARs and prime contractors. GTSI uses this
database, among other things, for targeting its marketing efforts and data
mining for various market research purposes.
The Company's sales organization is focused on expanding sales coverage
by increasing the number of customer accounts and by offering additional
products and services to existing accounts. The customer sales teams work
closely with the Company's technology teams to best meet the needs of the
government customer.
Service and Warranty
For certain products that it sells, GTSI provides post-sale field
service through subcontractors and through the Company's in-house technical
staff. The Company typically offers warranties on products sold to the
Government and certain other customers for the same term as the manufacturer's
9
warranty period although some IDIQ contracts include provisions for warranties
that extend beyond those offered by the manufacturer. The Company also sells
extended warranties on many of its government contracts. Product repaired while
under the manufacturer's warranty is at the manufacturer's expense; product
repaired after expiration of the manufacturer's and GTSI's warranty, if longer,
is at the customer's expense.
Competition
The government IT market is competitive and subject to rapid change.
GTSI competes with certain leading hardware manufacturers, which sell to the
government market directly and through representatives other than the Company,
and with a number of systems integrators, government and commercial resellers
and commercial computer retail chains, distributors and other resellers
(including companies qualifying as minority-owned, disadvantaged or small
businesses under applicable Government regulations). A number of GTSI's existing
and potential competitors have greater financial, sales, marketing and
technological resources than the Company.
The Company believes that the principal competitive factors in the
government IT market are price, expertise in the applicable government
procurement processes, breadth of product line, customer and partner
relationships, the technical and other skills of marketing and sales personnel,
distribution capability, available inventory and customer service and support.
The Company believes that it competes favorably on each of these factors. GTSI
also believes that it has a competitive advantage over certain of its
competitors because of its procurement expertise and its ability to offer a
centralized source for purchases of a wide variety of leading computer products
from numerous manufacturers.
Backlog
The Company recognizes an order in its backlog at the time it receives
and accepts a written customer purchase order. The Company's Total Backlog
includes orders that have not shipped ("Unshipped Backlog") as well as orders
that have shipped but cannot be recognized as revenue at the period end. Total
Backlog at December 31, 2003 was approximately $102.8 million compared to $91.3
million at December 31, 2002. Unshipped Backlog at December 31, 2003 was
approximately $87.4 million compared to $82.6 million at December 31, 2002.
Backlog fluctuates significantly from quarter to quarter because of the
seasonality of Government ordering patterns and fluctuations in inventory
availability of various products.
Available Information
All of the Company's current required filings with the Securities and
Exchange Commission, as well as press releases and other investor relations'
information, may be found at http://www.gtsi.com on the internet's world wide
web. Such information may also be obtained by request to the Company addressed
to: Investor Relations, GTSI Corp., 3901 Stonecroft Boulevard, Chantilly,
Virginia 20151-1010 or call the (703) 502-2540.
Employees
At March 1, 2004, the Company had 685 employees, including 461 in
sales, marketing and contract management; 124 in operations; and 100 in finance,
information technology, human resources, legal and other support functions. None
of the Company's employees is represented by a labor union, and the Company has
experienced no material labor-related work stoppages.
Item 2. PROPERTIES.
The Company's executive offices are located in an approximately 100,500
square-foot facility in Chantilly, Virginia under a lease expiring in November
2008, with one five-year option. In December 2002, GTSI expanded its office
space by leasing approximately 34,000 square feet of office space in Chantilly,
Virginia under a lease expiring in November 2005, with one two-year option and
one one-year option. GTSI's warehousing and distribution operations are also
located in Chantilly, Virginia in a separate 200,000 square-foot facility under
a lease expiring in December 2006. The Company has a branch sales office
occupying 444 square meters in Mannheim, Germany with a five-year lease expiring
in December 2008, with one five-year option. The Company also subleases a 10,000
square-foot distribution center in Chattanooga, Tennessee under a sublease which
expires on March 31, 2004, with a one-year option.
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Item 3. LEGAL PROCEDURES.
In November 2003, GTSI was served with a $25 million lawsuit, with
treble damages, related to the termination of a former subcontractor. This suit
follows the Company's earlier lawsuit against the former subcontractor.
Management believes these claims are without merit and intends to vigorously
defend this lawsuit, but the ultimate outcome of this matter is uncertain.
Management is unable to estimate the amount GTSI may have to pay related to this
matter. No amounts have been accrued as of December 31, 2003.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the fourth
quarter of 2003.
11
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Stock Data. The Company's common stock trades on The Nasdaq Stock
Market under the symbol "GTSI." As of December 31, 2003, there were 454 record
holders of the Company's common stock. As of March 1, 2004, there were 343
record holders and approximately 2,061 beneficial holders of the Company's
common stock. The following table sets forth, for the periods indicated, the
high and low closing prices for the Company's common stock based on information
updated by the Nasdaq Stock Market.
----------------------------------------------
2003 2002
-------------------------------------------------------------
Quarter High Low High Low
-------------------------------------------------------------
First 14.75 5.70 9.49 6.90
-------------------------------------------------------------
Second 9.23 7.15 9.47 7.65
-------------------------------------------------------------
Third 12.06 8.54 11.55 7.75
-------------------------------------------------------------
Fourth 13.85 10.10 14.89 8.52
-------------------------------------------------------------
The Company has never paid cash dividends and the Company does not
anticipate paying cash dividends on its common stock in the foreseeable future.
Transfer Agent. The Company's transfer agent is Wachovia Bank, N.A.,
Shareholder Services Group, 1525 West W.T. Harris Blvd., 3C3, Charlotte, NC
28262-1153; telephone 1-800-829-8432.
Annual Meeting. The Annual Meeting of Stockholders is scheduled to be
held at 9:00 a.m. on Thursday, April 29, 2004, at the Company's headquarters
located at 3901 Stonecroft Boulevard in Chantilly, Virginia.
Item 6. SELECTED FINANCIAL DATA.
The selected financial data for the three years ended December 31,
2003, 2002, and 2001 are derived from, and are qualified in their entirety by
reference to, the Company's audited Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K. The December 31, 2003 and 2002
Consolidated Financial Statements of the Company have been audited by Ernst &
Young LLP, independent auditors, as indicated in their report, which is also
included elsewhere in this Form 10-K. The December 31, 2001, 2000, and 1999
Consolidated Financial Statements of the Company have been audited by Arthur
Andersen LLP, independent accountants, who have ceased operations. The selected
financial data for the years ended December 31, 2000 and 1999 are derived from
the Company's audited consolidated financial statements, which are not included
in this Form 10-K.
12
(In thousands, except per share
amounts) Twelve months ended December 31,
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Statement of Operations Data:
Sales $ 954,118 $ 934,730 $ 783,496 $ 677,754 $ 660,570
Cost of sales 857,334 857,105 718,370 617,621 610,463
---------- ---------- ---------- ---------- ----------
Gross margin 96,784 77,625 65,126 60,133 50,107
---------- ---------- ---------- ---------- ----------
Operating expense:
Selling, general and administrative 85,473 62,956 57,002 49,382 44,931
Depreciation and amortization 2,874 3,543 4,407 3,934 3,584
Impairment charge 5,972 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total operating expenses 94,319 66,499 61,409 53,316 48,515
---------- ---------- ---------- ---------- ----------
Income from operations 2,465 11,126 3,717 6,817 1,592
Interest and other income, net (2,832) (4,520) (3,707) (2,259) (1,090)
---------- ---------- ---------- ---------- ----------
Income before income taxes 5,297 15,646 7,424 9,076 2,682
Income tax provision (benefit) 2,118 6,113 2,938 (2,008) --
---------- ---------- ---------- ---------- ----------
Net Income before cumulative effect
of
SAB No. 101 adoption 3,179 9,533 4,486 11,084 2,682
Cumulative effect of SAB 101
adoption -- -- -- 467 --
---------- ---------- ---------- ---------- ----------
Net income $ 3,179 $ 9,533 $ 4,486 $ 10,617 $ 2,682
========== ========== ========== ========== ==========
Net income per common share
Basic:
Basic income per share
before cumulative effect of
SAB No. 101 adoption $ 0.38 $ 1.15 $ 0.55 $ 1.23 $ 0.29
Cumulative effect per share of
SAB No. 101 adoption -- -- -- (0.05) --
---------- ---------- ---------- ---------- ----------
Basic net income per share $ 0.38 $ 1.15 $ 0.55 $ 1.18 $ 0.29
========== ========== ========== ========== ==========
Diluted:
Diluted income per share
before cumulative effect of
SAB No. 101 adoption $ 0.35 $ 1.04 $ 0.50 $ 1.20 $ 0.29
Cumulative effect per share of
SAB No. 101 adoption -- -- -- (0.05) --
---------- ---------- ---------- ---------- ----------
Diluted net income per share $ 0.35 $ 1.04 $ 0.50 $ 1.15 $ 0.29
========== ========== ========== ========== ==========
Weighted average common shares
outstanding
Basic 8,349 8,302 8,144 9,021 9,271
========== ========== ========== ========== ==========
Diluted 9,116 9,156 9,049 9,225 9,314
========== ========== ========== ========== ==========
13
(In thousands) December 31,
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Working capital $ 64,348 $ 62,836 $ 34,968 $ 43,659 $ 44,350
Total assets 268,761 224,918 252,452 227,065 186,333
Notes payable to banks 12,813 7,539 20,186 11,925 9,479
Total liabilities 190,816 149,427 189,387 168,586 133,137
Stockholders' equity 77,945 75,491 63,065 58,480 53,196
14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Consolidated
Financial Statements and Notes. Historical results and percentage relationships
among any amounts in the Consolidated Financial Statements are not necessarily
indicative of trends in operating results for any future period.
Overview
GTSI is a recognized information technology (IT) solutions leader,
providing products and services to federal, state, and local government
customers worldwide. For two decades GTSI has served the public sector by
teaming up with global IT leaders such as HP, Panasonic, Microsoft, Sun and
Cisco. GTSI seeks to deliver maximum value through its broad range of products,
extensive contract portfolio, and ISO 9002-registered logistics. Through its
Technology Teams, GTSI delivers "best of breed" products and services to help
its customers realize strong value for their IT investments. The Technology
Teams consist of technical experts who support a wide range of integrated IT
solutions in such areas as high performance computing, advanced networking,
mobile and wireless solutions, high availability storage and information
assurance. GTSI continues to broaden its leadership in electronic commerce and
procurement through its federally focused website, gtsi.com, that provides
customized shopping zones to meet customers' personalized needs. GTSI is
headquartered in Northern Virginia, outside of Washington, D.C.
Federal Government IT spending has grown at a 14% compounded annual
rate since 2000, and the Company believes that government IT spending will
continue to be robust in the foreseeable future. The Company's revenue has grown
at a 13% compounded annual rate since 2000. However, revenue grew at only two
percentage points in 2003. Changes in sales throughout the Company's history
have been attributable to increased or decreased unit sales, to expansion of the
Company's product offerings (e.g., peripherals, personal computers and
networking, Unix servers/workstation and internet products), to the
addition/removal of vendors, and to the addition or expiration of sales contract
vehicles. The expiration of the FBI Trilogy contract early in 2003 had a
significant impact on the ability for the Company to grow revenue in 2003.
A substantial portion of the Company's contracts are fixed-price and
IDIQ. The uncertainties related to future contract performance costs, product
life cycles, quantities to be shipped and delivery dates, among other factors,
make it difficult to predict the future sales and profits, if any, that may
result from such contracts.
GTSI qualified as a "small business" under several of the GWACs and
BPAs it held in 2003 based upon GTSI's size status at the time of the contracts'
original award. As a small business, GTSI enjoys a number of benefits, including
being able to compete for small business set-aside contracts, qualifying as a
small business subcontractor, bidding pursuant to small purchase procedures
directed to non-manufacturer small business, and offering Government Agencies an
avenue to meet their internal small business purchase goals.
A company's size status under a contract is based on the North American
Industry Classification System ("NAICS") Code referenced in the subject
contract's solicitation. Dependent on the NAICS Code referenced in a
solicitation, GTSI may or may not qualify as a small business for new contract
awards. Under a Federal Acquisition Regulation (FAR) Deviation issued by GSA on
October 10, 2002, GTSI will be required to recertify its size status on its GSA
Schedule Contract no later than 2007. At such time, GTSI may not qualify as a
15
small business for new contract awards under the GSA Schedule. In addition, new
legislation or regulations may require GTSI to recertify its size status on its
GSA Schedule sooner than 2007. GTSI cannot predict whether it would continue to
qualify as a small business at the time of recertification. To mitigate any
potential adverse impact, GTSI has developed strategic relationships with small
minority-owned businesses that benefit from the small business benefits
described above. GTSI acts as both a supplier and prime contractor to these
small minority-owned businesses.
Legislation is periodically introduced in Congress that may change the
federal government's procurement practices, and agencies from time to time may
issue new regulations or modify existing regulations that may also change the
government's procurement practices. GTSI cannot predict whether any legislative
or regulatory proposals will be adopted or, if adopted, the impact upon its
operating results. Changes in the structure, composition and/or buying patterns
of the Government, either alone or in combination with competitive conditions or
other factors, could adversely affect future results.
Noncompliance with Government procurement regulations or contract
provisions could result in termination of Government contracts, substantial
monetary fines or damages, suspension or debarment from doing business with the
Government and civil or criminal liability. During the term of any suspension or
debarment by any Government agency, the contractor could be prohibited from
competing for or being awarded any contract by any Government agency. In
addition, substantially all of the Company's Government contracts are terminable
at any time at the Government's convenience or upon default. Upon termination of
a Government contract for default, the Government may also seek to recover from
the defaulting contractor the increased costs of procuring the specified goods
and services from a different contractor. The effect of any of these possible
Government actions or the adoption of new or modified procurement regulations or
practices could adversely affect the Company.
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its operations as a result of
government buying and funding patterns, which also affect the buying patterns of
GTSI's prime contractor customers. These buying and funding patterns
historically have had a significant positive effect on GTSI's bookings in the
third quarter ending September 30 each year (the federal government's fiscal
year end), and consequently on sales and net income in the third and fourth
quarters of each year. Quarterly financial results are also affected by the
timing of the award of and shipments of products under government contracts,
price competition in the computer and IT industries, the addition of personnel
or other expenses in anticipation of sales growth, product line changes and
expansions, and the timing and costs of changes in customer and product mix. In
addition, customer order deferrals in anticipation of new product releases by
leading hardware and software manufacturers, delays in vendor shipments of new
or existing products, a shift in sales mix to more complex requirements
contracts with more complex service costs, and vendor delays in the processing
of incentives and credits due GTSI, have occurred (all of which are also likely
to occur in the future) and have adversely affected the Company's operating
performance in particular periods. The seasonality and the unpredictability of
the factors affecting such seasonality make GTSI's quarterly and yearly
financial results difficult to predict and subject to significant fluctuation.
The Company's stock price could be adversely affected if any such financial
results fail to meet the financial community's expectations.
The Company's business strategy is to continue to focus on higher-end
product-based solutions, to broaden its product offering, and to remain a
low-cost, and high-reliability provider of commodity products. The Company also
focuses on bringing new technologies to government customers.
16
Results of Operations
The following table sets forth, for the years indicated, the
percentages that selected items within the income statement bear to sales and
the annual percentage changes in the dollar amounts of such items.
Percentage of Sales Percentage Change
-------------------------------- ----------------------------
Years Ended December 31, Years Ended December 31,
-------------------------------- ----------------------------
2003 2002 2001 2002 to 2003 2001 to 2002
-------- -------- -------- ------------ ------------
Income Statement Data:
Sales 100.0% 100.0% 100.0% 2.1% 19.3%
Cost of sales 89.9% 91.7% 91.7% 0.0% 19.3%
-------- -------- --------
Gross margin 10.1% 8.3% 8.3% 24.7% 19.2%
Operating expense:
Selling, general and administrative 8.9% 6.7% 7.2% 35.8% 10.4%
Depreciation and amortization 0.3% 0.4% 0.6% -18.9% -19.6%
Impairment charge 0.6% 0.0% 0.0% 100.0% 0.0%
-------- -------- --------
Total operating expenses 9.8% 7.1% 7.8% 41.8% 8.3%
-------- -------- --------
Income from operations 0.3% 1.2% 0.5% -77.8% 199.3%
Interest income, net -0.3% -0.5% -0.5% -37.3% 21.9%
-------- -------- --------
Income before taxes 0.6% 1.7% 1.0% -66.1% 110.7%
Income tax provision 0.3% 0.7% 0.4% -65.4% 108.1%
-------- -------- --------
Net income 0.3% 1.0% 0.6% -66.7% 112.5%
======== ======== ========
* As of January 1, 2003, the Company adopted Emerging Issues Task Force ("EITF")
Issue No. 02-16, "Accounting for Consideration Received from a Vendor by a
Customer (Including a Reseller of the Vendor's Product)", which resulted in
reclassifying in 2003 certain vendor funds as a reduction in cost of sales. As a
result of adopting EITF No. 02-16, the Company records certain vendor
considerations as a reduction of inventory and a subsequent reduction in cost of
goods sold when the related product is sold. In 2002 and 2001, the Company
recorded these items as a reduction to operating expenses.
17
The following tables set forth, for the periods indicated, the
approximate sales by product, by contract vehicle and by vendor, along with
related percentages of total sales.
Product Category
(Dollars in millions) 2003 2002 2001
------------------- ------------------- -------------------
Hardware $ 692.5 72.6% $ 673.7 72.1% $ 570.3 72.8%
Software 154.5 16.2% 196.4 21.0% 158.3 20.2%
Services * 107.1 11.2% 64.6 6.9% 54.9 7.0%
-------- -------- -------- -------- -------- --------
Total $ 954.1 100% $ 934.7 100% $ 783.5 100%
======== ======== ======== ======== ======== ========
* For the years ended December 31, 2003, 2002, and 2001, services includes
approximately $91.2 million, $50.8 million, and $48.0 million of resold,
third-party services and maintenance contracts, respectively. Services also
include approximately $15.9 million, $13.8 million, and $6.9 million of
consulting and other services that we provided either through our own business
resources or through our alliance partners for the years ended December 31,
2003, 2002, and 2001, respectively. The increase in services revenue is
primarily related to the increased volume of the third party services and
maintenance contracts.
Contract Vehicles
(Dollars in millions) 2003 2002 2001
------------------- ------------------- -------------------
GSA Schedules $ 268.0 28.1% $ 276.0 29.5% $ 238.4 30.4%
IDIQ Contracts 430.4 45.1% 388.7 41.6% 355.5 45.4%
Open Market 159.7 16.7% 107.0 11.4% 133.3 17.0%
Subcontracts and
Other Contracts 96.0 10.1% 163.0 17.5% 56.3 7.2%
-------- -------- -------- -------- -------- --------
Total $ 954.1 100.0% $ 934.7 100.0% $ 783.5 100.0%
======== ======== ======== ======== ======== ========
Top 5 Vendors
(Dollars in millions) 2003 2002 2001
------------------- ------------------- -------------------
Panasonic $ 162.2 17.0% $ 123.5 13.2% $ 92.4 11.8%
Hewlett-Packard 139.3 14.6% 167.7 17.9% 188.5 24.1%
Sun 130.1 13.6% 110.6 11.8% 63.0 8.0%
Cisco 112.9 11.8% 114.9 12.3% 80.4 10.3%
Microsoft 66.5 7.0% 95.6 10.2% 88.0 11.2%
Other 343.1 36.0% 322.4 34.6% 271.2 34.6%
-------- -------- -------- -------- -------- --------
Total $ 954.1 100.0% $ 934.7 100.0% $ 783.5 100.0%
======== ======== ======== ======== ======== ========
During 2002 HP and Compaq merged. Thus, HP and Compaq have been combined in all
periods shown above for comparison purposes.
18
Additional Quarterly Data. The following tables show the Company's results and
revenue allocations by quarter. The tables have been included to provide
additional insight into the seasonailty of the Company's business as mentioned
previously.
2003 Quarters Ended
---------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------------ ------------------ ------------------ ------------------
(In thousands, except per share data)
Sales $ 178,858 100.0% $ 189,737 100.0% $ 273,066 100.0% $ 312,457 100.0%
Cost of sales 162,784 91.0% 166,981 88.0% 245,569 89.9% 282,001 90.3%
Gross margin 16,074 9.0% 22,756 12.0% 27,497 10.1% 30,456 9.7%
Operating expenses excluding impairment charge 19,702 11.0% 21,613 11.4% 22,640 8.3% 24,392 7.8%
Impairment charge -- 0.0% -- 0.0% -- 0.0% 5,972 1.9%
Operating expenses 19,702 11.0% 21,613 11.4% 22,640 8.3% 30,364 9.7%
(Loss) income from operations (3,628) -2.0% 1,143 0.6% 4,857 1.8% 92 0.0%
Interest income, net (733) -0.4% (744) -0.4% (840) -0.3% (515) -0.2%
Income before income taxes (2,895) -1.6% 1,887 1.0% 5,697 2.1% 607 0.2%
Income tax (benefit) provision (1,132) -0.6% 738 0.4% 2,227 0.8% 284 0.1%
Net income (loss) (1,763) -1.0% 1,149 0.6% 3,470 1.3% 323 0.1%
Net income per common share
Basic:
Basic net (loss) income per share $ (0.21) $ 0.14 $ 0.42 $ 0.04
Diluted:
Diluted net (loss) income per share $ (0.21) $ 0.13 $ 0.39 $ 0.04
Weighted average common shares
outstanding
Basic 8,564 8,258 8,238 8,343
========= ========= ========= =========
Diluted 8,564 8,907 8,986 9,208
========= ========= ========= =========
Contract Vehicles 2003 Quarter Ended
------------------------------------------------------------------------
(Dollars in millions) March 31, June 30, September 30, December 31,
--------------- --------------- --------------- ---------------
GSA Schedules $ 51.9 29.0% $ 53.9 28.4% $ 77.6 28.4% $ 84.6 27.1%
IDIQ Contracts 78.9 44.1% 83.3 43.9% 119.8 43.9% 148.4 47.5%
Open Market 27.0 15.1% 28.5 15.0% 50.5 18.5% 53.7 17.2%
Subcontracts and
Other Contracts 21.1 11.8% 24.0 12.7% 25.2 9.2% 25.7 8.2%
--------------- --------------- --------------- ---------------
Total $178.9 100.0% $189.7 100.0% $273.1 100.0% $312.4 100.0%
=============== =============== =============== ===============
Top 5 Vendors 2003 Quarter Ended
------------------------------------------------------------------------
(Dollars in millions) March 31, June 30, September 30, December 31,
--------------- --------------- --------------- ---------------
Panasonic $ 34.8 19.5% $ 33.6 17.7% $ 48.4 17.7% $ 45.4 14.5%
Hewlett-Packard 30.3 16.9% 28.6 15.1% 38.9 14.2% 41.5 13.3%
Sun 19.7 11.0% 34.8 18.3% 38.9 14.2% 36.7 11.7%
Cisco 20.5 11.5% 18.1 9.5% 32.2 11.8% 42.1 13.5%
Microsoft 14.9 8.3% 17.1 9.0% 19.3 7.1% 15.2 4.9%
Other 58.7 32.8% 57.5 30.4% 95.4 35.0% 131.5 42.1%
---------------- -------------- --------------- ---------------
Total $178.9 100.0% $189.7 100.0% $273.1 100.0% $312.4 100.0%
=============== =============== =============== ===============
19
2002 Quarters Ended
---------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------------ ------------------ ------------------ ------------------
(In thousands, except per share data)
Sales $ 176,743 100.0% $ 200,992 100.0% $ 276,846 100.0% $ 280,149 100.0%
Cost of sales 162,232 91.8% 185,883 92.5% 254,485 91.9% 254,505 90.8%
Gross margin 14,511 8.2% 15,109 7.5% 22,361 8.1% 25,644 9.2%
Operating expenses 15,386 8.7% 14,427 7.2% 18,414 6.7% 18,272 6.5%
(Loss) income from operations (875) -0.5% 682 0.3% 3,947 1.4% 7,372 2.6%
Interest income, net (1,770) -1.0% (611) -0.3% (1,288) -0.5% (851) -0.3%
Income before income taxes 895 0.5% 1,293 0.6% 5,235 1.9% 8,223 2.9%
Income tax provision 354 0.2% 521 0.3% 2,094 0.8% 3,144 1.1%
Net income 541 0.3% 772 0.4% 3,141 1.1% 5,079 1.8%
Net income per common share
Basic:
Basic net income per share $ 0.07 $ 0.09 $ 0.38 $ 0.60
Diluted:
Diluted net income per share $ 0.06 $ 0.08 $ 0.32 $ 0.54
Weighted average common shares
outstanding
Basic 8,184 8,265 8,316 8,439
========= ========= ========= =========
Diluted 9,518 9,582 9,723 9,402
========= ========= ========= =========
Contract Vehicles 2002 Quarter Ended
------------------------------------------------------------------------
(Dollars in millions) March 31, June 30, September 30, December 31,
--------------- --------------- --------------- ---------------
GSA Schedules $ 35.0 19.8% $ 64.1 31.9% $ 97.5 35.2% $ 79.4 28.3%
IDIQ Contracts 62.2 35.2% 80.5 40.0% 113.8 41.1% 132.1 47.1%
Open Market 19.1 10.8% 16.8 8.4% 33.4 12.1% 37.8 13.5%
Subcontracts and
Other Contracts 60.4 34.2% 39.6 19.7% 32.1 11.6% 30.9 11.0%
--------------- --------------- --------------- ---------------
Total $176.7 100.0% $201.0 100.0% $276.8 100.0% $280.2 100.0%
=============== =============== =============== ===============
Top 5 Vendors 2002 Quarter Ended
------------------------------------------------------------------------
(Dollars in millions) March 31, June 30, September 30, December 31,
--------------- --------------- --------------- ---------------
Panasonic $ 28.0 15.8% $ 25.9 12.9% $ 37.0 13.4% $ 32.6 11.6%
Cisco 36.8 20.8% 15.5 7.7% 33.2 12.0% 29.4 10.5%
Sun 10.9 6.2% 24.8 12.3% 46.8 16.9% 28.1 10.0%
Hewlett-Packard 17.5 9.9% 18.4 9.2% 32.9 11.9% 31.6 11.3%
Microsoft 9.1 5.1% 34.8 17.3% 32.3 11.7% 19.4 6.9%
Other 74.4 42.1% 81.6 40.6% 94.6 34.2% 139.1 49.6%
--------------- --------------- --------------- ---------------
Total $176.7 100.0% $201.0 100.0% $276.8 100.0% $280.2 100.0%
=============== =============== =============== ===============
20
2003 Compared with 2002
Sales. Sales consist of revenues from products delivered and services
rendered, net of allowances for customer returns and credits. Net sales in 2003
increased $19.4 million to $954.1 million, or 2.1% over 2002. Sales under IDIQ
and Open Market contracts increased $41.7 million and $52.7 million,
respectively. IDIQ sales increased due primarily to increased sales on one of
our mature contracts combined with strong sales on a newer contract that was
just ramping up at the end of 2002. Sales in the Subcontracts and Other
Contracts category decreased $67.0 million to $96.0 million due primarily to
decreased volume on subcontracts with prime contractors, specifically on the
FBI's Trilogy contract. Sales in the Services product category increase $42.5
million in 2003. Services consist mainly of third party productized service and
maintenance contracts, as well as consulting services, either through our own
business resources or through our alliance with partners. The increase in
service is primarily related to the increased volume of the third party
productized service and maintenance contracts.
Backlog. The Company recognizes an order in its backlog at the time it
receives and accepts a written customer purchase order. The Company's Total
Backlog includes orders that have not shipped ("Unshipped Backlog") as well as
orders that have shipped but cannot be recognized as revenue at the period end.
Total Backlog at December 31, 2003 was approximately $102.8 million compared to
$91.3 million at December 31, 2002. Unshipped Backlog at December 31, 2003 was
approximately $87.4 million compared to $82.6 million at December 31, 2002.
Backlog fluctuates significantly from quarter to quarter because of the
seasonality of Government ordering patterns and fluctuations in inventory
availability of various products.
Gross Margin. Gross margin increased $19.2 million, or 24.7%, to $96.8
million from $77.6 million in 2002. Gross margin as a percentage of sales also
increased to 10.1% for 2003 from 8.3% for 2002. This increase is due primarily
to the January 1, 2003 adoption of Emerging Issues Task Force ("EITF") Issue No.
02-16, "Accounting for Consideration Received from a Vendor by a Customer
(Including a Reseller of the Vendor's Product)", which resulted in reclassifying
in 2003 certain vendor funds as a reduction in cost of sales. As a result of
adopting EITF No. 02-16, the Company records certain vendor considerations as a
reduction of inventory and a subsequent reduction in cost of goods sold when the
related product is sold. In 2002, the Company recorded these items as a
reduction to operating expenses.
For comparative purposes, if the Company applied EITF No. 02-16 to the
year ended December 31, 2002, the Company's gross margin would have increased
from $90.0 million to $96.8 million. The gross margin percentage would have
increased from 9.6% for 2002 to 10.1% for 2003. The primary reason for the
increase in margins on this comparative basis is due to an increase in the
volume of the vendor incentives funds received in 2003 compared to 2002.
During the second quarter of 2003, GTSI's sales organization was
successful in securing an order for software inventory that had been reserved
for during 2002. As a result, the company reversed a $1.4 million reserve. This
benefit partially contributed to the increase in the gross margin percentage for
the year.
Operating Expenses. Total operating expenses for the year ended
December 31, 2003 increased to $94.3 million from $66.5 million for 2002.
Excluding a $6.0 million impairment charge the Company recorded in the fourth
quarter of 2003 for the impairment of a capitalized asset, operating expenses
increased $21.8 million to $88.3 million from $66.5 million in 2002. A large
portion of this increase was a result of the adoption of EITF No. 02-16. For
comparative purposes, operating expenses for the year ended December 31, 2002
would have been $78.8 million if EITF No. 02-16 was applied to 2002. In addition
to the impact of this new accounting pronouncement, operating expenses increased
due to higher personnel costs due to increased headcount primarily in the Sales
21
and Technology Team organizations. When an organization adds resources to its
sales teams, there is ramp up period before these new sales personnel are fully
optimized. Management feels that by making these investments in Sales and
Technology Team, personnel the Company is now better positioned to take
advantage of new opportunities in the State and Local marketplace utilizing the
US Communities Contract; sales to Prime Contractors through the Company's
revamped Integrator Solutions Group; and in the area of leasing to the
Government. Also during the third quarter 2003, the Company reversed two accrued
liabilities related to the resolution of a state business tax issue and the
resolution of a customer dispute, which resulted in a total expense reduction of
$.5 million.
Expressed as a percentage of total sales, total operating expenses
increased to 9.8% for 2003 from 7.1% in 2002. Excluding the impact of the
impairment charge, operating expenses as a percentage of sales for 2003
increased to 9.3% from 7.1%. Applying the impact from EITF No. 02-16 to the year
ended December 31, 2002 for comparison purposes, operating expenses excluding
the impairment charge expressed as a percentage of sales would have increased to
9.3% for 2003 compared to 8.4% in the same quarter last year.
In the fourth quarter of 2003 the Company recorded an impairment charge
of $6.0 million related to the impairment of capitalized software. During the
fourth quarter the Company determined that it was not in the Company's best
interest to continue to pursue a highly customized Enterprise Resource Planning
("ERP") solution due to the high level of development risk and the higher total
cost of ownership associated with maintaining a customized solution. The Company
has changed its strategy and decided to implement a standard ERP system, which
is expected to lower the risk, compress the delivery time, provide significant
value sooner, and reduce the overall project expenses. Due to this change in
strategy, $6.0 million of the capitalized assets related to the customized
solution was determined to have no future economic value. The enterprise
software and hardware for a standard ERP system purchased to date will be fully
utilized in the roll out of the new ERP.
During the fourth quarter of 2002, the Company determined that it was
remote that certain accrued obligations would need to be paid. Accordingly, the
associated obligation of $1.4 million was reversed.
Interest and Other Income, Net. Interest and other income, net is the
amount of interest income, prompt payment discounts, and other income partially
offset by interest expense on borrowings. Interest and other income, net
decreased $1.7 million, from $4.5 million to $2.8 million, or 37.8%, in 2003
compared to 2002. Interest and other income decreased by $2.1 million and
interest expense decreased $.4 million over 2002. The decrease in interest
income is primarily due to a $1.3 million decrease in prompt payment discounts
partially combined with a $.4 million decrease in interest income from lease
receivables. Other income decreased $.3 million due primarily to a $.5 million
gain on the sale of equipment leases in the first quarter of 2002 that did not
occur in 2003, partially offset by income received from a minority interest the
Company holds in another government contractor. Interest expense decreased $.4
million to $.3 million in 2003 due primarily to improved cash management
practices allowing the Company to rely less on the Credit Facility throughout
the year than in 2002.
Income Taxes. The Company's effective tax rate in 2003 was 40.0%
resulting in a tax provision of $2.1 million in 2003. The difference between the
effective rate and the statutory rate is primarily state taxes and permanent
non-deductible items.
22
2002 Compared with 2001
Sales. Sales consist of revenues from products delivered and services
rendered, net of allowances for customer returns and credits. Net sales in 2002
increased $151.2 million, or 19.3% over 2001. Sales increased in most product
and contract categories. The largest increase was an approximately $106.7
million increase in sales made under the Subcontracts and Other Contracts
category. This increase is primarily due to increase in volume on subcontracts
with prime contractors, specifically on the FBI's Trilogy contract. Increased
sales under a distribution agreement with a major vendor also contributed to the
increase in Subcontracts and Other Contracts category. The $33.2 million
increase in sales in the IDIQ Contracts category is primarily related to
increased sales under established contract vehicles. IDIQ Contracts sales were
also helped by sales from a new contract awarded to the Company in 2002. The GSA
Schedule category increased $37.6 million due primarily to the Government
converting some of the Company's legacy IDIQ contracts to BPA contracts at
contract renewal. This caused a shift in sales from the IDIQ category to the BPA
Contracts category during 2002. The Company was also awarded several new BPA
contracts during 2002 that also contributed to the increase in BPA Contract
sales. Open Market sales decreased $26.3 million primarily due to the Company's
customers taking advantage of the Company's expanding and mature contract
portfolio.
Backlog. The Company recognizes an order in its backlog at the time it
receives and accepts a written customer purchase order. The Company's Total
Backlog includes orders that have not shipped ("Unshipped Backlog") as well as
orders that have shipped but cannot be recognized as revenue at the period end.
Total Backlog at December 31, 2002, was approximately $91.3 million compared to
$76.6 million at December 31, 2001. Unshipped Backlog at December 31, 2002, was
approximately $82.6 million compared to $67.3 million at December 31, 2001.
Backlogs fluctuate significantly from quarter to quarter because of the
seasonality of Government ordering patterns and fluctuations in inventory
availability of various products.
Gross Margin. Gross margin increased $12.5 million, or 19.2%, to $77.6
million from $65.1 million in 2001 due primarily to the 19.3% increase in sales
for the year. Gross margin as a percentage of sales remained flat at 8.3% in
2002 and 2001.
Operating Expenses. Net operating expenses for the year ended December
31, 2002 increased $5.1 million to $66.5 million for 2002 as compared to $61.4
million for 2001. The increase in operating expenses is due primarily to an
increase in commission expense as a result of increased sales; an increase in
other performance based incentives; and an increase in sales and technology team
personnel expense. Expressed as a percentage of total sales, net operating
expenses decreased to 7.1% from 7.8% in the previous year. Operating expenses
reflect the favorable impact of vendor sales support funds. Before the
application of these funds, operating expenses were $79.2 million, or 8.5% of
sales, as compared to $70.0 million, or 8.9% of sales, for 2001.
During the fourth quarter of 2002, the Company determined that it was
remote that certain accrued obligations would need to be paid. Accordingly, the
associated obligation of $1.4 million was reversed and as a result operating
expenses were reduced.
Interest and Other Income, Net. Net interest and other income is the
amount of interest income, prompt payment discounts, and other income partially
offset by interest expense on borrowings. Net interest and other income
increased by approximately $.8 million, from $3.7 million to $4.5 million, or
21.9%, in 2002 compared to 2001. Interest income increased by $.3 million and
interest expense decreased $.1 million over 2001. The increase in interest
income is primarily due to a $1.4 million increase in prompt payment discounts
partially offset by a $.7 million decrease in interest income from lease
receivables and a $.4 million decrease in other interest income from customer
collections. Other income increased $.4 million due primarily to a $.5 million
gain on the sale of equipment leases in the first quarter of 2002.
23
Income Taxes. The Company's effective tax rate in 2002 was 39.1%
resulting in a tax provision of $6.1 million in 2002.
Critical Accounting Policies
We have included below our policies that are both important to our
financial condition and operating results, and require management's most
subjective and complex judgments in determining the underlying estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates, as they require assumptions that are inherently uncertain.
Revenue Recognition. Revenue is recognized when a customer order has
been executed, the sales price is fixed and determinable, delivery of services
or products has occurred, and collection of the sales price is considered
probable and can be reasonably estimated. Revenue from hardware and software
product sales is generally recognized when title to the products sold passes to
the customer, with provisions established for estimated product returns. Based
upon the Company's standard shipping terms, title generally passes upon the
customer's receipt of the products. The Company also sells third-party services,
such as maintenance contracts, and recognizes revenue in the same manner as
hardware and software sales. Revenues from other services are recognized when
the services are complete. Payments received before delivery has occurred or
services have been rendered are recorded as deferred revenue.
Allowance for Doubtful Accounts. We continuously monitor collections
and payments from our customers and maintain an allowance for doubtful accounts
based upon our historical experiences and any specific customer collection
issues that we have identified. While such losses have historically been within
our expectations and the provisions established, we cannot guarantee that we
will continue to experience the same loss rates that we have in the past. As we
continue to increase the volume of sales to prime contractors or to commercial
customers, the Company may see a need to increase its allowance for doubtful
accounts. The Company assesses the adequacy of its allowance for doubtful
accounts on a regular basis and adjusts the amount as necessary.
Sales of Lease Receivables. We periodically sell lease receivables to
unrelated financing companies. We account for our sales of lease receivables in
accordance with SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities - a Replacement of FASB
Statement No. 125."
Merchandise Inventories. We value our inventory at the lower of average
cost or market value of the inventory. Whenever possible, we order inventory
only as needed. However, we do maintain inventory related to certain products or
vendors. We regularly review inventory quantities on hand and record a provision
for excess and obsolete inventory based on assumptions about future demand and
market conditions. Our estimates of future product demand may prove to be
inaccurate, in which case we may have understated or overstated the provision
required for excess or obsolete inventory. In the future, if our inventory is
determined to be overvalued, we will be required to recognize such costs in our
cost of goods sold at the time of such determination. Therefore, although we
make every effort to ensure the accuracy of our forecasts of future product
demand, any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of our inventory and
our reported operating results.
24
Long-Lived Assets. Long-lived assets, consisting primarily of property
and equipment and capitalized software, are currently reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
should be addressed pursuant to Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or disposal of Long-Lived Assets." We
determine impairment by comparing the carrying value of these long-lived assets
to a probability weighted estimated undiscounted future cash flows expected to
result from the use of these assets and their eventual disposition. The cash
flow projections used to make this assessment is consistent with the cash flow
projections we use internally to assist us in making key decisions. If we
determine that an impairment exists, a loss would be recognized based on the
amount by which the carrying value exceeds the fair value of the assets, which
is generally determined by using quoted market prices or valuation techniques
such as the discounted present value of expected future cash flows, appraisals,
or other pricing models as appropriate. In accordance with Statement of
Financial Accounting Standards No. 144, the Company recorded a $6.0 million
impairment charge for the impairment of capitalized software in 2003.
Warranties. We offer warranties on sales under certain products
specific to the terms of the customer agreements. Our standard warranties
require us to repair or replace defective products reported to us during such
warranty period at no cost to the customer. We record an estimate for warranty
related costs at the time of sale based on our actual historical return rates
and repair costs at the time of sale. While our warranty costs have historically
been within our expectations and the provisions established, we cannot guarantee
that we will continue to experience the same warranty return rates or repair
costs that we have in the past. Factors that impact the Company's accrued
warranty liability include the number of installed units under warranty
contracts, the rate of unit failures, the cost of spare parts, and historical
and anticipated cost per warranty claim under the warranty contract. As these
factors are affected by actual experience and future expectations, the Company
reevaluates the adequacy of its accrued warranty liability and adjusts amounts
as necessary.
Stock Compensation. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principle Board (APB) Opinion No. 25 "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, compensation expense for
stock options is measured as the excess, if any, of the fair market value of the
Company's stock at the date of the grant over the exercise price of the related
option. Alternative guidance exists under Statement of "Accounting Standards
(SFAS) No. 123" Accounting for Stock Based Compensation which requires companies
to determine the fair value of options at the time of grant and to recognize
compensation expense over the service period.
25
Had compensation costs for the Company's stock options been determined
based on SFAS No. 123 using an accepted fair valuation method, the Company's net
income and earnings per share would have been as follows (in thousands, except
per share amounts):
2003 2002 2001
-------- -------- --------
Net income - as reported $ 3,179 $ 9,533 $ 4,486
Add: Total stock-based employee
compensation expense as reported under
intrinsic value method (APB No. 25) for all
awards, net of related tax effects -- -- --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method (SFAS No. 123)
for all awards and stock purchase plans, net
of related tax effects (2,373) (1,805) (1,648)
-------- -------- --------
Net income - pro forma $ 806 $ 7,728 $ 2,838
======== ======== ========
Net income per share - as reported (basic) $ 0.38 $ 1.15 $ 0.55
======== ======== ========
Net income per share - as reported (diluted) $ 0.35 $ 1.04 $ 0.50
======== ======== ========
Net income per share - pro forma (basic) $ 0.10 $ 0.93 $ 0.35
======== ======== ========
Net income per share - pro forma (diluted) $ 0.09 $ 0.85 $ 0.31
======== ======== ========
New Accounting Pronouncements
In November 2002, the EITF published Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables" ("EITF No. 00-21"), which addresses
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities. EITF No. 00-21 addresses
how to determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting. EITF No. 00-21 is effective for the Company
for revenue arrangements entered into beginning July 1, 2003. The adoption of
EITF No. 00-21 did not have a material impact on the Company's 2003 consolidated
financial statements.
In November 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN No. 45). FIN No. 45 elaborates on the disclosure to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of FIN No. 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN No. 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. As a result of
adopting FIN No. 45, the Company has added additional disclosures related to
accrued warranty obligations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No.
123." This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock -based employee
compensation. In addition, this statement amends the disclosure requirements of
26
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted the annual disclosure provisions of SFAS No. 148 in its financial report
for the year ended December 31, 2002 and adopted the interim disclosure
provisions for its financial reports beginning with the quarter ended March 31,
2003.
On January 1, 2003 the Company adopted a new accounting pronouncement,
EITF Issue No. 02-16, "Accounting for Consideration Received from a Vendor by a
Customer (Including a Reseller of the Vendor's Products)." This pronouncement
requires that consideration from vendors, such as advertising support funds and
sales volume incentives, be accounted for as a reduction to cost of sales unless
certain requirements are met showing that the funds represent a reimbursement of
a specific, incremental, identifiable cost incurred by the Company in selling
the vendor's product. If these specific requirements related to individual
vendors are met, the consideration is accounted for as a reduction in the
related expense category, such as advertising or selling and administrative
expense. The Company provides numerous advertising programs to support vendors,
including catalogs, radio, Internet, magazine and newspaper advertising for
which it receives consideration. The Company adopted EITF No. 02-16 for the
quarter ended March 31, 2003.
As a result of adopting EITF No. 02-16, the Company records certain
vendor considerations as a reduction of inventory and a subsequent reduction in
cost of goods sold when the related product is sold. In previous reporting
periods, the Company recorded these items as a reduction to operating expenses
in that period. The impact for the year ended December 31, 2003 was an increase
in cost of goods sold of approximately $148,000 or a tax effected reduction to
net income of approximately $89,000. If EITF No. 02-16 was applied to 2002, the
net income impact would have been a decrease of $13,000.
For comparative purposes, if the Company applied EITF No. 02-16 to the
year ended December 31, 2002, the Company's gross margin would have increased
from $90.0 million to $96.8 million. Gross margin percentage would have
increased from 9.6% for 2002 to 10.1% for 2003. The primary reason for the
increase in margins on this comparative basis is due to an increase in the
volume of the vendor incentives funds received in 2003 compared to 2002.
Operating expenses would have also increased from $78.8 million for 2002 to
$94.3 million for 2003.
Effect of Inflation
The Company believes that inflation has not had a material effect on
its operations. If, however, inflation increases in the future it could
temporarily adversely affect the profitability of GTSI's sales under its
government fixed-price contracts, which generally preclude the Company from
passing on inflation-related or other increases in product costs to Government
customers during the term of a pre-existing contract. The Company mitigates this
risk in part by often obtaining agreements from certain of its suppliers
prohibiting them from increasing their prices to GTSI during fixed-price, term
contracts.
Seasonal Fluctuations and Factors Affecting Government Procurement Practices
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its operations as a result of
government buying and funding patterns, which also affect the buying patterns of
GTSI's prime contractor customers. These buying and funding patterns
historically have had a significant positive effect on GTSI's bookings in the
third quarter ending September 30 each year (the federal government's fiscal
27
year end), and consequently on sales and net income in the third and fourth
quarters of each year. Quarterly financial results are also affected by the
timing of the award of and shipments of products under government contracts,
price competition in the computer and IT industries, the addition of personnel
or other expenses in anticipation of sales growth, product line changes and
expansions, and the timing and costs of changes in customer and product mix. In
addition, customer order deferrals in anticipation of new product releases by
leading hardware and software manufacturers, delays in vendor shipments of new
or existing products, a shift in sales mix to more complex requirements
contracts with more complex service costs, and vendor delays in the processing
of incentives and credits due GTSI, have occurred (all of which are also likely
to occur in the future) and have adversely affected the Company's operating
performance in particular periods. The seasonality and the unpredictability of
the factors affecting such seasonality make GTSI's quarterly and yearly
financial results difficult to predict and subject to significant fluctuation.
The Company's stock price could be adversely affected if any such financial
results fail to meet the financial community's expectations.
Additionally, legislation is periodically introduced in Congress that
may change the federal government's procurement practices, and agencies from
time to time may issue new regulations or modify existing regulations that may
also change the government's procurement practices. GTSI cannot predict whether
any legislative or regulatory proposals will be adopted or, if adopted, the
impact upon its operating results. Changes in the structure, composition and/or
buying patterns of the Government, either alone or in combination with
competitive conditions or other factors, could adversely affect future results.
Liquidity and Capital Resources
During 2003, the Company's operating activities provided approximately
$4.6 million of cash, compared to $13.5 million provided by operations in 2002.
Sources of cash provided by operating activities in 2003 include an increase in
accounts payable of $30.0 million, and an increase in accrued liabilities and
warranty liabilities of $6.8 million offset by an increase in accounts
receivables of $41.1 million and an increase in other assets of $2.3 million.
Trade accounts receivables are up $38.6 million as of December 31, 2003 compared
to the previous year-end and other vendor receivables make up the additional
$2.5 million increase. The primary reason for the increase in trade accounts
receivables at year-end is the increase in the fourth quarter sales.
Investing activities used cash of approximately $7.9 million in 2003.
The Company used approximately $6.0 million for the ERP system implementation.
Approximately $1.0 million was used for networking, storage, other hardware, and
equipment. Approximately $.5 million was used on leasehold improvements during
the year primarily related to a new office facility in Chantilly, Virginia.
Another $.3 million was used for other software projects primarily to support
sales initiatives. After the $6.0 million impairment charge for the impairment
of portions of the ERP system, the Company has capitalized approximately $3.9
million related to the development of the new ERP system as of December 31,
2003.
The Company's financing activities provided approximately $3.4 million
of cash during 2003 due to borrowings on its line-of-credit of $5.3 million. The
Company used $4.0 million in the first part of the year to repurchase its stock
from third party shareholders. This was partially offset by $2.1 million in
proceeds from stock options and employee stock purchase plan activity.
During the fourth quarter 2003, the Company closed a new $125 million
Credit Facility ( the Credit Facility) with a lender and terminated the existing
credit facilities. The new Credit Facility, which matures on February 28, 2005,
includes a revolving line of credit (the Revolver) and a provision for inventory
financing of vendor products (the Wholesale Financing Facility). Borrowing under
the Revolver is limited to 85% of eligible accounts receivable. The Revolver is
secured by substantially all of the Company's assets. Borrowing under the
28
Wholesale Financing Facility is limited to 100% of the value of the inventory.
The Wholesale Financing Facility is secured by the underlying inventory. The
Credit Facility carries an interest rate indexed to LIBOR plus 1.75 percentage
points. The Credit Facility also contains certain covenants as well as
provisions specifying compliance with certain quarterly and annual financial
ratios.
In 2002 and 2001 the Company had a revolving line of credit (the Prior
Revolver) with a group of banks, which allowed for borrowings up to $50.0
million during its highest seasonal period. Additionally, the Company had a
separate facility with a bank for inventory financing of vendor products (the
Prior Wholesale Financing Facility), which allowed for borrowings up to $60.0
million during its highest seasonal period. Combined, the Prior Revolver and the
Prior Wholesale Financing Facility (the Prior Credit Facilities) allowed the
Company to borrow from $55.0 million to $110.0 million depending on the seasonal
period. The seasonal structure of the Prior Credit Facilities coincided with the
seasonality of the Company's business and allowed the Company to minimize
banking fees. The interest rate under the Prior Credit Facilities was a rate
indexed to the London Interbank Offered Rate (LIBOR) plus 1.75 percentage
points.
On March 31, 2003 the Company and its group of banks signed an
amendment to the Prior Revolver in which the group of banks consented to allow
the Company to repurchase up to an additional $5.0 million worth of its stock
from stockholders. During 2003, the Company repurchased approximately $4.0
million of its stock.
The Company anticipates that it will continue to rely primarily on
operating cash flow, loans and vendor credit to finance its operating cash
needs. The Company believes that such funds should be sufficient to satisfy the
Company's near term anticipated cash requirements for operations. Nonetheless,
the Company may seek additional sources of capital, including permanent
financing over a longer term at fixed rates, to finance its working capital
requirements.
As of December 31, 2003 and 2002, respectively, the Company's interest
rate under the Credit Facility was 2.88% and 3.13%, respectively. The available
portion of the Credit Facility was approximately $90.4 million at December 31,
2003, up from $42.5 million available under the Prior Credit Facility at
December 31, 2002.
Contractual Obligations
Less than 1 1-3 3-5 More than 5
Contractual Obligations Total year years years years
- ----------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations $ -- $ -- $ -- $ -- $ --
Capital Lease Obligations -- -- -- -- --
Operating Lease Obligations 10,224 2,714 4,861 2,649 --
Purchase Obligations -- -- -- -- --
Notes Payable to Banks 12,813 12,813 -- -- --
Other Long-Term Liabilities Reflected on the
Registrant's Balance Sheet under GAAP -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total Contractual Obligations $ 23,037 $ 15,527 $ 4,861 $ 2,649 $ --
======================================================================================================================
The Company is obligated under an operating lease to provide the landlord with a
letter of credit in the amount of $1.0 million as a security deposit for all
tenant improvements associated with the lease.
29
Sarbanes-Oxley Section 404
The Company is working to ensure that it is in compliance with the
requirements set forth in Sarbanes-Oxley Section 404 ("SOX 404"). Under SOX 404,
the Company is required to attest to the effectiveness of its internal controls
as of December 31, 2004. At this time it is not clear as to the total cost the
Company will incur as a result of this compliance effort, however, it appears
that it will be a significant amount in 2004.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company had a $125.0 million credit facility indexed at LIBOR plus
1.75 percentage points as of December 31, 2003. This variable rate credit
facility subjects the Company to potential borrowing costs exposure resulting
from changes in interest rates. Accordingly, at current borrowing levels, the
Company does not believe that any move in interest rates would have such an
effect. If the Company were to increase borrowings under its Credit Facility
significantly, then future interest rate changes could potentially have such a
material impact on earnings.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
Except for historical information, all of the statements, expectations,
beliefs, anticipations, intentions, and assumptions contained in the foregoing
material are "forward-looking statements" (within the meaning of the Private
Securities Litigation Reform Act of 1995, as amended) that involve a number of
risks and uncertainties. All such forward-looking statements are intended to be
subject to the safe harbor protection provided by the Private Securities Reform
Act of 1995, as amended, and by other applicable securities laws. It is possible
that the assumptions made by management -- including, but not limited to, those
relating to the cost of and compliance with Sarbanes-Oxley Section 404,
favorable gross margins, a favorable mix of contracts, benefits of a more
efficient operation, future contract awards, returns on new product programs,
profitability, recovery of the costs of inventory, and increased control of
operating costs -- may not materialize. Actual results may differ materially
from those projected or implied in any forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to revise publicly the forward-looking statements to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risks factors described in other documents the Company
files from time to time with the Securities and Exchange Commission, including
the Quarterly Reports on the Form 10-Q to be filed by the Company subsequent to
this Annual Report on Form 10-K and any Current Reports on Form 8-K filed by the
Company.
30
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements and Schedule of GTSI Corp. and
Subsidiary are filed as part of this Form 10-K. Supplemental unaudited quarterly
financial data is included in Note 14 of the Notes to Consolidated Financial
Statements.
Index to Financial Statements and Schedule Page
- ------------------------------------------ ----
Financial Statements:
Reports of Independent Public Accountants 32-33
Consolidated Balance Sheets as of December 31, 2003 and 2002 34
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 35
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2003, 2002 and 2001 36
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 37
Notes to Consolidated Financial Statements 38-55
31
Report of Independent Auditors
To the Board of Directors and Stockholders of GTSI Corp.:
We have audited the accompanying consolidated balance sheets of GTSI
Corp. and subsidiary as of December 31, 2003 and 2002 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years then ended. Our audit also included the financial statement
schedule for the years ended December 31, 2003 and 2002 listed in the Index at
Item 15. These financial statements and the schedule are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
GTSI Corp. and subsidiary as of December 31, 2003 and 2002 and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule for the years
ended December 31, 2003 and 2002, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 1 to the financial statements, in 2003, the
Company changed its method of accounting for certain consideration received from
vendors.
/s/ Ernst & Young LLP
McLean, Virginia
February 9, 2004
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GTSI Corp.:
We have audited the accompanying consolidated balance sheet of GTSI
Corp. and subsidiary (GTSI Corp., formerly Government Technology Services, Inc.,
a Delaware corporation) as of December 31, 2001, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years ending December 31, 2001 and 2000. These financial statements are the
responsibility of GTSI Corp.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of GTSI Corp. and
subsidiary as of December 31, 2001 and 2000, and the results of their operations
and their cash flows for the years ending December 31, 2001 and 2000, in
conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Vienna, Virginia
February 14, 2002
This is a copy of the audit report previously issued by Arthur Andersen
LLP in connection with the GTSI Corp. filing on Form 10-K for the year ended
December 31, 2001. Arthur Andersen LLP has not reissued this audit report in
connection with this filing on Form 10-K. (See Exhibit 23.2 for further
discussion).
33
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
------------------------
2003 2002
---------- ----------
ASSETS
Current assets:
Cash $ 177 $ 32
Accounts receivable, net 180,270 139,164
Leases receivable, net 1,718 308
Merchandise inventories 55,987 56,039
Other current assets 15,490 15,080
---------- ----------
Total current assets 253,642 210,623
Property and equipment, net 10,670 11,707
Other assets 4,449 2,588
---------- ----------
Total assets $ 268,761 $ 224,918
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 12,813 $ 7,539
Accounts payable 152,435 122,432
Accrued liabilities 11,168 11,241
Deferred revenue 8,323 2,171
Accrued warranty liabilities 4,555 4,404
---------- ----------
Total current liabilities 189,294 147,787
Other liabilities 1,522 1,640
---------- ----------
Total liabilities 190,816 149,427
---------- ----------
Commitments and contingencies
Stockholders' equity
Preferred stock - $0.25 par value, 680,850 shares authorized;
none issued or outstanding -- --
Common stock - $0.005 par value, 20,000,000 shares authorized and 9,806,084
issued; 8,505,045 and 8,609,938 outstanding at December 31, 2003 and 2002,
respectively 49 49
Capital in excess of par value 45,911 44,439
Retained earnings 40,131 36,952
Treasury stock, 1,301,039 and 1,196,146 shares at December 31, 2003 and 2002
respectively (8,146) (5,949)
---------- ----------
Total stockholders' equity 77,945 75,491
---------- ----------
Total liabilities and stockholders' equity $ 268,761 $ 224,918
========== ==========
The accompanying notes are an integral part of these consolidated
balance sheets.
34
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the years ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Sales $ 954,118 $ 934,730 $ 783,496
Cost of sales 857,334 857,105 718,370
---------- ---------- ----------
Gross margin 96,784 77,625 65,126
Operating expenses excluding impairment charge 88,347 66,499 61,409
Impairment charge 5,972 -- --
---------- ---------- ----------
Operating expenses 94,319 66,499 61,409
Income from operations 2,465 11,126 3,717
Interest and other income 3,119 5,198 4,501
Interest expense (287) (678) (794)
---------- ---------- ----------
Interest and other income, net 2,832 4,520 3,707
---------- ---------- ----------
Income before income taxes 5,297 15,646 7,424
Income tax provision 2,118 6,113 2,938
---------- ---------- ----------
Net income $ 3,179 $ 9,533 $ 4,486
========== ========== ==========
Net income per common share
Basic $ 0.38 $ 1.15 $ 0.55
========== ========== ==========
Diluted $ 0.35 $ 1.04 $ 0.50
========== ========== ==========
Weighted average common shares outstanding
Basic 8,349 8,302 8,144
========== ========== ==========
Diluted 9,116 9,156 9,049
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
35
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
For the years ended December 31, 2003, 2002, and 2001
---------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
---------------------- ---------------------- Capital in Total
Shares Shares Excess of Retained Treasury Stockholders'
Issued Amount Issued Amount Par Earnings Stock Equity
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2000 -- $ -- 9,806 $ 49 $ 43,484 $ 22,933 $ (7,986) $ 58,480
Stock options exercised -- -- -- -- 49 -- 2,425 2,474
Employee stock purchase plan -- -- -- -- (99) -- 571 472
Common stock repurchase -- -- -- -- -- -- (2,847) (2,847)
Net income -- -- -- -- -- 4,486 -- 4,486
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2001 -- $ -- 9,806 $ 49 $ 43,434 $ 27,419 $ (7,837) $ 63,065
========== ========== ========== ========== ========== ========== ========== ==========
Stock options exercised -- -- -- -- 885 -- 2,298 3,183
Employee stock purchase plan -- -- -- -- 120 -- 387 507
Common stock repurchase -- -- -- -- -- -- (797) (797)
Net income -- -- -- -- -- 9,533 -- 9,533
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 -- $ -- 9,806 $ 49 $ 44,439 $ 36,952 $ (5,949) $ 75,491
========== ========== ========== ========== ========== ========== ========== ==========
Stock options exercised -- -- -- -- 1,269 -- 882 2,151
Employee stock purchase plan -- -- -- -- 203 -- 891 1,094
Common stock repurchase -- -- -- -- -- -- (3,970) (3,970)
Net income -- -- -- -- -- 3,179 -- 3,179
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2003 -- $ -- 9,806 $ 49 $ 45,911 $ 40,131 $ (8,146) $ 77,945
========== ========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
36
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended December 31,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,179 $ 9,533 $ 4,486
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,874 3,543 4,407
Impairment charge 5,972 -- --
Loss on disposal of property and equipment 64 593 26
Deferred taxes 502 (421) 1,573
Changes in operating assets and liabilities:
Accounts receivable (41,106) (779) (6,605)
Leases receivable (1,410) 28,851 (20,391)
Merchandise inventories 52 5,395 (7,864)
Other assets (2,271) (5,860) 7,079
Accounts payable 30,003 (28,946) 17,308
Accrued liabilities and warranty liabilities 6,842 2,397 (3,525)
Other liabilities (118) (763) 258
---------- ---------- ----------
Net cash provided by (used in) operating activities: 4,583 13,543 (3,248)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,873) (3,871) (3,577)
---------- ---------- ----------
Net cash used in investing activities: (7,873) (3,871) (3,577)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment of) bank notes, net 5,274 (12,647) 8,261
Payment of notes payable -- -- (1,500)
Purchase of treasury stock (3,970) (797) (2,847)
Proceeds from employee stock purchase plan 1,094 507 472
Proceeds from exercises of stock options 1,037 3,183 2,474
---------- ---------- ----------
Net cash provided by (used in) financing activities: 3,435 (9,754) 6,860
---------- ---------- ----------
Net increase (decrease) in cash 145 (82) 35
Cash at beginning of year 32 114 79
---------- ---------- ----------
Cash at end of year $ 177 $ 32 $ 114
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 299 $ 770 $ 907
Income taxes $ 1,796 $ 4,347 $ 2,509
The accompanying notes are an integral part of these consolidated
financial statements.
37
GTSI CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GTSI Corp. ("GTSI", or the "Company", formerly named Government
Technology Services, Inc.) operates in a single business segment and resells
hardware, software and peripherals to agencies of federal, state and local
governments (the "Government"). Business activities also include sales to
systems integrators, prime contractors and other companies reselling information
technology to various government agencies. GTSI is hereinafter referred to as
the "Company."
1. Summary of Significant Accounting Policies
Consolidation. The consolidated financial statements include the
accounts of GTSI and its wholly owned subsidiary, Falcon. All significant
intercompany accounts and transactions are eliminated in consolidation.
Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
The most significant estimates include the allowance for doubtful accounts,
reserves for excess or obsolete inventory, reserves for asset impairment, and
reserves for future costs to be incurred under the Company's warranty programs.
Revenue Recognition. Revenue is recognized when a customer order has
been executed, the sales price is fixed and determinable, delivery of services
or products has occurred, and collection of the sales price is considered
probable and can be reasonably estimated. Revenue from hardware and software
product sales is generally recognized when title to the products sold passes to
the customer, with provisions established for estimated product returns. Based
upon the Company's standard shipping terms, title generally passes upon the
customer's receipt of the products. The Company also sells third-party services,
such as maintenance contracts, and recognizes revenue in the same manner as
hardware and software sales. Revenues from other services are recognized when
the services are complete. Payments received before delivery has occurred or
services have been rendered are recorded as deferred revenue.
Cash and Cash Equivalents. The Company considers all investments with
maturity of three months or less on their acquisition date to be cash
equivalents.
Fair Value of Financial Instruments. At December 31, 2003 and 2002, the
recorded values of financial instruments such as accounts receivable and payable
and notes payable to banks approximated their fair values, based on the
short-term maturities of these instruments. As of December 31, 2003 and 2002,
the Company believes the carrying amount of its current and long-term lease
receivables approximates their value since the lease receivables are discounted
at an interest rate that approximates market.
Accounts Receivable. Accounts receivable principally represents amounts
collectible from the Government and prime contractors to the Government. Other
accounts receivable result from items billed to suppliers under various
agreements involving the sale of their products. The Company performs ongoing
credit evaluations of its non-governmental customers but generally does not
require collateral to support any outstanding obligation owed to GTSI.
Allowances for potential uncollectible amounts are estimated and deducted from
total accounts receivable.
38
Sales of Lease Receivables. The Company sells products to certain
customers under sales-type lease arrangements. The Company accounts for its
sales-type leases according to the provisions of Statement of Financial
Accounting Standard (SFAS) No. 13, "Accounting for Leases," and accordingly,
recognizes current and long-term lease receivables, net of unearned finance
income on the accompanying balance sheets. The Company periodically sells lease
receivables to various unrelated financing companies. The Company accounts for
its sales of lease receivables in accordance with SFAS No. 140, "Accounting for
Transfers and Serving of Financial Assets and Extinguishments of Liabilities - a
Replacement of SFAS No. 125." In accordance with the criteria set forth in SFAS
No. 140, lease receivables amounting to $19.5 million and $49.0 million, in 2003
and 2002 respectively, were accounted for as sales and, as a result, the related
receivables have been excluded from the accompanying balance sheets.
Merchandise Inventories. Merchandise inventories are valued at the
lower of cost or market. Cost is determined using a weighted average method.
Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over estimated useful lives ranging
from three to ten years. Leasehold improvements are amortized using the
straight-line method over the terms of the leases or their estimated useful
lives, whichever is shorter.
Impairment of Long-Lived Assets. Long-lived assets, consisting
primarily of property and equipment and capitalized software, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount should be addressed pursuant to SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." The Company determines
impairment by comparing the carrying value of these long-lived assets to a
probability weighted estimated undiscounted future cash flows expected to result
from the use of these assets and their eventual disposition. In the event the
Company determines that an impairment exists, a loss would be recognized based
on the amount by which the carrying value exceeds the fair value of the assets,
which is generally determined by using quoted market prices or valuation
techniques such as the discounted present value of expected future cash flows,
appraisals, or other pricing models as appropriate. During 2003, in accordance
with SFAS No. 144, the Company recorded an impairment charge of approximately
$6.0 million related to capitalized software (See Note 5).
Accrued Warranty Liabilities. The Company offers warranties on sales
under certain products specific to the terms of the customer agreements.
Standard warranties require repair or replacement of defective products reported
during the warranty period at no cost to the customer. The Company records an
estimate for warranty expenses related to costs based on its actual historical
return rates and repair costs at the time of sale.
Shipping Costs. The Company's shipping costs are included in cost of
sales for all periods presented.
Income Taxes. The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax
assets and liabilities are computed based on the estimated future tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. SFAS
No. 109 requires that a valuation allowance be established when necessary to
reduce deferred tax assets to amounts expected to be realized.
Earnings Per Share. In accordance with SFAS No. 128, "Earnings Per
Share," the Company presents basic and diluted earnings per share on the face of
the statements of operations for all periods presented. Basic earnings per share
excludes dilution and is computed by dividing income available to common
39
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. For the years ended December 31,
2003, 2002 and 2001, diluted weighted average common shares outstanding includes
the dilutive effect of options if exercised of 767,000, 854,000 and 905,000
shares, respectively.
Interest and Other Income, Net. For the years ended December 31, 2003,
2002, and 2001, interest and financing income includes $2.2 million, $3.6
million, and $2.2 million, respectively, of financing income earned on prompt
payment of vendor invoices and $.5 million, $1.4 million, and $1.7 million,
respectively, of interest income from lease receivables.
A $500,000 gain on the sales of certain of the Company's lease
receivables is included in interest and other income in the accompanying balance
sheet for the year ended December 31, 2002.
Marketing Development and Cooperative Advertising Funds. The costs of
advertising are expensed as incurred. Certain vendors provide the Company with
sales incentive programs. Generally, the funds received under these programs are
determined based on the Company's purchases and/or sales of the vendor's
product. The funds are earned upon performance of specific promotional programs
or upon completion of predetermined objectives dictated by the vendor.
On January 1, 2003 the Company adopted a new accounting pronouncement,
Emerging Issues Task Force (EITF) Issue No. 02-16, "Accounting for Consideration
Received from a Vendor by a Customer (Including a Reseller of the Vendor's
Products)." This pronouncement requires that consideration from vendors, such as
advertising support funds and sales volume incentives, be accounted for as a
reduction to cost of sales unless certain requirements are met showing that the
funds represent a reimbursement of a specific, incremental, identifiable cost
incurred by the Company in selling the vendor's product. If these specific
requirements related to individual vendors are met, the consideration is
accounted for as a reduction in the related expense category, such as
advertising or selling and administrative expense. The Company provides numerous
advertising programs to support vendors, including catalogs, radio, Internet,
magazine and newspaper advertising for which it receives consideration.
In accordance with EITF No. 02-16, the Company records certain vendor
considerations as a reduction of inventory and a subsequent reduction in cost of
goods sold when the related product is sold. In previous reporting periods, the
Company recorded these items as a reduction to operating expenses in that
period.
For comparative purposes, if the Company applied EITF No. 02-16 to the
year ended December 31, 2002, the Company's gross margin would have increased
from $90.0 million to $96.8 million. Gross margin percentage would have
increased from 9.6% for 2002 to 10.1% for 2003. The primary reason for the
increase in margins on this comparative basis is due to an increase in the
volume of the vendor incentives funds received in 2003 compared to 2002.
Operating expenses would have also increased from $78.8 million for 2002 to
$94.3 million for 2003. The impact for the year ended December 31, 2003 was an
increase in cost of goods sold or approximately $148,000 or a tax effected
reduction to net income of approximately $89,000. If EITF No. 02-16 was applied
to 2003, the net income impact would have been a decrease of $13,000.
Concentration of Credit Risk. The Company's customers are primarily
federal, state and local government agencies and prime contractors to the
Government, including systems integrators. In 2003, the Company sold products or
services to thousands of different customers, including to most agencies and
major departments of the Government, to many state governments and to hundreds
of prime contractors. The company's customer mix in 2003 was 40% Department of
Defense, 33% Civilian agencies and departments, 22% prime contractors, and 5%
state and local government business. In 2002, the Company recorded sales to a
single system integrator, which is a prime contractor to the Government in
excess of 9% of the Company's sales for 2002.
40
Outstanding Checks. Included in accounts payable at December 31, 2003
and 2002 are approximately $7.7 million and $6.9 million, respectively, which
represent checks that have been issued but have yet to clear the bank, which
would otherwise be considered a net overdraft.
New Accounting Pronouncements. In November 2002, the EITF published
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF No.
00-21"), which addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities.
EITF No. 00-21 addresses how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting. EITF No. 00-21
is effective for the Company for revenue arrangements entered into beginning
July 1, 2003. The adoption of EITF No. 00-21 did not have a material impact on
the Company's 2003 consolidated financial statements.
In November 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" (FIN No. 45). FIN No. 45 elaborates on the disclosure to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of FIN No. 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN No. 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. As a result of
adopting FIN No. 45, the Company has added additional disclosures related to
accrued warranty obligations. (See note 7).
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS No.
123." This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock -based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principle Board (APB) Opinion
No. 25 "Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the fair market value of the Company's stock at the date of the grant
over the exercise price of the related option.
41
Had compensation costs for the Company's stock options been determined
based on SFAS No. 123 using an accepted fair valuation method, the Company's net
income and earnings per share would have been as follows (in thousands, except
per share amounts):
2003 2002 2001
---------- ---------- ----------
Net income - as reported $ 3,179 $ 9,533 $ 4,486
Add: Total stock-based employee
compensation expense as reported under
intrinsic value method (APB No. 25) for
all awards, net of related tax effects -- -- --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method (SFAS No. 123)
for all awards and stock purchase plans,
net of related tax effects (2,373) (1,805) (1,648)
---------- ---------- ----------
Net income - pro forma $ 806 $ 7,728 $ 2,838
========== ========== ==========
Net income per share - as reported (basic) $ 0.38 $ 1.15 $ 0.55
========== ========== ==========
Net income per share - as reported
(diluted) $ 0.35 $ 1.04 $ 0.50
========== ========== ==========
Net income per share - pro forma (basic) $ 0.10 $ 0.93 $ 0.35
========== ========== ==========
Net income per share - pro forma (diluted) $ 0.09 $ 0.85 $ 0.31
========== ========== ==========
The fair value of each option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
2003 2002 2001
----------- ----------- -----------
Average expected life 4.0 years 4.0 years 4.4 years
Risk free interest rate 3.34% 2.53% 4.50%
Volatility 78.1% 77.9% 75.9%
Dividend yield -- -- --
2. Accounts Receivable
The composition of accounts receivable as of December 31, 2003 and
2002, is as follows (in thousands):
2003 2002
--------- ---------
Trade accounts receivable $ 161,285 $ 122,765
Vendor and other receivables 19,684 17,233
--------- ---------
180,969 139,998
Less: Allowance for uncollectible accounts (699) (834)
--------- ---------
Accounts receivable, net $ 180,270 $ 139,164
========= =========
42
3. Leases Receivable
The Company sold products to certain Government customers under
sales-type lease arrangements. Government leasing arrangements were for two to
three years and carry market interest rates ranging from 4.67 to 12.90 percent.
Total future minimum lease payments and unearned finance income due under the
sales-type leases are as follows (in thousands):
Total Lease Payments Unearned Finance Net Principle
Due Income Due
-------------------- -------------------- --------------------
2004 $ 2,146 $ 428 $ 1,718
2005 1,264 185 1,079
2006 1,634 160 1,474
-------------------- -------------------- --------------------
Total lease receivables $ 5,044 $ 773 $ 4,271
==================== ==================== ====================
4. Property and Equipment
The composition of property and equipment as of December 31, 2003 and
2002, is as follows (in thousands):
2003 2002
-------- --------
Office furniture and equipment $ 13,561 $ 11,885
Computer software (includes ERP system, see note 5) 15,805 15,938
Leasehold improvements 5,041 4,960
-------- --------
34,407 32,783
Less accumulated depreciation and amortization (23,737) (21,076)
-------- --------
Property and equipment, net $ 10,670 $ 11,707
======== ========
Depreciation and amortization expense $ 2,874 $ 3,543
======== ========
During 2002 the Company replaced its website and disposed of the old
website. The remaining book value of the old website of approximately $580,000
was written off during the second quarter of 2002.
5. Capitalized Software
The Company is implementing an enterprise resource planning (ERP)
system to replace its current fulfillment system. Implementation of the ERP
system is designed to improve management information and gain operating
efficiencies. As of December 31, 2003 the Company has $3.9 million of costs
capitalized under this project.
In the fourth quarter of 2003 the Company recorded an impairment charge
of approximately $6.0 million related to capitalized software. During the fourth
quarter the Company determined that it was not in the Company's best interest to
continue to pursue a highly customized ERP system due to the high level of
development risk and the higher total cost of ownership
43
associated with maintaining a customized solution. The Company has changed its
strategy and decided to implement a standard ERP system, which is expected to
lower the risk, compress the delivery time, provide significant value sooner,
and reduce the overall project expenses. Due to this change in strategy, $6.0
million of the capitalized assets related to the customized solution were
determined to have no future economic value. The enterprise software and
hardware for a standard ERP system purchased to date will be fully utilized in
the roll out of the new system.
6. Notes Payable to Banks
During the fourth quarter 2003, the Company closed a new $125 million
Credit Facility with a lender (the Credit Facility) and terminated the existing
credit facilities. The Credit Facility, which matures on February 28, 2005,
includes a revolving line of credit (the Revolver) and a provision for inventory
financing of vendor products (the Wholesale Financing Facility). Borrowing under
the Revolver is limited to 85% of eligible accounts receivable. The Revolver is
secured by substantially all of the Company's assets. Borrowing under the
Wholesale Financing Facility is limited to 100% of the value of the inventory.
The Wholesale Financing Facility is secured by the underlying inventory. The
Credit Facility carries an interest rate indexed to LIBOR plus 1.75 percentage
points. The Credit Facility also contains certain covenants as well as
provisions specifying compliance with certain quarterly and annual financial
ratios.
In 2002 and 2001 the Company had a revolving line of credit (the Prior
Revolver) with a group of banks, which allowed for borrowings up to $50.0
million during its highest seasonal period. Additionally, the Company had a
separate facility with a bank for inventory financing of vendor products (the
Prior Wholesale Financing Facility), which allowed for borrowings up to $60.0
million during its highest seasonal period. Combined, the Prior Revolver and the
Prior Wholesale Financing Facility (the Prior Credit Facilities) allowed the
Company to borrow from $55.0 million to $110.0 million depending on the seasonal
period. The seasonal structure of the Prior Credit Facilities coincided with the
seasonality of the Company's business and allowed the Company to minimize
banking fees. The interest rate under the Prior Credit Facilities was a rate
indexed to the London Interbank Offered Rate (LIBOR) plus 1.75 percentage
points.
On March 31, 2003 the Company and its group of banks signed an
amendment to the revolver in which the group of banks consented to allow the
Company to repurchase up to an additional $5.0 million worth of its stock from
stockholders. During 2003, the Company repurchased approximately $4.0 million of
its stock.
As of December 31, 2003 and 2002, respectively, the Company's interest
rate under the Credit Facility and the Prior Credit Facility was 2.88% and
3.13%, respectively. The weighted average interest rates for the years ended
December 31, 2003, 2002, and 2001 were 2.96%, 3.50%, and 5.70%, respectively.
The available portion of the Credit Facility was approximately $90.4 million at
December 31, 2003.
At December 31, 2003, the Company was in compliance with all financial covenants
set forth in the Credit Facility.
44
7. Accrued Warranty Liabilities
The Company offers warranties on sales under certain products specific
to the terms of the customer agreements. Standard warranties require repair or
replacement of defective products reported during the warranty period at no cost
to the customer. The Company records an estimate for warranty expenses related
to costs based on its actual historical return rates and repair costs at the
time of sale.
(in thousands) Year Ended December 31,
2003 2002
------------ ------------
Accrued warranty liability as of beginning of the year $ 4,404 $ 6,442
Warranty activity from January 1, to December 31,
Charges made against the warranty (5,004) (8,356)
Accruals related to warranty 5,155 6,318
------------ ------------
Net change to accrued warranty liability 151 (2,038)
------------ ------------
Accrued warranty $ 4,555 $ 4,404
============ ============
8. Earnings Per Share
The following table sets forth the components of basic and diluted earnings per
share:
In thousands, except per share amounts
------------------------------------
Year ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Basic earnings per share:
Net income (numerator) $ 3,179 $ 9,533 $ 4,486
Weighted average shares outstanding (denominator) 8,349 8,302 8,144
---------- ---------- ----------
Basic earnings per share $ 0.38 $ 1.15 $ 0.55
========== ========== ==========
Diluted earnings per share:
Net income (numerator) $ 3,179 $ 9,533 $ 4,486
Denominator:
Weighted average shares outstanding 8,349 8,302 8,144
Effect of dilutive securities:
Employee stock options 767 854 905
---------- ---------- ----------
Denominator for dilutive earnings per share 9,116 9,156 9,049
---------- ---------- ----------
Diluted earnings per share $ 0.35 $ 1.04 $ 0.50
========== ========== ==========
45
9. Income Taxes
The components of the provision for income taxes for the years ended
December 31, 2003, 2002, and 2001 are as follows (in thousands):
2003 2002 2001
-------- -------- --------
Current taxes :
Federal $ 1,373 $ 5,769 $ 1,079
State 243 765 287
-------- -------- --------
1,616 6,534 1,366
Deferred taxes:
Federal 427 (372) 1,398
State 75 (49) 174
-------- -------- --------
502 (421) 1,572
-------- -------- --------
Income tax provision $ 2,118 $ 6,113 $ 2,938
======== ======== ========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities and the
amounts recorded for income tax purposes. Significant components of the
Company's deferred taxes as of December 31, 2003 and 2002 were as follows (in
thousands):
December 31,
-------------------
2003 2002
-------- --------
Deferred tax assets:
Accounts receivable and inventory allowances $ 270 $ 322
Intangible assets -- 1,339
Accrued warranty 1,760 1,701
Bid and proposal costs 466 552
Vacation accrual 440 431
Depreciation 965 674
Rent abatement 129 96
Other reserves 987 711
Prepaid revenue 584 839
-------- --------
Total deferred tax assets 5,601 6,665
-------- --------
Deferred tax liabilities:
Web site development costs 109 1,302
Software development costs 631 --
-------- --------
Total deferred tax liabilities 740 1,302
-------- --------
Net deferred tax assets $ 4,861 $ 5,363
======== ========
46
The Company's effective tax rate for the years ended December 31, 2003,
2002, and 2001 differs from the statutory rate for federal income taxes as a
result of the following factors:
2003 2002 2001
------- ------- -------
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal tax benefit 4.0% 4.6% 4.6%
Other 2.0% 0.5% 1.0%
------- ------- -------
40.0% 39.1% 39.6%
======= ======= =======
10. Stockholders' Equity
Stock Options and Warrants. The Company has two combination incentive
and non-statutory stock option plans, the "1996 Plan" and the "1994 Plan," that
provide for the granting of options to employees (both plans) and non-employee
directors (only under the 1996 Plan) to purchase up to 2,500,000 and 300,000
shares, respectively, of the Company's common stock. In addition, in May 1997
the Company's Board of Directors adopted the 1997 Non-Officer Stock Option Plan
(the "1997 Plan"). The 1997 Plan provides for the granting of non-statutory
stock options only to employees other than officers and directors to purchase up
to 300,000 shares of the Company's common stock. Until its expiration on March
15, 1996, the Company had another combination incentive and non-statutory stock
option plan, the "1986 Plan," that provided for the granting of options to
employees to purchase up to 1,100,000 shares of the Company's common stock.
Under the 1997, 1996, 1994 and 1986 Plans, 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 Company's 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.
On May 14, 2003, the stockholders of the Company approved a change to
extend the exercise period for certain options granted to its non-employee
directors following cessation from the Company to the earlier of the fifth
anniversary of the cessation date or the expiration date of the respective
option. The maximum compensation expense impact, if any, related to this
change, is $1.8 million. Also, in January 2003, the Company agreed that the
unvested options held by one officer would automatically vest if a change in
control of the Company occurs. The maximum compensation expense impact, if any,
related to this change, is $.8 million. Both of these changes result in a new
measurement date as required by FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - An Interpretation of APB
Opinion No. 25". No compensation expense was recorded as a result of the
modifications at that time or to date because the Company is unable to estimate
whether the non-employee directors will benefit from the extension of their
option awards as a result of the modification and, with respect of the unvested
options held by the officer, if a change in control of the Company will occur.
The compensation expense, if recorded, would not impact the Company's cash flows
or stockholders' equity.
During 2003, an executive submitted Company mature stock with a value
of $1.1 million previously purchased on the open market to pay for the exercise
of 100,000 stock options pursuant to the terms of the Company's stock option
plan, which resulted in a cashless exchange of stock options for Company stock.
47
Options under the 1997, 1996, 1994 and 1986 Plans were as follows:
Weighted Weighted
Average Average
Number of Option Exercise Price Exercise Price Remaining
Shares Per Share Per Share Life
- ------------------------------------------------------------------------------------------------------------------------
1997 Plan:
Outstanding at December 31, 2000 279,967 $2.88-5.38 $4.23
Granted --
Forfeited or canceled (13,792) $2.88-4.88 $3.41
Exercised (112,917) $2.88-5.38 $4.42
Outstanding at December 31, 2001 153,258 $2.88-5.25 $4.16
Granted 33,000 $7.93-11.06 $9.15
Forfeited or canceled (6,750) $3.13-4.50 $3.49
Exercised (93,583) $2.88-5.25 $4.37
Outstanding at December 31, 2002 85,925 $3.00-11.03 $5.90
Granted -- -- $0.00
Forfeited or canceled (6,250) $3.31-8.75 $6.58
Exercised (18,525) $3.00-8.75 $4.87
Outstanding at December 31, 2003 61,150 $3.13-11.06 $6.15 4.2
- ------------------------------------------------------------------------------------------------------------------------
1996 Plan:
Outstanding at December 31, 2000 1,452,250 $2.81-5.44 $3.91
Granted 233,000 $4.00-6.40 $6.03
Forfeited or canceled (55,916) $2.88-4.00 $3.46
Exercised (252,084) $2.88-5.25 $3.82
Outstanding at December 31, 2001 1,377,250 $2.81-6.40 $4.30
Granted 265,000 $8.00-13.67 $10.00
Forfeited or canceled (43,000) $3.25-6.40 $3.77
Exercised (262,233) $2.88-6.40 $3.95
Outstanding at December 31, 2002 1,337,017 $2.81-13.67 $5.52
Granted 589,833 $8.18-12.48 $10.36
Forfeited or canceled (78,333) $3.25-11.30 $7.95
Exercised (184,167) $2.88-11.06 $3.84
Outstanding at December 31, 2003 1,664,350 $2.81-$13.67 $7.31 5.4
- ------------------------------------------------------------------------------------------------------------------------
48
1994 Plan:
Outstanding at December 31, 2000 249,500 $2.88-12.88 $5.70
Granted -- -- $0.00
Forfeited or canceled -- -- $0.00
Exercised (34,500) $2.88-3.50 $3.24
Outstanding at December 31, 2001 215,000 $2.88-12.88 $6.10
Granted 98,000 $7.81-11.06 $9.29
Forfeited or canceled (72,417) $2.88-8.75 $5.42
Exercised (95,166) $2.88-7.31 $4.56
Outstanding at December 31, 2002 145,417 $2.88-12.88 $7.25
Granted -- -- --
Forfeited or canceled (27,500) $3.13-11.06 $8.72
Exercised (35,000) $2.88-8.75 $4.14
Outstanding at December 31, 2003 82,917 $2.88-12.88 $8.08 6.9
- ------------------------------------------------------------------------------------------------------------------------
1986 Plan:
Outstanding at December 31, 2000 7,000 $10.25 $10.25
Granted -- -- --
Forfeited or canceled (7,000) $10.25 $10.25
Exercised -- -- --
Outstanding at December 31, 2001 -- -- --
Granted -- -- --
Forfeited or canceled -- -- --
Exercised -- -- --
Outstanding at December 31, 2002 -- -- -- --
Granted -- -- --
Forfeited or canceled -- -- -- --
Exercised -- -- --
Outstanding at December 31, 2003 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Capitalization Plan
Outstanding at December 31, 2000 995,000 $3.13-10.50 $4.47
Granted 400,000 $3.81-6.76 $4.73
Forfeited or canceled (87,500) $3.81-5.25 $4.34
49
Exercised (147,500) $3.75-5.25 $4.21
Outstanding at December 31, 2001 1,160,000 $3.13-10.50 $4.60
Granted 176,000 $7.81-11.06 $8.94
Forfeited or canceled (9,000) $7.81 $7.81
Exercised -- -- --
Outstanding at December 31, 2002 1,327,000 $3.13-11.06 $5.16
Granted 179,000 $9.14-11.30 $10.83
Forfeited or canceled (15,000) $6.20-6.20 $6.20
Exercised (188,500) $3.13-10.50 $7.76
Outstanding at December 31, 2003 1,302,500 $3.75-11.30 $5.55 3.4
- ------------------------------------------------------------------------------------------------------------------------
FOR ALL PLANS:
Outstanding at December 31, 2003 3,110,917 $2.81-13.67 $6.57 4.6
Outstanding and Exercisable by Price Range as of December 31, 2003
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------- -------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices 12/31/03 Life-Years Price 12/31/03 Price
- ---------------- ----------------- ----------------- --------------- ------------------ ---------------
2.81 - 2.85 75,000 6.4 $ 2.81 75,000 $ 2.81
2.86 - 4.28 1,249,417 2.7 3.73 1,117,167 3.75
4.29 - 5.70 294,750 3.4 5.06 288,000 5.06
5.71 - 7.13 253,500 5.6 6.26 153,000 6.23
7.14 - 8.55 288,250 7.4 8.16 158,086 8.26
8.56 - 9.98 235,500 6.4 8.84 15,000 8.75
9.99 - 11.40 656,500 6 11.16 85,000 11.12
11.41 - 12.83 50,000 6.9 12.48 7,500 12.48
12.84 - 13.67 8,000 3.9 13.37 4,250 13.11
- ---------------- ----------------- ----------------- --------------- ------------------ ---------------
2.81 - 13.67 3,110,917 4.6 $ 6.57 1,903,003 $ 4.91
================ ================= ================= =============== ================== ===============
50
At December 31, 2003, in the 1997 Plan, options for 30,900 shares were
exercisable and 10,492 options were available for grant; in the 1996 Plan,
options for 924,186 shares were exercisable and 1,126,416 options were available
for grant; in the 1994 Plan, options for 35,667 shares were exercisable and
28,217 options were available for grant; and in the 1986 Plan, no options for
shares were exercisable. The weighted average fair market value of options
granted was $6.39, $5.55, and $3.20 in 2003, 2002, and 2001, respectively. A tax
benefit from the exercise of stock options was recorded for the year ending
December 31, 2003, for $1.1 million.
Stock Purchase Plan. The Company has established an Employee Stock
Purchase Plan ("ESPP"). Eligible employees may elect to set aside, through
payroll deduction, up to 15% of their compensation to purchase common stock of
the Company. The maximum number of shares that an eligible employee may purchase
during any offering period is equal to 5% of such employee's compensation for
the 12 calendar-month period prior to the commencement of an offering period
divided by 85% of the fair market value of a share of common stock on the first
day of the offering period. The ESPP is implemented through one offering during
each six-month period beginning January 1 and July 1. The ESPP purchase price is
85% of the lower of the fair market value of a share of common stock on the
first day or the last day of the offering period. In the offering periods ended
June 30, 2003 and December 31, 2003, employees purchased 65,780 and 81,314
shares, respectively, at prices of $7.44 and $7.44, respectively. In the
offering periods ended June 30, 2002 and December 31, 2002, employees purchased
63,269 and 77,858 shares, respectively, at prices of $6.67 and $6.67,
respectively. In the offering periods ended June 30, 2001 and December 31, 2001,
employees purchased 68,465 and 57,563, respectively, at prices of $2.68 and
$5.02, respectively. The weighted average fair market value of shares under the
ESPP was $7.44, $6.67, and $3.75 in 2003, 2002, and 2001, respectively. The
Company has reserved 750,000 shares of common stock for the ESPP, of which
56,199 were available for future issuance as of December 31, 2003. During 2004,
the Company will request the shareholders to approve to reserve another 900,000
shares of common stock for the ESPP.
11. Commitments and Contingencies
The Company is occasionally a defendant in litigation incidental to its
business. The Company believes that none of such litigation currently pending,
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition or results of operations.
In November 2003, GTSI was served with a $25 million lawsuit, with
treble damages, related to the termination of a former subcontractor. This suit
follows the Company's earlier lawsuit against the former subcontractor.
Management believes these claims are without merit and intends to vigorously
defend this lawsuit, but the ultimate outcome of this matter is uncertain.
Management is unable to estimate the amount GTSI may have to pay related to this
matter. No amounts have been accrued as of December 31, 2003.
During the second quarter of 2003, GTSI's sales organization was
successful in securing an order for software inventory that had been reserved
for during 2002. As a result, the company reversed a $1.4 million reserve.
51
During 2002, the Company determined that it was remote that certain
accrued obligations would need to be paid. Accordingly, the associated
obligation of $1.4 million was reversed.
The Company leases office and warehouse space and various equipment
under noncancelable operating leases.
In October 1997, the Company executed a ten-year lease for office space
in Chantilly, Virginia. The agreement has one five-year option period and
commenced on December 1, 1998. The Company is obligated under the lease
agreement to provide to the landlord a letter of credit in the amount of $1.0
million as a security deposit for all tenant requested improvements associated
with the lease. The Company recorded leasehold improvements in the amount of
$2.0 million, as well as a liability for deferred rent of $2.0 million in
conjunction with the build-out improvements. The asset and liability are being
amortized over the life of the lease. The Company leases a warehouse and
distribution facility in Chantilly, Virginia, in a separate facility under a
lease that expires in December 2006. In December 2002, GTSI expanded its office
space by leasing approximately 34,000 square feet of office space in Chantilly,
Virginia under a lease expiring in November 2005, with one two-year option and
one one-year option. The Company also entered into a lease agreement on April 1,
1999 for a 20,000 square-foot distribution center in Chattanooga, Tennessee. The
Company has exercised its one-year lease renewal option for the Chattanooga
facilities effective April 1, 2003. The Company also maintains a sales office in
Germany and had entered into a lease agreement as of January 1, 2004 for a term
of five years ending on December 31, 2008. Rent expense for the years ended
December 31, 2003, 2002, and 2001 was approximately $2.5 million, $2.0 million,
and $2.1 million, respectively.
Collective future minimum lease payments as of December 31, 2003, are
as follows (in thousands):
Operating
Year ending December 31, Leases
- ------------------------ ----------
2004 $ 2,714
2005 2,716
2006 2,145
2007 1,362
2008 1,287
Thereafter --
----------
Total minimum lease payments $ 10,224
==========
12. 401(k) Plan
Effective April 1991, the Company adopted the Employees' 401(k)
Investment Plan (the "Plan"), a savings and investment plan intended to be
qualified under Section 401 of the Internal Revenue Code of 1986, as amended
(the "Code"). All employees of the Company who are at least 21 years of age and
have completed at least six months of employment with the Company are eligible
to participate. The Plan is voluntary and allows participating employees to make
pretax contributions, subject to limitations under the Code, of a percentage
(not to exceed 15%) of their total compensation. Employee contributions are
fully vested at all times. The Company, in its sole discretion, may make
contributions in amounts, if any, as may be determined by the Board of Directors
for the benefit of all participants. In 2003, 2002, and 2001 the Company
contributed approximately $1.0 million, $.9 million, and $.8 million to the
Plan, respectively.
52
13. Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which requires certain information about operating segments to be presented in
the financial statements and in condensed financial statements of interim
periods. The Company has determined that through December 31, 2003, it operated
as one business segment as defined by SFAS No. 131. The primary customer of the
Company is the Federal Government, which under SFAS No. 131 is considered a
single customer.
53
14. Quarterly Financial Data (unaudited)
The following tables set forth selected unaudited quarterly financial
data and the percentages such items represent of sales. The quarterly financial
data reflect, in the opinion of the Company, all normal and recurring
adjustments necessary to present fairly the results of operations for such
periods. Results of any one or more quarters are not necessarily indicative of
annual results or continuing trends.
2003 Quarters Ended
----------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
----------------- ----------------- ------------------ ------------------
(In thousands, except per share data)
Sales $ 178,858 100.0% $ 189,737 100.0% $ 273,066 100.0% $ 312,457 100.0%
Cost of sales 162,784 91.0% 166,981 88.0% 245,569 89.9% 282,001 90.3%
Gross margin 16,074 9.0% 22,756 12.0% 27,497 10.1% 30,456 9.7%
Operating expenses excluding
impairment charge 19,702 11.0% 21,613 11.4% 22,640 8.3% 24,392 7.8%
Impairment charge -- 0.0% -- 0.0% -- 0.0% 5,972 1.9%
Operating expenses 19,702 11.0% 21,613 11.4% 22,640 8.3% 30,364 9.7%
(Loss) income from operations (3,628) -2.0% 1,143 0.6% 4,857 1.8% 92 0.0%
Interest income, net (733) -0.4% (744) -0.4% (840) -0.3% (515) -0.2%
Income before income taxes (2,895) -1.6% 1,887 1.0% 5,697 2.1% 607 0.2%
Income tax (benefit) provision (1,132) -0.6% 738 0.4% 2,227 0.8% 284 0.1%
Net income (loss) (1,763) -1.0% 1,149 0.6% 3,470 1.3% 323 0.1%
Net income per common share
Basic:
Basic net (loss) income per share $ (0.21) $ 0.14 $ 0.42 $ 0.04
Diluted:
Diluted net (loss) income per share $ (0.21) $ 0.13 $ 0.39 $ 0.04
Weighted average common shares
outstanding
Basic 8,564 8,258 8,238 8,343
========= ========= ========= =========
Diluted 8,564 8,907 8,986 9,208
========= ========= ========= =========
54
2002 Quarters Ended
----------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
----------------- ----------------- ------------------ ------------------
(In thousands, except per share data)
Sales $ 176,743 100.0% $ 200,992 100.0% $ 276,846 100.0% $ 280,149 100.0%
Cost of sales 162,232 91.8% 185,883 92.5% 254,485 91.9% 254,505 90.8%
Gross margin 14,511 8.2% 15,109 7.5% 22,361 8.1% 25,644 9.2%
Operating expenses 15,386 8.7% 14,427 7.2% 18,414 6.7% 18,272 6.5%
(Loss) income from operations (875) -0.5% 682 0.3% 3,947 1.4% 7,372 2.6%
Interest income, net (1,770) -1.0% (611) -0.3% (1,288) -0.5% (851) -0.3%
Income before income taxes 895 0.5% 1,293 0.6% 5,235 1.9% 8,223 2.9%
Income tax provision 354 0.2% 521 0.3% 2,094 0.8% 3,144 1.1%
Net income 541 0.3% 772 0.4% 3,141 1.1% 5,079 1.8%
Net income per common share
Basic:
Basic net income per share $ 0.07 $ 0.09 $ 0.38 $ 0.60
Diluted:
Diluted net income per share $ 0.06 $ 0.08 $ 0.32 $ 0.54
Weighted average common shares
Outstanding
Basic 8,184 8,265 8,316 8,439
========= ========= ========= =========
Diluted
9,518 9,582 9,723 9,402
========= ========= ========= =========
55
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
GTSI Corp. engaged the services of Ernst & Young LLP as independent
auditors to replace Arthur Andersen LLP, effective July 11, 2002. For additional
information, see GTSI Corp.'s current report on Form 8-K dated July 16, 2002.
Item 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures
Our chief executive officer and our chief financial officer, after
evaluating the effectiveness of our "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a - 14(c) and 15d -
14(c)) as of a date ("the Evaluation Date") within 90 days before the filing of
this annual report, have concluded that, as of the Evaluation Date, our
disclosure controls and procedures were adequate and designed to ensure that the
information required to be filed or submitted by us under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
requisite time periods.
(b) Changes in internal controls
There were no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
Evaluation Date.
56
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
the sections of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on April 29, 2004 entitled
"Proposal 1 - Election of Directors," "Executive Officers," "Common Stock
Ownership of Principal Stockholders and Management - Section 16(a) Beneficial
Ownership Reporting Compliance," "Code of Ethics" (also included in Item 15
below), "Audit Fees", and "Audit Committee" to be filed with the Commission.
Item 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
the sections of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on April 29, 2004 entitled
"Election of Directors - Compensation of Directors" and "Executive Compensation
and Other Information," to be filed with the Commission.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item is incorporated by reference to
the section of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on April 29, 2004 entitled "Common
Stock Ownership of Principal Stockholders and Management," to be filed with the
Commission.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
the sections of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on April 29, 2004 entitled
"Proposal 1 - Election of Directors - Class 1 Nominees" and "Compensation of
Directors" and "Executive Compensation and Other Information-Employment
Agreements and Termination of Employment and Change of Control Arrangements," to
be filed with the Commission.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated by reference to
the sections of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on April 29, 2004 entitled "Audit
Committee" and "Audit Fees," to be filed with the Commission.
57
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
3.1 Restated Certificate of Incorporation (9)
3.2 Bylaws, as amended (6)
10.1 Amended and Restated 1986 Stock Option Plan, (3), including
forms of Stock Option Agreements and Stock Purchase Agreement
(1)(2)
10.2 Employee Stock Purchase Plan, as amended to date (1)(5)
10.3 Officer Severance Plan, as amended to date (7)
10.4 GTSI Employees' 401(k) Investment Plan (2); and Amendment No.
1 (4); Amendment No. 2 and Amendment No. 3 thereto (7)
10.5 Lease dated August 11, 1995 between the Registrant and
Security Capital Industrial Trust covering new distribution
center facility (7)
10.6 1994 Stock Option Plan, as amended to date (1)(12)
10.7 1996 Stock Option Plan, as amended to date (1)(12)(13)
10.8 1997 Non-Officer Stock Option Plan, as amended to date (1)(12)
10.9 Lease dated December 10, 1997 between the Registrant and
Petula Associates, Ltd. covering new headquarters facility
(excluding attachments and exhibits) (8)
10.10 Credit Facilities Agreement, dated as of October 23, 2003,
among the Registrant, certain lenders named in such agreement,
and GE Commercial Distribution Finance Corporation, as a
Lender and as Agent (excluding attachments and exhibits)
10.11 Offer Letter dated November 29, 2000 between the Registrant
and John T. Spotila (1)(9)
10.12 Employment Agreement dated January 1, 2001 between the
Registrant and M. Dendy Young (1)(9)
10.13 Non-Qualified Stock Option Agreement effective January 2, 2001
between the Registrant and John T. Spotila (1) (12)
10.14 Offer Letter dated June 28, 2001 between Registrant and Terri
Allen (1)(11)
10.15 Non-Qualified Stock Option Agreement effective July 31, 2001
between the Registrant and Terri Allen (1)(12)
10.16 Retirement Agreement effective March 12, 2002 between the
Registrant and Robert D. Russell (1)(10)
58
10.17 Offer Letter dated May 21, 2002 between the Registrant and Dr.
Jack Littley III (1)(12)
10.18 Retirement Agreement effective November 8, 2002 between the
Registrant and William E. Johnson, Jr. (1)(12)
10.19 Offer Letter dated December 31, 2002 between the Registrant
and Thomas Mutryn (1)(12)
10.20 Memorandum Regarding Promotion to Senior Vice President dated
February 20, 2003 between the Registrant and Dr. John Littley
III (1)(12)
10.21 Non-Qualified Stock Option Agreement effective January 28,
2003 between the Registrant and Thomas Mutryn (1)(12)
14.1 Code of Ethics
23.1 Consent of Ernst & Young LLP
23.2 Information Regarding Consent of Arthur Andersen LLP
31.1 Section 302 Certification of M. Dendy Young, Chief Executive
Officer
31.2 Section 302 Certification of Thomas A. Mutryn, Chief Financial
Officer
32.1 Section 906 Certification of M. Dendy Young, Chief Executive
Officer
32.2 Section 906 Certification of Thomas A. Mutryn, Chief Financial
Officer
59
(1) Constitutes a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form
10-K.
(2) Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-41351) filed with
the Commission on June 21, 1991.
(3) Incorporated by reference to Pre-effective Amendment No. 3 to
the Registrant's Registration Statement on Form S-1
(Registration No. 33-41351) filed with the Commission on
September 20, 1991.
(4) Incorporated by reference to the Registrant's Registration
Statement on Form S-8 (Registration No. 33-55090) filed with
the Commission on November 25, 1992.
(5) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
1992.
(6) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended March
31, 1993.
(7) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended
September 30, 1993.
(8) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
1993.
(9) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended March
31, 1994.
(10) Incorporated by reference to the Registrant's Current Report
on Form 8-K filed with the Commission on August 31, 1994, as
amended by Form 8-K/A No. 1 filed with the Commission on
October 31, 1994.
(11) Incorporated by reference to the Registrant's Annual Report on
Form 10-Q (File No. 0-19394) for the year ended December 31,
1994.
(12) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
1996.
(13) Incorporated by reference to the Registrant's Current Report
on Form 8-K filed with the Commission on January 17, 1995.
(14) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended June 30,
1995.
(15) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
1995.
(16) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended March
31, 1996.
(17) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
1997.
60
(18) Incorporated by reference to the Registrant's Current Report
on Form 8-K filed with the Commission on May 18, 1998.
(19) Incorporated by reference to the Registrant's Current Report
on Form 8-K filed with the Commission on May 21, 1998.
(20) Incorporated by reference to the Registrant's Current Report
on Form 8-K filed with the Commission on August 5, 1998.
(21) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended June 30,
1998.
(22) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
1999.
(23) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
2000.
(24) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
2001.
(25) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended March
31, 2002.
(26) Incorporated by reference to the Registrant's Annual Report on
Form 10-K (File No. 0-19394) for the year ended December 31,
2002.
(27) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q (File No. 0-19394) for the quarter ended June 30,
2003.
(a) Index to Financial Statements and Schedule Page
------------------------------------------ ----
Financial Statements:
Reports of Independent Public Accountants 32-33
Consolidated Balance Sheets as of December 31, 2003 and 2002 34
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 35
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2003, 2002 and 2001 36
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 37
Notes to Consolidated Financial Statements 38-55
GTSI Corp.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands) Balance at Charged to Balance
Beginning Costs and at end
Description of Period Expenses Deductions of Period
- ----------------------------------------- ---------- ---------- ---------- ----------
Year ended December 31, 2003:
Allowance for uncollectible accounts $ 834 $ 58 $ (193) $ 699
Year ended December 31, 2002:
Allowance for uncollectible accounts $ 1,413 $ 218 $ (797) $ 834
Year ended December 31, 2001:
Allowance for uncollectible accounts $ 1,709 $ 171 $ (467) $ 1,413
(b) Reports on Form 8-K
On October 29, 2003, GTSI filed a report on Form 8-K under Item 12
relating to its financial information for the quarter ended December
31, 2003.
(c) Exhibits
See the list of Exhibits in Item 15 beginning on Page 55 of this Form
10-K.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Chantilly, Commonwealth of Virginia.
GTSI CORP.
Dated: March 15, 2004 By: /s/ M. DENDY YOUNG
------------------------------------
M. Dendy Young
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ M. DENDY YOUNG Chairman and March 15, 2004
- ---------------------------- Chief Executive Officer
M. Dendy Young (Principal Executive Officer)
and a Director
/s/ THOMAS A. MUTRYN Senior Vice President and March 15, 2004
- ---------------------------- Chief Financial Officer
Thomas A. Mutryn (Principal Financial and
Accounting Officer)
/s/ THOMAS HEWITT Director March 15, 2004
- ----------------------------
Thomas Hewitt
/s/ LEE JOHNSON Director March 15, 2004
- ----------------------------
Lee Johnson
/s/ STEVEN KELMAN Director March 15, 2004
- ----------------------------
Steven Kelman, Ph.D.
/s/ JAMES J. LETO Director March 15, 2004
- ----------------------------
James J. Leto
/s/ BARRY REISIG Director March 15, 2004
- ----------------------------
Barry Reisig
/s/ LAWRENCE J. SCHOENBERG Director March 15, 2004
- ----------------------------
Lawrence J. Schoenberg
62
/s/ JOHN M. TOUPS Director March 15, 2004
- ----------------------------
John M. Toups
/s/ DANIEL R. YOUNG Director March 15, 2004
- ----------------------------
Daniel R. Young
63