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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
COMMISSION FILE NO. 0-19394
GTSI CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1248422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3901 STONECROFT BOULEVARD
CHANTILLY, VA 20151-1010
(Address and zip code of principal executive offices)
703-502-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Shares Outstanding At August 1, 2001
- ---------------------------------- ----------------------------------------
Common Stock, $0.005 par value 8,296,005
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GTSI CORP. AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2001
TABLE OF CONTENTS PAGE
- ----------------- ----
COVER PAGE.......................................................................................1
TABLE OF CONTENTS................................................................................2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS -
Consolidated Balance Sheets as of
June 30, 2001 and December 31, 2000........................................3
Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 2001 and 2000...................4
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000....................................5
Notes to Consolidated Condensed Financial Statements...........................6
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................14
PART II - OTHER INFORMATION.....................................................................15
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. OTHER INFORMATION
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES......................................................................................16
-2-
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, DECEMBER 31,
(In thousands, except share data) 2001 2000
----------------- -------------------
ASSETS
Current assets:
Cash $ 9,296 $ 79
Accounts receivable, net 91,753 137,181
Merchandise inventories 33,993 53,570
Other current assets 18,086 18,269
----------------- -------------------
Total current assets 153,128 209,099
Property and equipment, net 12,198 12,830
Other assets 6,610 5,136
----------------- -------------------
Total assets $ 171,936 $ 227,065
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to banks $ - $ 11,925
Note payable, current 1,000 500
Accounts payable 92,042 134,071
Accrued liabilities 8,549 10,249
Accrued warranty liabilities 7,266 8,695
----------------- -------------------
Total current liabilities 108,857 165,440
Notes payable, net of current portion - 1,000
Other liabilities 5,928 2,145
----------------- -------------------
Total liabilities 114,785 168,585
----------------- -------------------
Stockholders' equity
Preferred Stock - $0.25 par value, 680,850 shares authorized; none issued
or outstanding at June 30, 2001 and December 31, 2000 - -
Common stock - $0.005 par value 20,000,000 shares authorized 9,806,084
issued and 8,296,005 outstanding at June 30, 2001; 20,000,000 shares
authorized, 9,806,084 issued and 7,956,272 outstanding at December 31, 2000 49 49
Capital in excess of par value 43,246 43,484
Retained earnings 20,402 22,933
Treasury stock, 1,510,079 shares at June 30, 2001 and
1,849,812 shares at December 31, 2000, at cost
(6,546) (7,986)
----------------- -------------------
Total stockholders' equity 57,151 58,480
----------------- -------------------
Total liabilities and stockholders' equity $ 171,936 $ 227,065
================= ===================
The accompanying notes are an integral part of these consolidated condensed financial statements.
- 3 -
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
(In thousand, except per share data) JUNE 30, JUNE 30,
2001 2000 2001 2000
------------------------------------------- ----------------------- ---------------
Sales $ 151,090 $ 136,468 $ 300,379 $ 257,601
Cost of sales 138,250 123,929 274,773 235,893
---------------------- -------------------- ----------------------- ---------------
Gross margin 12,840 12,539 25,606
21,708
Operating expenses 15,697 11,978 31,056
24,071
---------------------- -------------------- ----------------------- ---------------
(Loss) income from operations (2,857) (5,450)
561 (2,363)
---------------------- -------------------- ----------------------- ---------------
Interest income (733) (379) (1,639)
(1,452)
Interest expense 305
54 225 559
---------------------- -------------------- ----------------------- ---------------
Interest income, net (679) (154) (1,334)
(893)
---------------------- -------------------- ----------------------- ---------------
(Loss) income before income taxes and (2,178) (4,116)
cumulative effect of SAB No. 101 715 (1,470)
adoption
Income tax benefit (839) (1,586)
- -
---------------------- -------------------- ----------------------- ---------------
Net (loss) income before cumulative (1,339) (2,530)
effect of SAB No. 101 adoption 715 (1,470)
Cumulative effect of SAB No. 101
adoption - - - 467
---------------------- -------------------- ----------------------- ---------------
Net (loss) income $ (1,339) $ 715 $ (2,530) $ (1,937)
====================== ==================== ======================= ===============
Basic and diluted net (loss) income $ (0.16) $ 0.08 $ (0.31) $ (0.16)
per share before cumulative effect of
SAB No. 101 adoption
====================== ==================== ======================= ===============
Basic and diluted net (loss) income $ (0.16) $ 0.08 $ (0.31) $ (0.21)
per share
====================== ==================== ======================= ===============
Basic weighted average shares
outstanding 8,157 9,336 8,099 9,308
====================== ==================== ======================= ===============
Diluted weighted average shares
outstanding 8,157 9,351 8,099 9,308
====================== ==================== ======================= ===============
The accompanying notes are an integral part of these consolidated condensed financial statements.
-4-
GTSI CORP. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
(In thousands) 2001 2000
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,530) $ (1,937)
Depreciation and amortization 2,158 1,905
Adjustments to reconcile net loss to net cash
provided by operating activities: 22,340 11,810
------------------------ -------------------
Net cash provided by operating activities: 21,968 11,778
------------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of property and equipment (1,527) (2,233)
------------------------ -------------------
Net cash used in investing activities (1,527) (2,233)
------------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of bank notes, net (11,925) (9,479)
Payments of note payable (500) (500)
Proceeds from exercises of stock options 1,201 314
------------------------ -------------------
Net cash used in financing activities (11,224) (9,665)
------------------------ -------------------
Net increase (decrease) in cash 9,217 (120)
Cash at beginning of period 79 149
------------------------ -------------------
Cash at end of period $ 9,296 $ 29
======================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 501 $ 811
Income taxes $ - $ -
The accompanying notes are an integral part of these consolidated condensed financial statements.
-5-
GTSI CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements of GTSI
Corp. ("GTSI" or the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, therefore,
omit or condense certain footnotes and other information normally included in
financial statements prepared in accordance with generally accepted accounting
principles. This report should be read in conjunction with the audited
financials for the year ended December 31, 2000 and the accompanying Notes to
the Financial Statements, contained in the Company's 2000 Annual Report on Form
10-K. In the opinion of Management, all adjustments, consisting primarily of
normal recurring adjustments, necessary for a fair presentation of interim
period results have been made. The interim results reflected in the consolidated
financial statements are not necessarily indicative of results expected for the
full year, or future periods.
NEW ACCOUNTING PRONOUNCEMENTS.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the application of generally
accepted accounting principles to revenue recognition issues in financial
statements. SAB No. 101 clarifies the appropriate timing of revenue recognition
when products are shipped to customers. The impact to the Company of the
adoption of SAB No. 101 is to generally defer the recognition of revenue from
two to seven days as compared to the Company's previous method. During the
fourth quarter of 2000, the Company adopted the provisions of SAB No. 101
retroactive to January 1, 2000. The Company implemented the guidance set forth
in SAB No. 101 by recording a charge to income of $467,000 representing the
cumulative effect of adopting SAB No. 101 on January 1, 2000.
The Emerging Issues Task Force ("EITF") has issued EITF Issue No.
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent."
Consistent with the requirements under SAB No. 101, EITF No. 99-19 provides
guidance regarding the income statement presentation of revenue based on either
(a) the gross amount billed to a customer because it has earned revenue from the
sale of the goods or services or (b) the net amount retained (that is, the
amount billed to a customer less the amount paid to a supplier) because it has
earned a commission or fee. During the fourth quarter of 2000, and on a
retroactive basis for all periods presented, the financial statements were
reclassified to reflect the provisions of EITF No. 99-19. Adoption of EITF No.
99-19 had no impact on our reported gross margin or net income, but merely
resulted in the reduction of previously reported sales and cost of sales for our
resold software maintenance agreements of approximately $7.3 million for the
quarter ended June 30, 2000, and $8.3 million for the six months ended
June 30, 2000.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 requires the Company to record derivatives on the balance sheet as
assets or liabilities measured at fair value. SFAS No. 133 is effective as of
January 1, 2001. The adoption of SFAS No. 133 had no effect on the Company's
financial statements.
-6-
2. NOTES PAYABLE TO BANKS
On May 2, 1996, the Company executed a three-year credit facility with
a bank (the "Principal Lender") for $40.0 million and a one-year credit facility
with the other lenders (collectively, the "Lenders") for an additional $55.0
million (collectively, the "Credit Facility"). Additionally, on June 27, 1996,
the Company executed a separate $10.0 million facility with the Principal Lender
for inventory financing of vendor products (the "Wholesale Financing Facility").
On July 28, 1997, the Company and its banks executed the Second Amended
and Restated Business Credit and Security Agreement (the "Credit Agreement") to
modify some of the terms and conditions, as well as the amounts available under
the Credit Facility and the Wholesale Financing Facility. These modifications
included the revision of the Credit Facility's term to one year with a one year
automatic renewal.
On, June 30, 1999, the Credit Agreement of July 28, 1997 was amended to
make the Tangible Net Worth requirement for the Company an amount no less than
$40 million at all times beginning the calendar quarter ending June 30, 1999 and
each calendar quarter thereafter. All other material terms of the Credit
Agreement remained the same.
On, November 24, 1999, the Company and its banks executed separate
amendments, effective December 1, 1999, for the continuation of the Credit
Agreement through November 30, 2000 with an automatic one year renewal, and
adjusting, among other things, the seasonality of the amount available under the
Credit Facility. The limit of the Credit Facility is $50 million during the
period July 1 through January 31. During the period February 1 through April 30,
the total amount available under the Credit Facility is limited to $30 million.
During the period May 1 though June 30, the total amount available under the
Credit Facility is $20 million. In addition, the interest rate under the Credit
Facility is a rate of the London Interbank Offered Rate (LIBOR) plus 1.75%. The
Wholesale Financing Facility was also amended effective December 1, 1999 to
$50.0 million throughout the fiscal year.
On November 17, 2000, the Company and its banks executed an amendment,
effective December 1, 2000, for the continuation of the Credit Agreement with a
90-day written termination notice upon receipt by either party and, among other
things, increased the Company's Stock Repurchase authorization from third-party
stockholders to $6.1 million, up from $5.25 million in the previous Amendment.
All other material terms of the Credit Agreement remained the same.
On February 28, 2001, the Company and its banks executed an amendment,
for the establishment of a reserve to facilitate certain payments to its vendors
via Automated Clearing House "ACH" transfers. The amendment also increased the
Company's Stock Repurchase authorization from third-party stockholders by an
additional $4.7 million, notwithstanding the $6.1 million previously authorized
from the Fourth Amendment dated November 17, 2000.
On March 13, 2001, the Wholesale Financing Facility was amended to
$35.0 million throughout the fiscal year.
Borrowing is limited to 85% of eligible accounts receivable. The Credit
Facility is secured by substantially all of the operating assets of the Company.
Current obligations are first funded and then all cash receipts are
automatically applied to reduce outstanding borrowings. The Credit Facility also
contains certain covenants that include restrictions on the payment of dividends
and the repurchase of the Company's Common Stock, as well as provisions
specifying compliance with certain quarterly and annual financial statistical
ratios. At June 30, 2001, the Company was in compliance with all financial
covenants set forth in the Credit Facility.
-7-
3. PROPERTIES
The Company's executive offices are located in an approximately 100,500
square foot facility in Chantilly, Virginia under a lease expiring in November
2009, with one five-year option. GTSI's warehousing and distribution operations
are also located in Chantilly, Virginia in a separate 200,000 square foot
facility under a lease expiring in December 2006. The Company has a branch sales
office occupying 139 square meters in Mannheim, Germany. In addition, the
Company has branch sales offices in Calverton, Maryland, under a month to month
lease, beginning on March 14, 2001. The Company also leases a 20,000 square foot
distribution center in Chattanooga, Tennessee under a one-year renewable option,
exercised and effective April 1, 2001.
4. COMMITMENTS AND CONTINGENCIES
The Company is occasionally a defendant in litigation incidental to its
business. The Company believes that none of such litigation currently pending
against it, individually or in the aggregate, will have a material adverse
effect on the Company's financial condition or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Consolidated
Financial Statements and Notes thereto included elsewhere in this Report, as
well as the Company's consolidated financial statements and notes thereto
incorporated into its Annual Report on Form 10-K for the year ended December 31,
2000. 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 Corp. ("GTSI" or the "Company") is a leading business to
Government marketer (B2G) of microcomputer and Unix workstation hardware,
software and networking products to the Federal government market. The Company
currently offers access to over 250,000 information technology products from
more than 1,300 manufacturers. GTSI also performs network integration services,
including configuring, installing and maintaining microcomputers in local area
networks. The Company sells to virtually all departments and agencies of the
Government, many state governments and several hundred systems integrators and
prime contractors that sell to the government market. GTSI offers its customers
a convenient and cost-effective centralized source for microcomputer and
workstation products through its competitive pricing, broad product selection
and procurement expertise. The Company provides its vendors with a low-cost
marketing and distribution channel to the millions of end users comprising the
government market, while virtually insulating these vendors from most of the
complex government procurement rules and regulations.
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; to the addition of new vendors; and to the addition or
expiration of sales contract vehicles (e.g., the addition of the SEWP III
Contract and the MMAD Contract, and the expiration of the SEWP II Contract). The
Company's financial results have fluctuated seasonally, and may continue to do
so in the future, because of the Government's buying patterns which have
historically favorably impacted the last two calendar quarters and adversely
affected the first two calendar quarters.
-8-
The Company's business strategy is to continue to focus on higher-end
product-based solutions, to broaden its product offering, to remain a low-cost,
reliable provider of commodity products. The Company also focuses on bringing
new technologies to government customers.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that selected items within the statement of operations bear to sales
and the annual percentage changes in the dollar amounts of such items.
PERCENTAGE
CHANGE
--------------------------
PERCENTAGE OF SALES THREE SIX
------------------------------------------------- MONTHS MONTHS
THREE SIX ENDED ENDED
MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30,
JUNE 30, JUNE 30, 2000 TO 2000 TO
2001 2000 2001 2000 2001 2001
------------------------ ------------------------ --------------------------
Sales 100.0% 100.0% 100.0% 100.0% 10.7% 16.6%
Cost of sales 91.5 90.8 91.5 91.6 11.6% 16.5%
----------- ------------ ------------ -----------
Gross margin 8.5 9.2 8.5 8.4 2.4% 18.0%
----------- ------------ ------------ -----------
Operating expenses:
Selling, general, and 9.7 8.1 9.6 8.6 32.7% 30.4%
administrative
Depreciation and 0.7 0.7 0.7 0.7 12.6% 13.3%
amortization
----------- ------------ ------------ -----------
Total operating expenses 10.4 8.8 10.3 9.3 31.1% 29.0%
----------- ------------ ------------ -----------
(Loss) Income from operations (1.9) 0.4 (1.8) (0.9) -609.3% -130.6%
interest income net (0.4) (0.1) (0.4) (0.3) 340.9% 49.4%
----------- ------------ ------------ -----------
(Loss) Income before taxes (1.5) 0.5 (1.4) (0.6) -404.6% -180.0%
income tax benefit (0.60) - (0.50) - 100.0% 100.0%
----------- ------------ ------------ -----------
Net (loss) before cumulative effect (0.9) 0.5 (0.9) (0.6) -287.3% -72.1%
of SAB No. 101 adoption
Cumulative effect of SAB No. 101 - - - 0.2 0.0% -100.0%
adoption
----------- ------------ ------------ -----------
Net (loss) income (0.9) 0.5 (0.9) (0.8) -287.3% -30.6%
=========== ============ ============ ===========
-9-
The following table sets forth, for the periods indicated, the
approximate sales by category, along with the related percentages of total
sales:
Three months ended June 30, Six months ended June 30,
---------------------------------------------------------------------------------------------
2001 2000 2001 2000
---------------------------------------------------------------------------------------------
GSA Schedules $ 35,723 23.6% $ 51,321 37.6% $ 61,687 20.5% $ 91,984 35.7%
IDIQ Contracts 78,940 52.2% 63,254 46.4% 171,866 57.2% 122,703 47.6%
Open Market 23,691 15.7% 14,671 10.8% 46,747 15.6% 27,925 10.8%
Other Contracts 12,736 8.3% 7,222 5.2% 20,079 6.7% 14,989 5.9%
---------------------------------------------------------------------------------------------
Total $ 151,090 100.0% $ 136,468 100.0% $ 300,379 100.0% $ 257,601 100.0%
=============================================================================================
THREE MONTHS ENDED JUNE 30, 2001 COMPARED
WITH THE THREE MONTHS ENDED JUNE 30, 2000
SALES. Sales consist of revenues from product shipments and services
rendered net of allowances for customer returns and credits. Revenues for the
second quarter of 2001 were $151.1 million, compared to $136.5 million in the
second quarter of 2000, or an increase of 10.7%.
GROSS MARGIN. Gross margin is sales less cost of goods sold, which
includes product cost, freight, warranty maintenance cost and certain other
overhead expenses related to the cost of acquiring products. Gross margin
percentages vary over time and may change significantly depending on the mix of
customer's use of available contract vehicle and the mix of product sold. Gross
margin in the current quarter decreased by 0.7 percentage points to 8.5%,
compared to a gross margin of 9.2% in the second quarter of 2000. The decrease
in gross margin percentage is primarily due to a decrease in contract gross
margins.
OPERATING EXPENSES. Total operating expenses for the three months ended
June 30, 2001 increased $3.7 million, or 31.1%, from the same period in 2000.
The increase in operating expenses primarily resulted from increased personnel
costs to achieve increased sales for the second half of 2001 and beyond.
Expressed as a percentage of total sales, total operating expenses increased to
10.4% from 8.8% in the comparable period of 2000.
INTEREST INCOME. Net interest income in the second quarter of 2001
increased to $679,000 compared to $154,000 in the same period in 2000 due
primarily to a increase in prompt payment discounts relating to strategic
inventory purchases. In addition, the Company incurred lower interest expense
due to reduced borrowings from its line of credit.
INCOME TAX. The Company recorded a tax benefit of $839,000 for the
second quarter of 2001 based on the effective rate of approximately 39%. No
income tax benefit was recognized in the second quarter of 2000, as the Company
determined that certain net deferred assets did not satisfy the recognition
criteria set forth in the Statement of Financial Accounting Standards No. 109 "
Accounting For Income Taxes."
-10-
SIX MONTHS ENDED JUNE 30, 2001 COMPARED
WITH THE SIX MONTHS ENDED JUNE 30, 2000
SALES. In the six-month period ended June 30, 2001, revenues grew $42.8
million, or 16.6 percent, to $300.4 million, compared to $257.6 million in the
same period in 2000.
GROSS MARGIN. Gross margin in the six-month period ended June 30, 2001
was 8.5%, relatively comparable to gross margin of 8.4% for the first six months
of 2000.
OPERATING EXPENSES. Total operating expenses for the six-month period
ended June 30, 2001 increased $7.0 million, or 29.0%, from the same period in
2000. The increase in operating expenses primarily resulted from increased
personnel costs to support increased sales for the second half of 2001 and
beyond. Expressed as a percentage of total sales, total operating expenses
increased to 10.3% from 9.3% in the comparable period of 2000.
INTEREST EXPENSE. Net interest income for the six-month period ended
June 30, 2001 increased to $1.3 million compared to $900,000 in the same period
in 2000 due primarily to a increase in prompt payment discounts relating to
strategic inventory purchases. In addition, the Company incurred lower interest
expense due to reduced borrowings from its line of credit.
INCOME TAX. The Company recorded a tax benefit of $1.6 million for the
six-month period ended June 30, 2001 based on the effective rate of
approximately 39%. No income tax benefit was recognized in the first six months
of 2000, as the Company determined that certain net deferred assets did not
satisfy the recognition criteria set forth in the Statement of Financial
Accounting Standards No. 109 " Accounting For Income Taxes."
EFFECT OF INFLATION
The Company believes that inflation has not had a material effect on
its operations. However, if inflation increases in the future it could
temporarily adversely affect the profitability of GTSI's sales under its
Government fixed-price contracts, which generally preclude the Company from
passing on inflation-related or other increases in product costs to Government
customers during the term of a pre-existing contract. The Company mitigates this
risk in part by often obtaining agreements from certain of its suppliers
prohibiting them from increasing their prices to GTSI during fixed-price, term
contracts.
SEASONAL FLUCTUATIONS AND OTHER FACTORS
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its operations as a result of
Government buying and funding patterns, which also impact 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 Government's fiscal year end),
and consequently on sales and net income in the third and fourth quarters of
each year. Quarterly financial results are also affected by the timing of the
award of and shipments of products under government contracts, price competition
in the microcomputer and workstation industries, the addition of personnel or
other expenses in anticipation of sales growth, product line changes and
expansions, and the timing and costs of changes in customer and product mix. In
addition, customer order deferrals in anticipation of new product releases by
leading microcomputer and workstation hardware and software manufacturers,
delays in vendor shipments of new or existing products, a shift in sales mix to
more complex requirements contracts with more complex service costs, and vendor
delays in the processing of incentives and credits due GTSI, have occurred (all
of which are also likely to occur in the future) and
-11-
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 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.
NEW ACCOUNTING PRONOUNCEMENTS.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the application of generally
accepted accounting principles to revenue recognition issues in financial
statements. SAB No. 101 clarifies the appropriate timing of revenue recognition
when products are shipped to customers. The impact to the Company of the
adoption of SAB No. 101 is to generally defer the recognition of revenue from
two to seven days as compared to the Company's previous method. During the
fourth quarter of 2000, the Company adopted the provisions of SAB No. 101
retroactive to January 1, 2000. The Company implemented the guidance set forth
in SAB No. 101 by recording a charge to income of $467,000 representing the
cumulative effect of adopting SAB No. 101 on January 1, 2000.
The Emerging Issues Task Force ("EITF") has issued EITF Issue No.
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent."
Consistent with the requirements under SAB No. 101, EITF No. 99-19 provides
guidance regarding the income statement presentation of revenue based on either
(a) the gross amount billed to a customer because it has earned revenue from the
sale of the goods or services or (b) the net amount retained (that is, the
amount billed to a customer less the amount paid to a supplier) because it has
earned a commission or fee. During the fourth quarter of 2000, and on a
retroactive basis for all periods presented, the financial statements were
reclassified to reflect the provisions of EITF No. 99-19. Adoption of EITF No.
99-19 had no impact on our reported gross margin or net income, but merely
results in the reduction of previously reported sales and cost of sales for our
resold software maintenance agreements of approximately $7.3 million for the
quarter ended June 30, 2000, and $8.3 million for the six months ended
June 30, 2000.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 requires the Company to record derivatives on the balance sheet as
assets or liabilities measured at fair value. SFAS No. 133 is effective as of
January 1, 2001. The adoption of SFAS No. 133 had no effect on the Company's
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 2001, the Company's operating activities
provided $22.0 million of cash flow, compared to the $11.8 million of cash flow
provided in the same period in 2000. The increase in cash flow relates primarily
to the Company's decreased inventory purchases and faster receivables collection
in the first quarter of 2001 versus the same period in 2000.
Investing activities used cash of approximately $1.5 million during the
six-month period ended June 30, 2001 compared to $2.2 million for the same
period in 2000 reflecting the strategic timing of the investment in the
Company's computers and software, including Customer Relationship Management
initiatives.
-12-
During the six-month period ended June 30, 2001, the Company's
financing activities used cash of approximately $11.2 million, primarily related
to repayment of borrowings under the Company's Credit Facilities and payment
against a note payable. At June 30, 2001 the Company had $20.0 million available
for borrowing under its credit facility.
On May 2, 1996, the Company executed a three-year credit facility with
a bank (the "Principal Lender") for $40.0 million and a one-year credit facility
with the other lenders (collectively, the "Lenders") for an additional $55.0
million (collectively, the "Credit Facility"). Additionally, on June 27, 1996,
the Company executed a separate $10.0 million facility with the Principal Lender
for inventory financing of vendor products (the "Wholesale Financing Facility").
On July 28, 1997, the Company and its banks executed the Second Amended
and Restated Business Credit and Security Agreement (the "Credit Agreement") to
modify some of the terms and conditions, as well as the amounts available under
the Credit Facility and the Wholesale Financing Facility. These modifications
included the revision of the Credit Facility's term to one year with a one year
automatic renewal.
On, June 30, 1999, the Credit Agreement of July 28, 1997 was amended to
make the Tangible Net Worth requirement for the Company an amount no less than
$40 million at all times beginning the calendar quarter ending June 30, 1999 and
each calendar quarter thereafter. All other material terms of the Credit
Agreement remained the same.
On, November 24, 1999, the Company and its banks executed separate
amendments, effective December 1, 1999, for the continuation of the Credit
Agreement through November 30, 2000 with an automatic one year renewal, and
adjusting, among other things, the seasonality of the amount available under the
Credit Facility. The limit of the Credit Facility is $50 million during the
period July 1 through January 31. During the period February 1 through April 30,
the total amount available under the Credit Facility is limited to $30 million.
During the period May 1 though June 30, the total amount available under the
Credit Facility is $20 million. In addition, the interest rate under the Credit
Facility is a rate of the London Interbank Offered Rate (LIBOR) plus 1.75%. The
Wholesale Financing Facility was also amended effective December 1, 1999 to
$50.0 million throughout the fiscal year.
On November 17, 2000, the Company and its banks executed an amendment,
effective December 1, 2000, for the continuation of the Credit Agreement with a
90-day written termination notice upon receipt by either party and, among other
things, increased the Company's Stock Repurchase authorization from third-party
stockholders to $6.1 million, up from $5.25 million in the previous Amendment.
All other material terms of the Credit Agreement remained the same.
On February 28, 2001, the Company and its banks executed an amendment,
for the establishment of a reserve to facilitate certain payments to its vendors
via Automated Clearing House "ACH" transfers. The amendment also increased the
Company's Stock Repurchase authorization from third-party stockholders by an
additional $4.7 million, notwithstanding the $6.1 million previously authorized
from the Fourth Amendment dated November 17, 2000.
On March 13, 2001, the Wholesale Financing Facility was amended to
$35.0 million throughout the fiscal year.
Borrowing is limited to 85% of eligible accounts receivable. The Credit
Facility is secured by substantially all of the operating assets of the Company.
Current obligations are first funded and then all cash receipts are
automatically applied to reduce outstanding borrowings. The Credit Facility also
contains certain covenants that include restrictions on the payment of dividends
and the repurchase of the Company's
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Common Stock, as well as provisions specifying compliance with certain quarterly
and annual financial statistical ratios. At June 30, 2001, the Company was in
compliance with all financial covenants set forth in the Credit Facility.
The Company anticipates that it will continue to rely primarily on
operating cash flow, bank loans and vendor credit to finance its operating cash
needs. The Company believes that such funds should be sufficient to satisfy the
Company's near term anticipated cash requirements for operations. Nonetheless,
the Company may seek additional sources of capital, including permanent
financing over a longer term at fixed rates, to finance its working capital
requirements. The Company believes that such capital sources will be available
to it on acceptable terms, if needed.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This Form 10-Q, including certain documents incorporated herein by
reference, contains "forward-looking" statements that involve certain risks and
uncertainties. Actual results may differ materially from results express or
implied by such forward-looking statements, based on numerous factors. Such
factors include, but are not limited to, competition in the government markets,
buying patterns of the Company's customers, general economic and political
conditions, results of negotiations with the Company's lenders concerning a new
credit facility, changes in laws and government procurement regulations, and
other risks described in this Form 10-Q and in the Company's other SEC filings.
For these statements, the Company claims the protection of the safe harbor for
forward-looking statements under the Private Securities Litigation Reform Act of
1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Inapplicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - Inapplicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Stockholders was held on May 15, 2001.
(b) At said Annual Meeting, the Company's stockholders: (1) elected three
members to serve on the Company's Board of Directors; and (2) amended
the Company's 1996 Stock Option Plan by increasing the Company's
common stock issuable thereunder by 900,000 shares.
- -------------------------------------------------------------------------- ---------------- --------------- -----------
VOTES FOR VOTES ABSTAIN
WITHHELD OR
AGAINST
- -------------------------------------------------------------------------- ---------------- --------------- -----------
DIRECTORS:
- -------------------------------------------------------------------------- ---------------- --------------- -----------
Lawrence J. Schoenberg 6,744,096 916,950
- -------------------------------------------------------------------------- ---------------- --------------- -----------
Daniel R. Young 6,909,446 751,600
- -------------------------------------------------------------------------- ---------------- --------------- -----------
M. Dendy Young 6,892,891 768,155
- -------------------------------------------------------------------------- ---------------- --------------- -----------
INCREASE OF SHARES IN 1996 STOCK OPTION PLAN: 2,999,998 1,979,463 11,223
- -------------------------------------------------------------------------- ---------------- --------------- -----------
(Broker non-vote: 2,670,362)
- -------------------------------------------------------------------------- ---------------- --------------- -----------
ITEM 5. OTHER INFORMATION - Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) REPORTS ON FORM 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 14, 2001
GTSI CORP.
By: /s/ Dendy Young
--------------------------------------------------
Dendy Young
Chairman and Chief Executive Officer
By: /s/ Robert D. Russell
--------------------------------------------------
Robert D. Russell
Senior Vice President and Chief Financial Officer
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