-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sa+w5z8Cs9bxxFytndXSRVaADqsw1aN1esCoxKGFFVpFRw+vmNsTM09jQZbbrMQT SBzdDF9tGX/XE1+A2ew82w== 0001005477-01-002316.txt : 20010402 0001005477-01-002316.hdr.sgml : 20010402 ACCESSION NUMBER: 0001005477-01-002316 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GTSI CORP CENTRAL INDEX KEY: 0000850483 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 541248422 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19394 FILM NUMBER: 1585676 BUSINESS ADDRESS: STREET 1: 3901 STONECROFT BLVD CITY: CHANTILLY STATE: VA ZIP: 20151-0808 BUSINESS PHONE: 703-502-2000 MAIL ADDRESS: STREET 1: 3901 STONECROFT BLVD CITY: CHANTILLY STATE: VA ZIP: 20151-1010 10-K 1 0001.txt FORM 10-K 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, 2000 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 20151-0808 (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. |_| 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 March 1, 2001, as reported on The Nasdaq Stock Market, was $37,855,520. The number of shares outstanding of the registrant's Common Stock on March 1, 2001, was 8,130,481. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement to be delivered to stockholders in connection with their Annual Meeting of Stockholders scheduled to be held on May 15, 2001 are incorporated by reference into Part III of this Form 10-K. PART I Item 1. BUSINESS. The Company GTSI Corp., a Delaware Corporation ("GTSI" or the "Company"), is a leading business to Government marketer (B2G) of microcomputer and Unix workstation hardware, software and networking products. (Unless the context indicates otherwise, all references herein to the capitalized term "Government" shall refer to the U.S. Federal Government, and all references herein to the non-capitalized term "government" shall refer generally to any federal, state or municipal government.) The Company was incorporated in 1983. GTSI offers its customers a convenient and cost-effective centralized source for microcomputer and workstation solutions through its broad selection of popular products and services at competitive prices. The Company specializes in understanding both the various information technology needs and the procurement processes of Government customers. GTSI sells to most departments and agencies of the Government, state governments and systems integrators and prime contractors selling to the government market. In 2000, GTSI's sales directly to Government agencies, to prime contractors for resale to Government agencies and to state and local government agencies accounted for 89%, 8% and 3% of sales, respectively. GTSI currently offers access to approximately 250,000 information technology products from approximately 1,300 manufacturers, including Hewlett-Packard Company ("Hewlett-Packard"), Microsoft Corporation ("Microsoft"), Panasonic Personal Computer Company (a division of Matsushita Electric Corporation of America), Compaq Computer Corporation ("Compaq"), Sun Microsystems, Inc. ("Sun"), CISCO Systems Incorporated ("CISCO"), International Business Machines Corp. ("IBM"), Apple Computer, Inc. ("Apple") and Toshiba America Information Systems, Inc. ("Toshiba"). The Company provides its vendors with a low-cost marketing and distribution channel to the many end users comprising the government market, while virtually insulating these vendors from most of the complex government procurement rules and regulations. GTSI fulfills customer orders from its state-of-the-art 200,000-square foot distribution center located in Chantilly, Virginia, near Dulles International Airport and Washington, D.C. In addition to the normal distribution functions, activities at the center include stocking of popular items for fast delivery, customizing equipment through the integration of various hardware and software components, and specialized services such as providing source acceptance inspections and documentation. The distribution center has the capability of supporting approximately $1.5 billion in shipments per year. This includes the capacity to integrate hardware at an estimated rate of 1,600 to 1,800 units per day, including functional and diagnostic testing of all integrated components. In 1998, the Company's distribution and integration operations achieved ISO 9002 certification. The Company also subleases a 10,000 square foot distribution center in Chattanooga, Tennessee. In addition to being able to ship to any of the 48 contiguous states overnight, the center's location in the Washington, D.C. metropolitan area allows for expedited deliveries to anywhere in the world. "GTSI" is a registered service mark of GTSI Corp. All other trademarks and service marks are proprietary to their respective owners. -2- Business Strategy GTSI is committed to, and focused on, the government customer. 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, high-reliability provider of commodity products. The Company also focuses on bringing new technologies to government customers by concentrating on the following elements: Focus on the Government Market. Because of its historical focus on the Government market, GTSI has developed the expertise and established the vendor 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, systems integrators, value-added resellers ("VARs"), prime contractors and a wide array of end users. In addition, by focusing on the Government market, the Company has avoided the significant costs of commercial retail outlets and the potentially higher credit risk associated with selling solely or primarily to commercial entities. Pursue Government Contracts. GTSI pursues Government contracts ranging in size from as small as a few hundred dollars to as large as potentially hundreds of millions of dollars in sales. The Company holds a wide range of Government contracts, including multi-million dollar, multi-year contracts with the Department of Defense ("DoD") and certain civilian agencies, as well as several multiple award schedules and Blanket Purchasing Agreements ("BPA's") with a variety of DoD and civilian agencies (generally, "contract vehicles"). GTSI also serves as a subcontractor 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, distribution capabilities and vendor relationships. Focus on Office Automation Products. GTSI focused initially on the rapidly growing market for microcomputer applications software and expanded successively into the complementary office automation market segments of peripherals, microcomputers and networking products, including LANs. In 1996, GTSI began focusing on internet and intranet products and services and entered into an agreement with Hewlett-Packard to add their Unix-Based server products. In 1998, GTSI began offering a full range of seat management services to Government agencies. These services include project management, help desk support, local area network management support, basic hardware support, continuous training support, asset management, information technology planning as well as technical assessment and evaluation. In future years, the Company intends to add other complementary office automation products and expanded systems integration services. Focus on Customer Service. In the Company's process orientation and interaction with its many customers, Company employees focus on attempting to provide high quality customer service(s) associated with the order, delivery, installation and repair of microcomputer and workstation products. By following a "one person - one transaction - one time" approach to customer service, the Company's employees strive to ensure customer satisfaction and thereby increase the possibilities for future business. In 2000, the Company implemented the Siebel Customer Relationship Management system to its customer support organization and sales organization. Provide a Centralized Source for Procuring Office Automation Products and Services. In addition to offering a full line of microcomputer hardware, software and peripheral products as well as the leading brand of workstations, 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 microcomputer and workstation products through a variety of procurement mechanisms, GTSI offers its customers the convenience, flexibility and cost -3- savings of purchasing from a centralized source. GTSI believes that its convenient "one-stop shop" for microcomputer and workstation products is an important factor in its success in the government market. Maintain Competitive Pricing and Improve Operating Efficiencies. The government market is price-sensitive. GTSI therefore focuses both on offering competitive pricing to its customers and on constantly improving operating efficiencies. Establish and Maintain Strong Vendor Relationships. To provide a centralized source of products for its customers, GTSI maintains strong relationships with leading hardware and software vendors. GTSI offers its vendors a wide range of marketing and sales services, which provide them with access to the millions of end users comprising the government market. In addition, the Company virtually insulates its vendors from most of the procurement regulatory complexities, costs, extensive paperwork and complicated billing requirements associated with the government market. The Government Procurement Process The Company's 2000 revenues were derived primarily from sales directly to departments and agencies of the government and to prime contractors reselling to the government market. The Company achieves these sales primarily through contracts with the government and through open market sales. Company contracts with the government include General Services Administration ("GSA") schedule contracts, BPAs and indefinite dealing/indefinite quantity contracts. GSA Schedule Contracts In 1996, GTSI held four GSA Schedule contracts: Schedule A, Schedule B/C, Schedule 58 Parts VI and VII, and Schedule E. Schedule A included general purpose commercial automatic data processing equipment and software including workstations and connected peripherals equipment. Schedule B/C included general-purpose automatic data processing equipment (end-user computers, normally microcomputers and related software) for office use environment. Schedule 59 Part VI and VII was for telecommunications products, and Schedule E was for electronic commerce and services. On November 26, 1997 GSA combined the four schedules under the terms of the B/C Schedule Contract and the B/C Schedule Contract became the Information Technology ("IT") Schedule. Products offered under the IT Schedule Contract include workstations, desktops, laptops, notebooks, servers, laser printer, color printers, scanners, monitors, modems, hard drives, memory, networking products, facsimile products, internet and intranet products, video teleconferencing, maintenance, training and services. GTSI's IT schedule is set to expire on March 31, 2002. In August 1998, GTSI was awarded GSA Schedule 36. Schedule 36 is for the supply of Hewlett-Packard printer toner cartridges. Schedule 36 is set to expire on September 30, 2003. The GSA, which is the central procurement agency of the Executive Branch of the Government, negotiates schedule contracts. Although Government agencies are not required to purchase products under GSA Schedule contracts, these contracts provide all Government agencies, certain international organizations and authorized prime contractors with an efficient and cost-effective means for buying commercial products. Government agencies and other authorized purchasers (collectively, "GSA Schedule Purchasers") may purchase goods under GSA Schedule contracts at predetermined ceiling prices, terms and conditions. GSA Schedule Purchasers may place unlimited orders for products under GSA Schedule contracts. However, agencies are instructed to seek lower prices for orders exceeding a "maximum order" threshold. This threshold is $25,000 per order for classroom training, $50,000 per order for shrink-wrap software and $500,000 per order for other software and hardware. -4- GSA Schedule contracts are awarded on the basis of a number of factors, the most important of which are compliance with applicable Government regulations and the prices of the products to be sold. Any number of competing vendors may be awarded a GSA Schedule contract for a given product although manufacturers may enter into exclusive relationships. GSA Schedule contracts require that each bidder must either be the manufacturer of the product covered by the contract or furnish evidence of capability to provide a manufacturer's product for the period of the GSA Schedule contract. Products may be added to a GSA Schedule contract during its term under certain circumstances with the consent of both the contractor and Government. GSA Schedule contracts include a GSA administrative fee calculated on the product price. This fee is collected by the Company and is remitted quarterly to the GSA. GTSI's GSA Schedule contracts require the Government to pay for product shipped under the contracts within 30 days of acceptance by the Government. The GSA Schedule contracts also permit payment by Government-issued credit cards. When payment is made by credit card, the Company usually receives payment in less than 30 days. The Government may require GTSI to accept returns only of incorrectly shipped product. GTSI's GSA Schedule contracts require GTSI to pass on to customers the vendor's warranty and to provide for on-site or depot maintenance at a pre-paid fixed fee. GTSI's GSA Schedule contracts also contain price reduction clauses requiring, among other things, that GTSI pass on to Government customers certain reduced prices GTSI may receive from its vendors during a contract's term but prohibiting GTSI to pass on vendor price increases for a period of one year. To mitigate the potential adverse impact of any such price increase, the Company requires substantially all vendors acting as suppliers to GTSI under its GSA Schedule contracts to provide GTSI with supply and price protection. The GSA Schedule includes an economic price adjustment clause that permits the Company to adjust contract prices upward if certain conditions have been satisfied after a period of one year. Blanket Purchase Agreements Historically, the Company has held numerous BPA's with federal agencies. A BPA is a simplified but non-mandatory, fixed price, IDIQ contract for the Government to purchase products, usually by establishing charge accounts with qualified sources. Agencies typically enter into BPA's for similar products with several companies. BPA's generally include a list of products at established prices, individual purchase limits for authorized purchasers, and other pre-negotiated terms and conditions. Purchases under BPA's are often paid for with a Government-issued credit card. In 1996, the GSA authorized agencies to enter into BPA's with GSA Schedule holders. The GSA-authorized BPA's 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. The Company normally enters into separate agreements with vendors in order to offer reduced BPA prices to the Government. The BPA sales vehicle allows the Company to focus specific vendor relationships on specific sets of customers. In response to the GSA's authorization, the Company has increased its emphasis on BPA's. Formal Bids Many Government purchases of computer products and services are made under contracts or purchase orders awarded through formal competitive bids and negotiated procurements. In addition to its GSA Schedule and open market business, GTSI also pursues formal Government bids. Substantially all of these bids are awarded on the basis of "best value" to the Government (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 vendor contacts, purchasing power, distribution strength and -5- procurement expertise to compete successfully for the business. These major procurements can exceed millions of dollars in total revenues, span many years, and provide a purchasing vehicle for many agencies. The vast majority of the contracts pursued by GTSI have been fixed-price (i.e., at the time of initial award, the end-user selling prices are set for the duration of the contract at a specified level or at specified levels varying over time) and IDIQ (i.e., the contract provides no pre-set delivery schedules or minimum purchase levels). In some cases, various agencies levy a fee on purchases made by departments outside of the agency which 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. GTSI's bids group is responsible for evaluating bid opportunities, identifying key products or services needed to respond to bids, negotiating favorable agreements with suppliers and subcontractors, preparing written responses to the solicitation document, satisfying all mandatory technical requirements and, in general, successfully managing the proposal effort. GTSI's competitors for these contracts typically include major systems integrators, computer manufacturers and a variety of other systems integrators, VARs and commercial resellers. Open Market Many microcomputer and workstation products may also be resold by GTSI through open market procurements. These procurements are separate and apart from GSA Schedules or formal competitive bids, and 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. When awarding contracts, the Company's customers often evaluate, in addition to price, which is typically the most important factor, a number of other factors, such as the vendor's experience, performance record, service, support and financial strength. Unless purchasing electronically, Government agencies procuring products not on a Schedule or other contract vehicle must typically publicize their procurements with a value in excess of $25,000 to allow competitors to submit price quotes. The Company also sells to Government prime contractors, including systems integrators, typically through open market procurements. As a result of recent legislative changes, the Government is encouraged to make purchases under $2,500 by credit card and often without competition. State and Local Contracts Most purchases in the state government market are made through individual competitive procurements, although many state governments issue invitations for bid for statewide computer term contracts. State and local procurements typically require formal responses and the posting of "bid bonds" or "performance bonds" to ensure complete and proper service by a prospective bidder. Each state maintains a separate code of procurement regulations that must be understood and complied with in order to successfully market and sell to that state. GTSI currently maintains several state and local microcomputer contracts, submits oral and written bids to state and local governments each month and is on a number of state and local government bid lists. 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. -6- Under applicable Government regulations GTSI qualified as a "small business" under several of the contracts it held during 2000 by virtue of it being a non-manufacturing entity with a rolling average over the prior 12 months of 500 or fewer employees at the time of contract award. As a small business, GTSI enjoyed a number of significant benefits, including being able to: compete for designated small business set-aside contracts; bid pursuant to preferential small purchase procedures for open market purchases under $100,000 directed to non-manufacturer small businesses; qualify as a small business subcontractor to prime contractors on contracts over $500,000 in which the prime contractor must submit to the Government a small business subcontracting plan; offer Government agencies the advantage of having their purchases from GTSI count toward fulfilling their internal small purchase goals; and avoid having to establish small business subcontracting plans in order to compete for certain large Government contracts. As a result of the acquisition of the BTG Division in February 1998, GTSI no longer qualifies as a small business for contract awards after February, 1998. Although most government contracts entered into before the BTG Division acquisition will not be affected by this change, the Company cannot predict the effect, if any, of this change on its operations. GTSI has a number of possible actions available to it to seek to mitigate an adverse impact to GTSI of the future loss of its small business status, including the following: increasing sales through the large number of Government contracts which are not subject to small purchase procedures; aggressively implementing GTSI's low-cost, one-stop shop strategy to economically encourage customers to continue to place orders with GTSI; expanding its sales to prime contractors qualifying as small or minority-owned businesses; and increasing its sales to state and other markets not subject to Government small business regulations. Currently, GTSI cannot precisely quantify the extent of the impact, if any, on its future results from a loss of its small business status. 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 even 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 convenience of the Government 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. The industry in which the Company conducts its business, as well as the geographic location of the Company's headquarters near the nation's capitol and the concomitant density of high technology companies headquartered nearby, results in a limited pool of qualified employees. Although the Company believes that its compensation and benefits are competitive, such competition and geography may from time to time adversely affect the Company's ability to attract and retain a competent and productive workforce. -7- Products The Company currently offers access to approximately 250,000 information technology products from approximately 1,300 hardware and software vendors. The Company continuously monitors sales of existing and newly introduced products to ensure that it carries state-of-the-art technology products. Hardware. The Company resells microcomputers from major brand name manufacturers, including Hewlett-Packard, Panasonic, Compaq, Sun, Cisco, IBM, Apple and Toshiba and peripherals from major brand name manufacturers, including Hewlett-Packard, Sony, Iomega, Panasonic and Kodak. Peripherals carried by the Company include disk drives, CD-ROM drives, printers, video display monitors, plug-in circuit boards, modems and related products. GTSI's LAN hardware products are supplemented by the Company's LAN services, which include assisting customers in selecting, configuring, installing and maintaining LANs. Software. The Company remarkets computer software from substantially every leading MS-DOS and Windows based software publisher, as well as leading UNIX, Linux and Apple products. The Company's software vendors include Microsoft, Symantec, IBM/Lotus, Art Technology Group ("ATG"), Veritas, Siebel Systems, MicroStrategy, Adobe, and Citrix. The Company has subset specialization in Customer Relationship Management software, as well as Web Development and Personalization software. Marketing and Sales The Company's marketing and sales personnel design and direct the Company's sales efforts and market research, telemarketing and direct mail campaigns; Company-sponsored catalogues and seminars; advertising in specialty publications; and participation in major trade shows. GTSI provides training to its marketing and sales force on various government procurement processes and technical features of the products and services it offers. All sales personnel have been trained on, and have online access to, GTSI's computerized system for maintaining price, product availability, bid, ordering and order-status information. From inception, GTSI recognized that the size and diversity of the government market made it imperative 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 microcomputer users and their buying patterns. This proprietary, on-line computerized database currently contains over 300,000 entries, including an extensive list of agency procurement and contracting officers, information resource managers, senior policy makers, end users, systems integrators, VARs and prime contractors. GTSI uses this database, among other things, for targeting telemarketing and direct mail campaigns. The Company conducts direct mail campaigns consisting of brochures, fliers, questionnaires, reply cards and other promotional items. In 2000, the Company implemented the Siebel Customer Relationship Management system for managing this database and maintaining customer relationships. In addition to being an active participant in major federal and state government trade shows, GTSI sponsors and produces its own federal and state government seminars and agency-specific shows. GTSI designs these seminars and shows to provide training and information about microcomputers and workstations and related services that are of significant interest to government users. GTSI also produces its own "Expos" in which GTSI and specific agencies work together to showcase products to key end users and decision makers. These seminars, shows and expositions are supplemented by technical support hot lines, customer bulletin boards and an evaluation library of microcomputer and workstation product profiles, technical literature and demonstration hardware and software. In 2000, the Company expanded -8- its ability to deliver focused electronic messages to its key customers through its "eblast" marketing program. The Company publicly introduced its web site, GTSI Online (http://www.gtsi.com), on the world wide web in 1995. In 1997 and 1998, the website provided access to certain product, contract and Company information. In the first quarter of 1999, the Company introduced its third generation website which consists of an electronic shopping/product and contract information section (www.gtsi.com) and a government-focused information portal (www.governmentIT.com). In 2000, the Company expanded its customers' access to open market, rapid delivery products through its GTSI Express program. Additionally, the Company developed partnerships with key customers to streamline the interfaces between its web sties and integrate gtsi.com into their purchasing processes. Vendor Relationships To offer its customers a centralized source for their microcomputer and workstation needs, the Company establishes and maintains relationships with key vendors and offers them a number of profitable opportunities to expand their sales to the government market, including: o Access to the government market through a significant number of diverse contract vehicles; o Substantial relief from the cost of compliance with procurement regulations involved in selling directly to the government market; o Lower operating costs related to reduction or elimination of selling and marketing programs, and elimination of non-commercial billing and collection costs related to the government market; 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 vendors vary widely, but typically permit the Company to purchase product for resale to at least the government market. Virtually none of the Company's vendor agreements requires the Company to purchase any specified quantities of product. The Company typically requires vendors 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 vendor agreements are typically terminable by the vendor on short notice, at will or immediately upon default by GTSI and may contain limitations on vendor liability. These vendor agreements also generally permit GTSI to return previous product purchases at no charge within certain time limits, for a restocking fee and/or in exchange for other products of such vendor. The Company also purchases some products from independent distributors. Vendors provide the Company with various forms of marketing and sales assistance, including but not limited to sales incentives and market development funds. Vendors provide sell-through and other sales incentives in connection with certain product promotions. Additionally, key vendors participate with the Company in cooperative advertising and sales events and typically provide funding which offsets the costs of such efforts. A reduction in or discontinuance of any of these incentives or significant delays in receiving reimbursements could materially adversely affect the Company. The Company must continue to obtain products at competitive prices from leading vendors in order to provide a centralized source of price-competitive products for its customers and to be awarded government -9- contracts. Although almost all of GTSI's vendors currently do not have all of their own computer products on a GSA Schedule contract, one or more may elect to apply for its own GSA Schedule contract and may do so at lower end-user selling prices than those GTSI currently offers or could profitably offer. Although GTSI believes its relationships with its key vendors to be good, a decision by one or more to sell directly to the Government (especially if at significantly lower prices than GTSI), to sell their products to GTSI's competitors on more favorable terms than to GTSI, to allow additional resellers to represent their products on a GSA Schedule contract, to restrict or terminate GTSI's rights to sell their products or restrict their products from being carried on a GSA Schedule contract, could materially adversely affect the Company. Customers The Company's customers are primarily federal, state and local government agencies and prime contractors to the Government, including systems integrators. In 2000, 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. Although no single customer accounted for greater than 5% of the Company's 2000 sales, aggregate 2000 sales to the Government's Departments of the Army, Navy and Air Force were 19.9%, 14.4% and 19.9%, respectively, of GTSI's 2000 sales. The Company's sales are highly dependent on the Government's demand for microcomputer and workstation 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. Reductions in DoD or other Government outlays could occur and may adversely affect the Company. Furthermore, legislation is periodically introduced in Congress that, if enacted, may change the Government's current procurement processes. GTSI cannot predict whether any such 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 could affect the Company's future operating results. Backlog At February 28, 2001, and December 31, 2000, the Company's total backlog of orders was approximately $48.2 million and $62.7 million, respectively, as compared with approximately $55.0 million and $54.9 million at February 28, 2000, and December 31, 1999, respectively. Total backlog consists of written purchase orders received and accepted by GTSI but not yet shipped. Backlog fluctuates significantly from quarter to quarter because of the seasonality of Government ordering patterns and the periodic inventory shortages resulting from constrained products. Service and Warranty GTSI provides post-sale field service for certain products that it sells primarily through subcontractors and to a limited extent through the Company's in-house technical staff. The Company typically warrants products sold to the Government and certain other customers for the same term as the manufacturer's warranty period although many IDIQ contracts include provisions for warranties that extend beyond those offered by the manufacturer. The Company also sells extended warranties on many of the 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. GTSI outsources to third parties a significant portion of its extended warranty obligations. -10- Competition The government microcomputer and workstation market is intensely competitive and subject to rapid change. GTSI competes with certain leading microcomputer and/or workstation 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 VARs (including companies qualifying as minority-owned, disadvantaged or small businesses under applicable Government regulations) seeking to enter or expand their presence in the government market. In 2000, certain manufacturers selling directly to the Government have gained market share in the GSA schedule market. 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 microcomputer market are price, expertise in the applicable government procurement processes, breadth of product line, customer and vendor relationships, financial strength, the technical and other skills of marketing and sales personnel, distribution capability, available inventory and customer service and support. The Company believes that the principal competitive factors in the government workstation market are essentially the same, except that technical expertise and customer service and support are often more important and breadth of product line and available inventory are often less important. The Company believes that it competes favorably on each of these factors, although to a lesser degree with respect to technical expertise. GTSI also believes that it has a competitive advantage over certain of its competitors because of its procurement expertise and avoidance of costly overhead related to selling into multiple market segments and maintaining numerous retail outlets. In addition, the Company's ability to offer a centralized source for purchases of a wide variety of leading computer products from numerous manufacturers often provides a competitive advantage over manufacturers which sell only their own line of products directly to the government. Employees At March 2, 2001, the Company had 605 employees, including 347 in sales, marketing and contract management; 193 in operations; and 65 in executive, finance, information technology, human resources and legal. None of the Company's employees is represented by a labor union, and the Company has experienced no 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 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 also has a branch sales office occupying 139 square meters in Mannheim, Germany. The Company also subleases a 10,000 square foot distribution center in Chattanooga, Tennessee under a sublease, which expires on March 31, 2001, with three one-year options. Item 3. LEGAL PROCEEDINGS. 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. -11- Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable. -12- 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, 2000, there were 160 record holders of the Company's common stock. As of March 16, 2001, there were 190 record holders and approximately 3,700 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. ------------------------------------------ 2000 1999 ----------------------------------------------------- Quarter High Low High Low ----------------------------------------------------- First 6 3/4 2 3/4 5 1/4 3 3/16 ----------------------------------------------------- Second 3 3/4 2 5/8 4 1/4 3 1/8 ----------------------------------------------------- Third 5 1/8 2 5/8 4 1/4 3 1/8 ----------------------------------------------------- Fourth 4 1/8 2 3/4 3 3/4 2 7/16 ----------------------------------------------------- The Company has never paid cash dividends. It is the current policy of the Company to retain earnings to finance the growth and development of its business, and therefore the Company does not anticipate paying cash dividends on its common stock in the foreseeable future. Furthermore, certain financial covenants in the Company's bank credit agreement restrict the Company's ability to pay cash dividends. Additional Investor Relations 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. For those without internet access, such information may be obtained without charge by request to the Company addressed to: Investor Relations, GTSI Corp., 3901 Stonecroft Boulevard, Chantilly, Virginia 20151-0808. Transfer Agent. The Company's transfer agent is First Union National Bank, Shareholder Services Group, 1525 West W.T. Harris Blvd., 3C3, Charlotte, NC 28288-1153; telephone 1-800-829-8432. Annual Meeting. The Annual Meeting of Stockholders is scheduled to be held at 9:00 a.m. on Tuesday, May 15, 2001, 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, 2000, 1999 and 1998 are derived from, and are qualified in their entirety by reference to, the Company's audited Financial Statements and Notes thereto included elsewhere in this Form 10-K. The December 31, 2000, 1999 and -13- 1998 Consolidated Financial Statements of the Company have been audited by Arthur Andersen LLP, independent accountants, as indicated in their report, which is also included elsewhere in this Form 10-K. The selected financial data for all other periods are derived from the Company's audited consolidated financial statements, which are not included in this Form 10-K.
(In thousands, except per share amounts) Twelve months ended December 31, 2000 1999 1998 1997 1996 (1) --------- --------- --------- --------- --------- Income Statement Data: Sales $ 677,755 $ 660,570 $ 593,571 $ 486,377 $ 491,642 Cost of sales 617,622 610,463 541,934 450,454 458,510 --------- --------- --------- --------- --------- Gross margin 60,133 50,107 51,637 35,923 33,132 --------- --------- --------- --------- --------- Operating Expense: Selling, general and administrative 49,382 44,931 44,660 36,940 38,008 Depreciation and amortization 3,934 3,584 3,661 3,539 13,456 --------- --------- --------- --------- --------- Total operating expenses 53,316 48,515 48,321 40,479 51,464 --------- --------- --------- --------- --------- Income (loss) from operations 6,817 1,592 3,316 (4,556) (18,332) Interest (income) expense, net (2,259) (1,090) 977 548 1,537 --------- --------- --------- --------- --------- Income (loss) before taxes 9,076 2,682 2,339 (5,104) (19,869) Income tax benefit (2,008) -- -- -- (2,031) --------- --------- --------- --------- --------- Net income (loss) before cumulative effect of SAB No. 101 adoption 11,084 2,682 2,339 (5,104) (17,838) --------- --------- --------- --------- --------- Cumulative effect of SAB 101 adoption (467) -- -- --------- --------- --------- --------- --------- Net income (loss) $ 10,617 $ 2,682 $ 2,339 $ (5,104) $ (17,838) ========= ========= ========= ========= ========= Net income (loss) per common share Basic: Basic net income (loss) per share before cumulative effect of SAB No. 101 adoption $ 1.23 $ 0.29 $ 0.27 $ (0.76) $ (2.67) Cumulative effect per share of SAB No. 101 adoption (0.05) -- -- -- -- --------- --------- --------- --------- --------- Basic net income (loss) per share $ 1.18 $ 0.29 $ 0.27 $ (0.76) $ (2.67) ========= ========= ========= ========= ========= Diluted: Diluted net income (loss) per share before cumulative effect of SAB No. 101 adoption $ 1.20 $ 0.29 $ 0.26 $ (0.76) $ (2.67) Cumulative effect per share of SAB No. 101 adoption (0.05) -- -- -- -- --------- --------- --------- --------- --------- Diluted net income (loss) per share $ 1.15 $ 0.29 $ 0.26 $ (0.76) $ (2.67) ========= ========= ========= ========= ========= Weighted average common shares outstanding Basic 9,021 9,271 8,700 6,733 6,690 ========= ========= ========= ========= ========= Diluted 9,225 9,314 8,909 6,733 6,690 ========= ========= ========= ========= =========
(1) The year ended December 31, 1996 includes a pretax charge of $9.1 million ($8.2 million after tax, or $1.22 per share) related to the impairment of intangible assets acquired as part of the acquisition of Falcon Microsystems, Inc.in 1994. -14-
(In thousands) December 31, 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Balance Sheet Data: Working capital $ 43,659 $ 44,350 $ 42,206 $ 30,860 $ 34,599 Total assets 227,065 186,333 161,090 137,464 141,001 Notes payable to banks 11,925 9,479 14,889 21,569 15,828 Total liabilities 168,585 133,137 105,766 97,590 96,153 Stockholders' equity 58,480 53,196 55,324 39,874 44,848
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 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 (e.g., peripherals, microcomputers and networking and workstation products, from 1985 through 1992); to the addition of new vendors (e.g., IBM, Sun, Panasonic, Apple and Nexar, from 1988 through 1996, and Cisco in 1998); and to the addition or expiration of sales contract vehicles (e.g., the addition of the SEWP II Contract, the NIH ECS-II Contract, the TDA-1 Contract and STAMIS Contract, and the expiration of the Companion Contract in 1995 and Desktop IV systems ordering in 1996). 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. 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, high-reliability provider of commodity products. The Company also focuses on bringing new technologies to government customers. -15- 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, --------------------------- ------------------------------ 2000 1999 1998 1999 to 2000 1998 to 1999 ----- ----- ----- ------------ ------------ Income Statement Data: Sales 100.0% 100.0% 100.0% 2.6% 11.3% Cost of sales 91.1% 92.4% 91.3% 1.2% 12.6% ----- ----- ----- Gross margin 8.9% 7.6% 8.7% 20.0% -3.0% Operating expense: Selling, general and administrative 7.3% 6.8% 7.5% 9.9% 0.6% Depreciation and amortization 0.6% 0.5% 0.6% 9.8% -2.1% ----- ----- ----- Total operating expenses 7.9% 7.3% 8.1% 9.9% 0.4% ----- ----- ----- Income from operations 1.0% 0.3% 0.6% 328.2% -52.0% Interest (income) expense, net -0.3% -0.2% 0.2% 107.2% -211.6% ----- ----- ----- Income before taxes 1.3% 0.5% 0.4% 238.4% 14.7% Income tax benefit -0.3% 0.0% 0.0% -100.0% -- ----- ----- ----- Net income before cumulative effect of SAB No. 101 adoption 1.6% 0.5% 0.4% 313.3% 14.7% ----- ----- ----- Cumulative effect of SAB 101 adoption 0.0% 0.0% 0.0% 100.0% -- ----- ----- ----- Net income 1.6% 0.5% 0.4% 295.9% 14.7% ===== ===== =====
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) 2000 1999 1998 -------------------- -------------------- -------------------- Hardware $534.5 78.9% $514.4 77.9% $474.7 80.0% Software 122.5 18.1% 123.7 18.7% 82.3 13.9% Services 20.8 3.0% 22.5 3.4% 36.6 6.1% ------ ----- ------ ----- ------ ----- Total $677.8 100.0% $660.6 100.0% $593.6 100.0% ====== ===== ====== ===== ====== ===== Contract Vehicles -------------------- -------------------- -------------------- (Dollars in millions) 2000 1999 1998 -------------------- -------------------- -------------------- GSA Schedules $230.6 34.0% $261.6 39.6% $188.6 31.8% IDIQ 327.1 48.2% 307.3 46.5% 318.2 53.6% Open Market 79.7 11.8% 76.8 11.6% 68.6 11.5% Other Contracts 40.4 6.0% 14.9 2.3% 18.2 3.1% ------ ----- ------ ----- ------ ----- Total $677.8 100.0% $660.6 100.0% $593.6 100.0% ====== ===== ====== ===== ====== =====
-16-
Vendor Category -------------------- -------------------- -------------------- (Dollars in millions) 2000 1999 1998 -------------------- -------------------- -------------------- Hewlett-Packard $160.0 23.6% $166.4 25.2% $138.1 23.3% Panasonic 93.3 13.7% 68.5 10.4% 53.4 9.0% Microsoft 63.7 9.4% 75.8 11.5% 56.0 9.4% Sun 53.4 7.9% 47.5 7.2% 20.3 3.4% Compac 41.3 6.1% 51.6 7.8% 62.9 10.6% Cicso 37.2 5.5% 34.0 5.1% 30.0 5.0% IBM 18.4 2.7% 9.2 1.4% 7.2 1.2% Toshiba 8.6 1.3% 11.1 1.7% 14.1 2.4% Dell 6.5 1.0% 11.3 1.7% 16.5 2.8% Other 195.4 28.8% 185.2 28.0% 195.1 32.9% ------ ----- ------ ----- ------ ----- Total $677.8 100% $660.6 100.0% $593.6 100.0% ====== === ====== ===== ====== =====
2000 Compared with 1999 Sales. Sales consist of revenues from product delivered and services rendered, net of allowances for customer returns and credits. Net sales in 2000 increased $17.2 million, or 2.6% over 1999. The primary reason for the increase was an approximately $19.8 million, or 6.4%, increase in sales under the Company's indefinite-delivery/indefinite-quantity ("IDIQ") contracts and $25.5 million, or 171.1%, increase in Other Contract sales. Increased sales in the IDIQ and Other Contract sales categories were partially offset by lower sales under the Company's GSA schedules of approximately $31.0 million, or 11.9%. Sales on Other Contracts were up $25.5 million dollars led by strong sales to a new prime contractor of $12.3 million and increased sales in the Company's Panasonic distribution business, up $6.7 million. Miscellaneous state contracts and the Tennessee State Sun contract were up a combined $3.7 million and the Immigration and Naturalization vehicle was up $1.6 million. IDIQ contract sales were up $19.8 million dollars partially as a result of increased sales on the combined SEWP contract vehicles of $49.6 million dollars. The increase in SEWP contract sales can be attributed to a wide product offering on this vehicle and the ability of all Government agencies to purchase off of this contract. Ruggedized Portables was another vehicle that experienced increased sales, rising $4.3 million from 1999, as the contract didn't begin until the third quarter of 1999. Sales on the Army Portable 2 and Portable 3 vehicles were up a net $2.8 million year over year. These increases were partially offset by a decrease in the PC 2 and PC 3 contract vehicles and the Stamis contract of $15.4 million and $13.1 million, respectively, from the prior year as the Army shifted spending to non-IT priorities. The State Department contract vehicle was $3.2 lower than last year due to the State Department's lower operating budget and IC4I was down $2.9 million as this contract vehicle expired in late 1999. The decline in sales under the Company's GSA Schedules is due to lower sales on the GSA Schedule B/C of $25.8 million. Sales on the GTSI-PA vehicle were off $11.0 million as large one-time orders from several customers were received in 1999. Sales were also lower on the TDA-Bridge contract by $22.1 million due to the cancellation of the IRS contract. During the fourth quarter of 2000, the Company adopted the provisions of the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," retroactive to January 1, 2000. The impact of adoption of SAB No. 101 is to generally defer -17- the recognition of sales from two to seven days as compared to the Company's previous revenue recognition policy. The impact of adoption of SAB No. 101 on the year 2000 was to reduce revenues by $2.5 million and decrease gross margin by $358,000. The Company implemented the guidance set forth in SAB No. 101 by recording a charge of $467,000 for the cumulative effect of adoption on January 1, 2000. Total booked backlog at December 31, 2000 was approximately $62.7 million compared to $54.9 million at December 31, 1999. Total booked backlog was $48.2 million at February 28, 2001, compared to $55.0 million at February 29, 2000. Booked backlog represents orders received but product has yet to ship. Gross Margin. Gross margin increased $10.0 million, or 20.0%, to $60.1 million from $50.1 million in 1999. Gross margin as a percentage of sales increased to 8.9% in 2000, as compared to a gross margin of 7.6% in 1999. The increase in gross margin percentage is due to better contract margins, more effective inventory management and better warranty experience. A favorable geographical mix of contracts, which lowered freight costs, also helped gross margin. Sales contract margins were higher in 2000 versus 1999 due to a shift from lower margin GSA contract vehicles to higher margin IDIQ contract vehicles and the maturation of IDIQ contract vehicles, for example the PC3 and Portables 3 contracts which were awarded in 1999. More effective warranty administration, inventory management, and lower freight costs contributed to improved margins. Maintenance costs were $1.8 million dollars lower and freight costs were $2.1 million lower than in 1999. Freight costs decreased from 1.15% of sales in 1999 to 0.83% of sales in 2000. Inventory management costs, net of product liquidations, were $1.5 million lower than last year. Cumulatively, these costs were $6.6 million dollars lower than last year. Operating Expenses. Total operating expenses for 2000 increased $4.8 million, or 9.9%, to $53.3 million from $48.5 million in 1999, and increased to 7.9% from 7.3% as a percentage of sales. Total personnel costs and infrastructure costs increased by $4.1 million, or 8.4%, due primarily to increased personnel costs to support increased emphasis on customer relationship selling. Other factors contributing to the increase in operating expenses include increased legal costs of $316,000 to defend various contract awards and protests and $470,000 in increased bad debt allowance over 1999. Interest Expense. Net interest expense is the amount of interest expense on borrowings offset by interest income and prompt payment discounts. Net interest income increased by $1.2 million, from $1.1 million to $2.3 million, or 107.2%, in 2000 compared to 1999. Interest income increased by $1.9 million, but was partially offset by an increase in interest expense of $708,000 over 1999. The increase in interest income is primarily due to a greater utilization of cash discounts earned on prompt payments of vendor invoices. Income Taxes. The Company's effective tax rate in 2000 was favorably impacted by the recognition of its previously reserved tax assets, which resulted in a $2.0 million income tax benefit in the fourth quarter and full year 2000. The Company anticipates that its ongoing effective tax rate will be approximately 39%. 1999 Compared with 1998 Sales. Sales consist of revenues from product delivered and services rendered, net of allowances for customer returns and credits. Net sales in 1999 increased $67.0 million, or 11.3% over 1998. The primary reason for the increase was higher sales under the Company's GSA schedules and Open Market sales of approximately $73.0 million, or 38.7%, and $8.2 million, or 12.0%, respectively. The increase is -18- partially offset by lower sales under IDIQ contracts of approximately $10.9 million, or 3.4%, and lower sales on other contracts of $3.3 million, or 18.1%. The decline in IDIQ sales is primarily attributable to the replacement of the TDA-1 IDIQ contract sales of $27.6 million in 1998 with the TDA BPA agreement sales of $25.4 million in 1999. In 1996, GSA expressly authorized agencies to procure from GSA Schedule holders under BPA's which incorporate many terms and conditions of the GSA Schedule contracts. Additionally, BPA's offer many of the same products as GSA schedules, often at lower prices than available on GSA schedules. In response to GSA's authorization, the Company has increased its emphasis on BPA's. Sales under GSA contracts increased primarily as a result of TDA Bridge BPA sales of $25.4 million, which replaced the expired 1998 TDA-1 IDIQ contract. Additional increases result from increased sales under the Army Microsoft Upgrade BPA contract of $20.2 million; and increased sales under the Enhanced Technology contract of $9.4 million resulting from a full year effect of this contract which was awarded in April, 1998; and increased overall emphasis on BPA's. Total booked backlog at December 31, 1999 was approximately $54.9 million compared to $59.7 million at December 31, 1998. Total booked backlog was $55.0 million at February 29, 2000, up 1.6 million or 3.0% compared to February 28, 1999. Booked backlog represents orders received but product has yet to ship. Gross Margin. In 1999, gross margin decreased in absolute dollars by $1.5 million, or 3.0%, and decreased as a percentage of sales to 7.6% from 8.7%, when compared to 1998. Margins in 1999 were affected by a combination of the replacement of several existing contracts by competitive wins and continued downward pressure on personal computer margins. Although the gross margin in 1999 is below the gross margin in 1998, the gross margin in 1998 included the beneficial effect of a one-time $2.2 million inventory valuation adjustment. Removal of this inventory adjustment results in a pro-forma gross margin of 8.2% for 1998. Operating Expenses. Total operating expenses for 1999 increased $194,000, or 0.4%, compared to 1998, but as a percentage of sales, operating expenses decreased to 7.3% from 8.1%. Operating expenses, at $48.5 million in 1999, were relatively equal with operating expenses of $48.3 in 1998. Although total operating expenses were relatively flat compared to 1998, personnel costs increased by $3.5 million, or 12.5% due to expanded sales and program management and support coverage due to the acquisition of new contract vehicles as well as an emphasis on revenue growth. This increase was substantially offset by reductions in advertising, consulting, and rent. Advertising expense was reduced by $2.1 million, or 33.4%, compared to 1998, primarily related to the Company's discontinued catalog business along with the better management of show related costs. Consultant expense was reduced by $907,000, or 40.8%, in transitioning functions internally to Company personnel. Rent expense was reduced $650,000, or 54.2% due to better negotiated lease terms related to the Company's move to its new headquarters in November of 1998. Interest Expense. Net interest expense is the amount of interest expense on borrowings offset by interest income and prompt payment discounts. Net interest expense decreased by $2.1 million, or 211.6% in 1999 compared to 1998. The Company utilized more prompt payment discounts and reduced average borrowings as compared to the same period in 1998. The reduced average borrowing was primarily due to improved cash flow from the increased collections emphasis on aged accounts receivables. Average days sales outstanding ("DSO") decreased 5 days to 47 in 1999 from 52 in 1998. Average borrowing was also reduced by the increase of credit card sales which allows for the immediate collection of invoices. -19- Income Taxes. No provision for income tax has been recognized with respect to the Company's income from operations for 1999 due to the reversal of tax valuation allowance that fully offset the Company's current tax expenses for 1999. 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. During the fourth quarter of 2000, the Company adopted the provisions of SAB No. 101 retroactive to January 1, 2000. 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. The Company implemented the guidance set forth in SAB No. 101 by recording an adjustment for the cumulative effect of adoption of $467,000 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 whether a company should report revenue based on (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 accompanying financial statements have been reclassified to reflect the provisions of EITF No. 99-19. This accounting pronouncement clarifies the income statement presentation of the Company's revenues and expenses generated from the sale of software maintenance agreements. The Company had previously reported total billings to customers for software maintenance agreements as sales and the total amount we owed to the maintenance providers as cost of sales. Pursuant to the guidance EITF No. 99-19, our income statement presentation has been reclassified to reflect only the net margin on these transactions as sales. Adoption of EITF No. 99-19 had no impact on the Company's reported gross margin or net income, but merely results in the reduction of previously reported sales and cost of sales of $12.3 million, $7.9 million and $13.4 million for 1998, 1999 and 2000, respectively. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. The Company determined that adoption of SFAS No. 133 will not have a material affect on its financial statements. 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. -20- 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 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 any 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 2000, the Company's operating activities generated approximately $7.6 million of cash flow, compared to $10.3 million for 1999. Significant factors impacting cash provided by operating activities in 2000 include an increase in accounts receivables of $17.8 million, an increase in inventories of $6.8 million, an increase in other assets of $12.2 million, offset by corresponding increases in accounts payable and accrued liabilities of $30.2 million and $4.3 million respectively. The increase in accounts receivable was primarily attributed to an increase of $13.5 million in trade accounts receivable due to increased shipments and an increase in short-term lease receivable of $5.4 million, offset by a $1.1 million decrease in various vendor receivables. The increase in inventory was primarily due to an increase in inventory in transit. The increase in other assets was primarily due to an increase in warranty spares to support contracts of $2.1 million, an increase in prepaid inventory of $7.0 million, and an increase in long-term lease receivable of $3.4 million. The increase in accounts payable was due to an increase in trade accounts payable of $27.8 due to increased backlog and shipments at year end and an increase of $2.4 million in income taxes payable. Investing activities used cash of approximately $4.3 million in 2000 primarily for the Company's continued investment in its customer relationship management initiatives and its Web site development. The Company's financing activities used approximately $3.4 million of cash flow during 2000 due to an increase in the Company's outstanding borrowing under its line-of-credit of $2.4 million and $6.0 million used to repurchase the common stock of the Company. -21- 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, March 31, 1999, the Second Amended and Restated Business 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 March 31, 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 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 the Fourth Amendment to the Credit Agreement for the continuation of the Credit Agreement. The termination provisions of the agreement were modified to provide for a 90-day written termination notice upon receipt by either party. The Amendment also provided for, among other things, increasing the Company's stock repurchase authorization from third-party shareholders to $6.1 million, up from $5.25 million in the previous Amendment. All other material terms of the Credit Agreement remained the same. As of December 31, 2000, 1999, and 1998, respectively, the Company's interest rate on the Credit Facility was 8.40%, 8.24%, and 7.83%, respectively. Amounts due to the Lenders of $11.9 million as of December 31, 2000 are classified as current liabilities up from $9.5 million as of December 31, 1999 and the available portion of the Credit Facility was approximately $38.1 million at December 31, 2000, up from $35.3 million at December 31, 1999. 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 purchase of the Company's Common Stock, as well as provisions specifying compliance with certain quarterly and annual financial statistical ratios. At December 31, 2000, the Company was in compliance with all financial covenants set forth in the credit facility. -22- Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Inapplicable. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 The statements which are not historical facts contained in this Management's Discussion and Analysis of Financial Condition, Results of Operations and Notes to Consolidated Financial Statements, are forward-looking statements that involve certain risks and uncertainties. Actual results may differ materially based on numerous factors, including but not limited to competition in the government markets, spending patterns of the Company's customers, general economic and political conditions, success of negotiations with the Company's Lenders, changes in government procurement regulations, and other risks described in this Annual Report on Form 10-K and in the Company's other Securities and Exchange Commission filings. -23- 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 information is included in Note 10 of Notes to Consolidated Financial Statements. Index to Financial Statements and Schedule Page ---- Financial Statements: Report of Independent Public Accountants 25 Consolidated Balance Sheets as of December 31, 2000 and 1999 26 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 27 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 28 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 29 Notes to Consolidated Financial Statements 30-44 Schedule: Schedule II - Valuation and Qualifying Accounts 45 Schedules not listed above have been omitted because they are not applicable or the information required to be set forth therein is included in the financial statements or notes thereto. -24- Report of Independent Public Accountants To GTSI Corp.: We have audited the accompanying consolidated balance sheets of GTSI Corp. and subsidiary (formerly Government Technology Services, Inc., a Delaware corporation) as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company'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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. As explained in Note 1 to the financial statements, the Company has given retroactive effect to the change in accounting for certain of its revenue transactions in accordance with Emerging Issues Task Force Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." In addition, effective January 1, 2000, the Company changed its method of revenue recognition for certain of its transactions in accordance with the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 101, " Revenue Recognition in Financial Statements". 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. ARTHUR ANDERSEN LLP Vienna, Virginia February 5, 2001 -25- GTSI CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, (In thousands, except share amounts) 2000 1999 --------- --------- ASSETS Current assets: Cash $ 79 $ 149 Accounts receivable, net 137,181 125,179 Merchandise inventories 53,570 41,483 Other current assets 18,269 6,057 --------- --------- Total current assets 209,099 172,868 Property and equipment, net 12,830 12,627 Other assets 5,136 838 --------- --------- Total assets $ 227,065 $ 186,333 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable to banks $ 11,925 $ 9,479 Note payable, currrent 500 500 Accounts payable 134,071 103,871 Accrued warranty liabilities 10,249 9,135 Accrued liabilities 8,695 5,533 --------- --------- Total current liabilities 165,440 128,518 Notes payable, net of current portion 1,000 1,500 Other liabilities 2,145 3,119 --------- --------- Total liabilities 168,585 133,137 --------- --------- Commitments and contingencies Stockholders' equity Preferred stock - $0.25 par value, 680,850 shares authorized; none issued or outstanding -- -- Common stock - $0.005 par value 20,000,000 shares authorized, 9,806,084 issued and 7,956,272 outstanding at December 31, 2000; and 20,000,000 shares authorized, 9,806,084 issued and 9,235,043 outstanding at December 31, 1999 49 49 Capital in excess of par value 43,484 43,687 Retained earnings 22,933 12,316 Treasury stock, 1,849,812 shares at December 31, 2000 and 571,041 shares at December 31, 1999, at cost (7,986) (2,856) --------- --------- Total stockholders' equity 58,480 53,196 --------- --------- Total liabilities and stockholders' equity $ 227,065 $ 186,333 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. -26- GTSI CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, (In thousands, except per share amounts) 2000 1999 1998 --------------------------------------- Sales $ 677,754 $ 660,570 $ 593,571 Cost of sales 617,621 610,463 541,934 --------- --------- --------- Gross margin 60,133 50,107 51,637 Operating expenses 53,316 48,515 48,321 --------- --------- --------- Income from operations 6,817 1,592 3,316 --------- --------- --------- Interest and financing income (3,206) (1,742) (541) Interest expense 947 652 1,518 --------- --------- --------- Interest (income) expense, net (2,259) (1,090) 977 --------- --------- --------- Income before income taxes 9,076 2,682 2,339 Income tax benefit (2,008) -- -- --------- --------- --------- Net income before cumulative effect of SAB No. 101 adoption 11,084 2,682 2,339 Cumulative effect of SAB No. 101 adoption (467) -- -- --------- --------- --------- Net income $ 10,617 $ 2,682 $ 2,339 ========= ========= ========= Net income per common share Basic Basic net income per share before cumulative effect of SAB No. 101 adoption $ 1.23 $ 0.29 $ 0.27 Cumulative effect per share of SAB No. 101 adoption (0.05) -- -- --------- --------- --------- Basic net income per share $ 1.18 $ 0.29 $ 0.27 ========= ========= ========= Diluted Diluted net income per share before cumulative effect of SAB No. 101 adoption $ 1.20 $ 0.29 $ 0.27 Cumulative effect per share of SAB No. 101 adoption (0.05) -- -- --------- --------- --------- Diluted net income per share $ 1.15 $ 0.29 $ 0.26 ========= ========= ========= Weighted average common shares outstanding Basic 9,021 9,271 8,700 ========= ========= ========= Diluted 9,225 9,314 8,909 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -27- GTSI CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 2000, 1999 and 1998 ------------------------------------------------------------------------------------------- Preferred Stock Common Stock ------------------------------------------ Capital in Total Shares Shares Excess of Retained Treasury Stockholders' (In thousands) Issued Amount Issued Amount Par Earnings Stock Equity ------------------------------------------------------------------------------------------- Balance, December 31, 1997 -- $ -- 6,806 $ 34 $ 33,086 $ 7,295 $ (541) $ 39,874 Stock options exercised -- -- -- -- (326) -- 470 144 Acquisition of BTG Division- issuance of preferred stock 15,375 15,375 -- -- -- -- -- -- Acquisition of BTG Division- conversion of preferred stock into common stock (15,375) (15,375) 3,000 15 12,952 -- -- 12,967 Net income -- -- -- -- -- 2,339 -- 2,339 ------------------------------------------------------------------------------------------ Balance, December 31, 1998 -- $ -- 9,806 $ 49 $ 45,712 $ 9,634 $ (71) $ 55,324 Stock options exercised -- -- -- -- (81) -- 178 97 BTG settlement - purchase of Treasury stock and repurchase option -- -- -- -- (1,944) -- (2,963) (4,907) Net income -- -- -- -- -- 2,682 -- 2,682 ------------------------------------------------------------------------------------------ Balance, December 31, 1999 -- $ -- 9,806 $ 49 $ 43,687 $ 12,316 $ (2,856) $ 53,196 Stock options exercised -- -- -- -- (203) -- 916 713 Purchase of treasury stock -- -- -- -- -- -- (6,046) (6,046) Net income -- -- -- -- -- 10,617 -- 10,617 ------------------------------------------------------------------------------------------ Balance, December 31, 2000 -- $ -- 9,806 $ 49 $ 43,484 $ 22,933 $ (7,986) $ 58,480 ======= ==================================================================================
The accompanying notes are an integral part of these consolidated financial statements. -28- GTSI CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, (In thousands) 2000 1999 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,617 $ 2,682 $ 2,339 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of SAB No. 101 adoption 467 -- -- Depreciation and amortization 3,934 3,584 3,661 Loss on disposal of property and equipment 134 288 -- Deferred taxes (4,334) (440) (1,740) (Decrease) increase in cash due to changes in assets and liabilities: Accounts receivable (17,805) (21,702) (15,429) Merchandise inventories (6,751) (4,939) 9,408 Other assets (12,176) 223 (566) Accounts payable 30,200 28,389 8,086 Accrued liabilities and warranty liabilities 4,276 1,553 3,333 Other liabilities (974) 657 1,439 -------- -------- -------- Net cash provided by operating activities: 7,588 10,295 10,531 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (4,271) (5,004) (4,827) Payments related to purchase of BTG Division -- -- (7,826) Payments from BTG settlement -- 132 -- -------- -------- -------- Net cash used in investing activities: (4,271) (4,872) (12,653) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payment of) bank notes, net 2,446 (5,410) 1,146 Payment of notes payable (500) -- -- Purchase of treasury stock (6,046) -- -- Proceeds from exercises of stock options 713 97 159 -------- -------- -------- Net cash (used in) provided by financing activities: (3,387) (5,313) 1,305 -------- -------- -------- Net (decrease) increase in cash (70) 110 (817) Cash at beginning of year 149 39 856 -------- -------- -------- Cash at end of year $ 79 $ 149 $ 39 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,429 $ 571 $ 2,114 Income taxes $ -- $ -- $ 2,553
The accompanying notes are an integral part of these consolidated financial statements. -29- GTSI CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GTSI Corp. ("GTSI", or the "Company", formerly Government Technology Services, Inc.) operates in a single business segment and resells microcomputer and workstation 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. In August 1994, GTSI acquired all of the outstanding shares of common stock of Falcon Microsystems, Inc. ("Falcon"). GTSI and Falcon are hereinafter referred to as the "Company." Acquisition of BTG Division On February 12, 1998, the Company entered into and closed on an Asset Purchase Agreement with BTG, Inc. and two of its subsidiaries (collectively, "BTG") under which the Company acquired substantially all of the assets of the BTG division that resells computer hardware, software and integrated systems to the Government (the "BTG Division"). The acquired assets consisted primarily of inventory and rights under certain contracts and intangible personal property, along with furniture, fixtures, supplies and equipment. In addition, the Company assumed certain liabilities under specified contracts of BTG as well as certain liabilities arising from the ownership or operation of the acquired assets after the closing. The Company paid at closing $7,325,265 in cash (after a $174,735 adjustment for accrued vacation liability and satisfaction of an outstanding invoice owed by BTG) and issued 15,375 shares, having a liquidation preference of $15,375,000, of a new series of preferred stock designated as Series C 8% Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"). The Company paid an additional $500,000 in cash upon the release of liens on certain items of equipment, which are part of the acquired assets. A portion of the consideration, $800,000 in cash and 1,538 shares of Series C Preferred Stock, was held under an escrow agreement to secure BTG's indemnification obligations under the Asset Purchase Agreement. Under the Asset Purchase Agreement, BTG was obligated to repay to the Company up to $4.5 million to the extent that there was a shortfall in the amounts that the Company received from dispositions of certain inventory acquired. The acquisition of the BTG Division was accounted for using the purchase method of accounting. The purchase price was allocated to tangible assets based on fair market value. The financial statements include the results of operation of the BTG Division since the acquisition date. The following table sets forth the unaudited pro forma results of the operations of the Company and the BTG Division for the year ended December 31, 1998, assuming the acquisition occurred on January 1, 1998. Net income for 1998 excludes approximately $1 million of nonrecurring cost and $270,000 of interest expense directly attributable to the acquisition. -30- (In thousands, except per share data) (unaudited) 1998 ----------- Revenues $ 647,021 Net income $ 1,970 Basic net income per share $ 0.23 Diluted net income per share $ 0.22 The pro forma results are not indicative of the results of operations had the acquisition taken place on January 1, 1998. Subsequent to the closing, BTG delivered to the Company certain other inventory ("Surplus Inventory"). By letter dated May 15, 1998, the Company and BTG agreed that BTG would invoice GTSI an aggregate of $3,912,419 for Surplus Inventory. In addition, BTG agreed to pay to the Company $1 million on June 30, 1998, which constituted full and complete payment for any inventory shortfall as described in the Asset Purchase Agreement, as well as $250,000 for costs associated with processing the Surplus Inventory. Pursuant to the Asset Purchase Agreement, the Company agreed to convene a meeting of stockholders no later than January 1, 1999 to approve a proposal to convert the Series C Preferred Stock into 3,000,000 shares of Common Stock (the "Conversion Proposal"), and a proposal to amend the Company's Certificate of Incorporation to increase the number of authorized shares of Common Stock from 10,000,000 to 20,000,000 (the "Charter Amendment Proposal"). At the Company's annual meeting of stockholders held on May 12, 1998, the Company's stockholders approved the Conversion Proposal and the Charter Amendment Proposal. The Series C Preferred Stock was converted automatically into 3,000,000 shares of Common Stock valued at $5.125 per share and which, pursuant to the exemption provided under Section 4(2) of the Securities Act of 1933, as amended ("Securities Act"), were not registered under the Securities Act. On February 10, 1999, the Company entered into subsequent agreements with BTG. The agreements relate to the reacquisition of GTSI common stock by GTSI from BTG, the terms of certain contracts and the relationship of the parties going forward. Pursuant to the agreements, GTSI reacquired 600,000 shares of its common stock from BTG. Of the 600,000 shares, 200,000 were tendered to GTSI at no cost and 400,000 were purchased by GTSI for $5.00 per share, in exchange for a three-year, 8% interest bearing note from BTG with the principal due in three annual installments of $500,000, $500,000 and $1,000,000, respectively. As part of the agreements, GTSI had an exclusive five-year option to purchase the remaining 1.3 million shares of GTSI stock held by BTG for $5.25 per share. As a result of the agreement, BTG transferred to GTSI all of the cash portion of the February 12, 1998 escrow, totaling $827,219, and BTG's ownership interest in GTSI was reduced to 13.3%. On October 23, 2000, the Company exercised its option with BTG and purchased the remaining 1.3 million shares of GTSI stock held by BTG for $4.25 a share or $5.53 million. 1. Accounting Policies Significant accounting policies of the Company are summarized below: -31- Basis of 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 and reserves for future costs to be incurred under the Company's warranty programs. Revenue Recognition. Revenue from hardware 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. Revenue from software product sales is recognized in accordance with the provisions of American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition." Revenue from the sale of software products is recognized when persuasive evidence of an arrangement exists, the software has been delivered, the fee is fixed or determinable and collection is probable. Net revenues from sales of third party software maintenance contracts are recognized at the time of sale. 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 accompanying financial statements have been 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 $13.4 million, $7.9 million and $12.3 million for 2000, 1999 and 1998, respectively. Financial Instruments. At December 31, 2000 and 1999, 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. 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 -32- 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. 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. 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. Intangible Assets. Intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives. Included in operating expenses for the years ended December 31, 2000, 1999, and 1998 is amortization expenses of $0, $114,000 and $338,000, respectively. Impairment of Long-Lived Assets. The Company evaluates long-lived assets for events or changes in circumstances that would indicate that the carrying value may not be recoverable. In making that determination, the Company considers a number of factors, including undiscounted future cash flows, prior to interest expense. The Company measures an impairment loss by comparing the fair value of the assets to their carrying value. 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 is established when necessary to reduce deferred tax assets to amounts expected to be realized. Earnings Per Share. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," the Company presents basic and diluted earnings per share on the face of the income statement for all periods presented. Basic earnings per share excludes dilution and is computed by dividing income available to common 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, 2000, 1999 and 1998, diluted weighted average common shares outstanding includes the dilutive effect of options if exercised of 204,000, 43,000 and 209,000 shares respectively. Interest and Financing Income. For the years ended December 31, 2000, 1999, and 1998, interest and financing income includes $2.1 million, $1.0 million, and $33,000, respectively, of financing income earned on prompt payment of vendor invoices. Marketing Development and Cooperative Advertising Funds. 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. Once earned, the funds reduce associated expenses of promotional programs. -33- Check Overdrafts. Included in accounts payable at December 31, 2000 and 1999, are approximately $ 1.7 million and $9.1 million, respectively, which represent checks that have been issued but have yet to clear the bank. Reclassifications. Certain amounts from prior years have been reclassified to conform to the current year financial statement presentation. New Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. The Company determined that adoption of SFAS No. 133 will not have a material effect on its financial statements. 2. Accounts Receivable The composition of accounts receivable as of December 31, 2000 and 1999 is as follows (in thousands): 2000 1999 --------- --------- Trade accounts receivable $ 116,825 $ 109,130 Vendor and other receivables 22,065 18,605 --------- --------- 138,890 127,735 Less: Allowance for uncollectible accounts (1,709) (2,556) --------- --------- Accounts receivable, net $ 137,181 $ 125,179 ========= ========= 3. Property and Equipment The composition of property and equipment as of December 31, 2000 and 1999 is as follows (in thousands): 2000 1999 --------- --------- Office furniture and equipment $ 10,286 $ 10,379 Computer software 12,685 9,599 Leasehold improvements 4,797 4,797 ----------------------- 27,768 24,775 Less: accumulated depreciation and amortization (14,938) (12,148) ----------------------- Property and equipment, net $ 12,830 $ 12,627 ======================= Depreciation and amortization expense on property and equipment was $3,934, $3,470, and $3,323 in 2000, 1999 and 1998 respectively. -34- 4. 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, March 31, 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 March 31, 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. As of December 31, 2000, 1999, and 1998, respectively, the Company's interest rate on the Credit Facility was 8.40%, 8.24%, and 7.83%, respectively. Amounts due to the Lenders of $11.9 million as of December 31, 2000 are classified as current liabilities, as compared with $9.5 million outstanding as of December 31, 1999, and the available portion of the Credit Facility was approximately $38.1 million at December 31, 2000, as compared with $35.3 million available at December 31, 1999. 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 December 31, 2000, the Company was in compliance with all financial covenants set forth in the Credit Facility. -35- The following information pertains to the notes payable to banks for the years ended December 31, 2000, 1999 and 1998 (dollars in thousands): 2000 1999 1998 ------- -------- -------- Weighted average interest rate ...... 8.2% 7.5% 8.2% Weighted average borrowings ......... $ 9,600 $ 4,100 $ 12,500 5. Income Taxes The components of the provision (benefit) for income taxes for the years ended December 31, 2000, 1999 and 1998 are as follows (in thousands): 2000 1999 1998 ------- ------- ------- Current taxes: Federal $ 1,923 $ 370 $ 1,443 State 403 70 297 ------- ------- ------- 2,326 440 1,740 Deferred taxes: Federal (4,063) (397) (1,443) State (271) (43) (297) ------- ------- ------- (4,334) (440) (1,740) ------- ------- ------- Income tax benefit $(2,008) $ -- $ -- ======= ======= ======= 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. As of December 31, 1999, the Company had a valuation allowance of $5.0 million against its net deferred tax assets. In the fourth quarter of 2000, the Company, after its third consecutive year of positive earnings, concluded that a valuation allowance against its net deferred tax assets was no longer necessary as the future realizability of these assets was now more likely than not. -36- Significant components of the Company's deferred taxes as of December 31, 2000 and 1999 were as follows (in thousands): December 31, ------------------ 2000 1999 ------------------ Deferred tax assets: Accounts receivable and inventory reserves $ 864 $ 1,436 Intangible assets 1,682 1,819 Accrued warranty 2,985 3,272 Bid and proposal costs 446 332 Vacation accrual 326 280 Depreciation 61 -- Rent abatement 96 84 Other reserves 692 365 ------------------ Total deferred tax assets 7,152 7,588 ------------------ Deferred tax liabilities: Depreciation -- 118 Web site development costs 638 245 ------------------ Total deferred tax liabilities 638 363 ------------------ Net deferred tax assets 6,514 7,225 Valuation allowance -- (5,045) ------------------ Net deferred tax assets reported $ 6,514 $ 2,180 ================== The Company's effective tax rate for the years ended December 31, 2000, 1999, and 1998 differs from the statutory rate for Federal income taxes as a result of the following factors: 2000 1999 1998 ------ ------ ------ Statutory rate 34.0% 34.0% 34.0% State income taxes, net of Federal tax benefit 4.5% 4.0% 4.2% Valuation allowance -59.3% -39.8% -36.4% Other -1.3% 1.8% -1.8% ------ ------ ------ -22.1% -- -- ====== ====== ====== 6. 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 1,600,000 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 -37- 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. Options under the 1997, 1996, 1994 and 1986 Plans were as follows:
Weighted Weighted Average Number of Option Exercise Price Per Average Exercise Remaining Shares Share Price Per Share Life - ------------------------------------------------------------------------------------------------------------------------------ 1997 Plan: Outstanding at December 31, 1997 119,342 $ 4.88-5.50 $ 5.00 Granted 239,000 3.63-5.38 4.90 Forfeited or canceled (62,167) 4.88-5.50 5.07 Exercised -- -- -- Outstanding at December 31, 1998 296,175 3.63-5.38 4.90 Granted 74,000 2.88-3.75 3.48 Forfeited or canceled (94,250) 3.75-5.31 4.90 Exercised -- -- -- Outstanding at December 31, 1999 275,925 2.88-5.38 4.52 Granted 57,000 3.25-5.22 3.60 Forfeited or canceled (49,625) 3.31-5.31 4.70 Exercised (3,333) 2.88 2.88 Outstanding at December 31, 2000 279,967 $ 2.88-5.38 $ 4.23 5.1 - ------------------------------------------------------------------------------------------------------------------------------ 1996 Plan: Outstanding at December 31, 1997 399,500 $ 4.88-7.31 $ 5.21 Granted 223,750 4.50-5.25 4.88 Forfeited or canceled (50,500) 5.00-7.31 5.58 Exercised -- -- -- Outstanding at December 31, 1998 572,750 4.50-5.44 5.05 Granted 826,000 2.88-4.94 3.72 Forfeited or canceled (144,750) 3.75-5.25 4.63 Exercised -- -- -- Outstanding at December 31, 1999 1,254,000 2.88-5.44 4.22 Granted 463,000 2.81-3.31 3.21 Forfeited or canceled (254,000) 2.88-5.25 4.24 Exercised (10,750) 3.13-3.75 3.62 Outstanding at December 31, 2000 1,452,250 $ 2.81-5.44 $ 3.91 6.1
-38-
Weighted Weighted Average Number of Option Exercise Price Per Average Exercise Remaining Shares Share Price Per Share Life - ------------------------------------------------------------------------------------------------------------------------------ 1994 Plan: Outstanding at December 31, 1997 232,500 $3.25-13.44 $ 7.02 Granted 80,000 4.53-5.00 4.81 Forfeited or canceled (26,000) 3.50-5.19 4.21 Exercised (15,000) 3.50 3.50 Outstanding at December 31, 1998 271,500 3.25-13.44 6.83 Granted 84,000 2.88-3.75 3.03 Forfeited or canceled (74,000) 5.00-5.25 5.14 Exercised -- -- -- Outstanding at December 31, 1999 281,500 2.88-13.44 6.13 Granted 35,000 3.31 3.31 Forfeited or canceled (60,500) 4.81-13.44 7.71 Exercised (6,500) 2.88 2.88 Outstanding at December 31, 2000 249,500 $2.88-12.88 $ 5.70 4.9 - ------------------------------------------------------------------------------------------------------------------------------ 1986 Plan: Outstanding at December 31, 1997 84,500 $3.50-14.25 $ 4.95 Granted -- -- -- Forfeited or canceled (13,000) 3.25 3.25 Exercised (7,000) 3.25 3.25 Outstanding at December 31, 1998 64,500 3.50-14.25 5.48 Granted -- -- -- Forfeited or canceled (7,500) 14.25 14.25 Exercised -- -- -- Outstanding at December 31, 1999 57,000 3.50-10.25 4.33 Granted -- -- -- Forfeited or canceled (50,000) 3.50 3.50 Exercised -- -- -- Outstanding at December 31, 2000 7,000 $ 10.25 $ 10.25 0.8 - ------------------------------------------------------------------------------------------------------------------------------ Nonstatutory Stock Options: Outstanding at December 31, 1997 1,255,000 $3.75-10.50 $ 4.67 Granted 81,000 4.88 4.88 Forfeited or canceled (20,000) 6.13 6.13 Exercised -- -- -- Outstanding at December 31, 1998 1,316,000 3.75-10.50 4.61 Granted 150,000 3.13-4.63 4.13 Forfeited or canceled (321,000) 4.63-5.38 5.05 Exercised -- -- -- Outstanding at December 31, 1999 1,145,000 3.13-10.50 4.42 Granted -- -- -- Forfeited or canceled (50,000) 3.13-10.50 4.41 Exercised (100,000) 3.75 3.75 Outstanding at December 31, 2000 995,000 $3.13-10.50 $ 4.47 4.8 - ------------------------------------------------------------------------------------------------------------------------------ FOR ALL PLANS: Outstanding at December 31, 2000 2,983,717 $2.81-12.88 $ 4.29 5.4
-39- Outstanding and Exercisable by Price Range as of December 31, 2000
Options Outstanding Options Exercisable - -------------------------------------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Exercise Outstanding at Contractual Life- Exercise Exercisable at Exercise Prices 12/31/00 Years Price 12/31/00 Price - ------------------- -------------- ----------------- ------------ -------------- ------------ 2.81-2.85 75,000 6.4 $ 2.81 50,000 $ 2.81 2.85-4.28 2,110,667 5.7 3.59 1,244,337 3.72 4.28-5.70 618,050 5.1 5.04 569,925 5.05 5.70-7.13 13,000 2.9 6.36 12,000 6.38 7.13-8.55 9,000 3.0 7.31 7,200 7.31 9.98-11.40 107,000 3.4 10.48 107,000 10.48 11.40-12.83 48,000 1.0 12.50 48,000 12.50 12.83-12.88 3,000 3.4 12.88 3,000 12.88 ----------- --------- ------------ -------- --------- -------- 2.81-12.88 2,983,717 5.4 $ 4.29 2,041,462 $ 4.67 =========== ========= ============ ======== ========= ========
The Company adopted the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation," effective for the Company's December 31, 1996 financial statements. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans, as allowed under SFAS 123. Accordingly, no compensation cost has been recognized for stock option and stock purchase plans. If compensation cost for the Company's stock-based compensation plans had been determined based on the fair value at the grant dates for awards under those plans consistent with the method in SFAS 123, the Company's net income and net income per share would have increased to the pro forma amounts (in thousands, except net income per share amounts) indicated below. 2000 1999 1998 --------- -------- --------- Net income - pro forma $ 9,697 $ 1,340 $ 1,504 Net income per share - pro forma (basic) 1.08 0.14 0.17 Net income per share - pro forma (diluted) 1.05 0.14 0.17 The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2000: no dividend yield, 76% volatility, a risk-free interest rate of 4.95%, and an average expected life of six years; and the following assumptions were used for grants in 1999 and 1998: no dividend yield, volatility from 68% to 70%, risk-free interest rates ranging from 3.79% to 6.00%, and expected lives from seven to eight years. At December 31, 2000, in the 1997 Plan options for 164,010 shares were exercisable and 20,033 options were available for grant; in the 1996 Plan options for 757,251 shares were exercisable and 147,750 options were available for grant; in the 1994 Plan options for 158,201 shares were exercisable and 50,500 options were available for grant; and in the 1986 Plan options for 7,000 shares were exercisable. 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 -40- 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, 2000 and December 31, 2000, employees purchased 27,221 and 43,007 shares, respectively, at prices of $2.34 and $2.66, respectively. In the offering periods ended June 30, 1999 and December 31, 1999, employees purchased 11,912 and 23,641, respectively, at prices of $3.51 and $2.34, respectively. In the offering periods ended June 30, 1998 and December 31, 1998, employees purchased 9,367 and 11,943 shares, respectively, at prices of $4.04 and $3.85, respectively. The weighted average fair market value of shares under the ESPP was $2.53, $2.73 and $3.93 in 2000, 1999, and 1998, respectively. The Company has reserved 750,000 shares of common stock for the ESPP, of which 470,175 were available for future issuance as of December 31, 2000. 7. 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. The Company leases office and warehouse space and various equipment under noncancelable operating leases. In November 1988, the Company executed a ten-year lease for its corporate headquarters that comprises approximately 120,000 square feet of office space and 14,000 square feet of warehouse space. The Company also entered into a nine-year lease for 55,170 square feet of office space in two buildings beginning December 1, 1989. The lease for the entire facility expired on November 30, 1998. In October 1997, the Company executed a ten-year lease for a new administrative facility consisting of approximately 100,500 square feet of new 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 $2.0 million as a security deposit for all tenant requested improvements associated with the lease. This deposit will be reduced by 10%, per year, over the life of the lease. The Company has 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 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, 2001. Rent expense for the years ended December 31, 2000, 1999 and 1998 was approximately $2.0 million, $2.1 million, and $2.8 million, respectively. The Company also maintains a sales office in Germany and has entered into a lease agreement as of January 1, 1999 for a term of two-years ending on December 31, 2000. The Company renewed this lease commitment as of January 1, 2001 for a one year term ending on December 31, 2001. -41- Collective future minimum lease payments as of December 31, 2000 are as follows (in thousands): Operating Year ending December 31, Leases (1) ---------- 2001 $ 1,979 2002 1,950 2003 1,985 2004 2,035 2005 2,095 Thereafter 4,597 ---------- Total minimum lease payments $ 14,641 ========== (1) Includes $42,075 in 2001 and $14,025 for lease renewal option exercised in Chattanooga and Germany facilities. 8. 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 2000, 1999 and 1998, the Company contributed a total of $ 662,164, $ 242,917 and $101,034 to the Plan, respectively. 9. Segment Reporting In June 1997, the Financial Accounting Standards Board issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," which requires certain information about operating segments in the financial statements and in condensed financial statements of interim periods. The Company has determined that through December 31, 2000, it operated as one business segment as defined by SFAS 131. In addition, the Company aggregates and reports revenues from products which have similar economic characteristics in their nature, production, and distribution process. The primary customer of the Company is the federal government, which under SFAS 131 is considered a single customer. -42- 10. 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. The quarterly financial data also reflects the adoption of SAB No. 101 effective January 1, 2000 and the adoption of EITF No. 99-19 on a retroactive basis for all quarters presented (see Note 1). Results of any one or more quarters are not necessarily indicative of annual results or continuing trends.
2000 Quarters Ended -------------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, ------------------- ------------------- ----------------- ------------------- (In thousands, except per share data) Sales (1) (a) $ 121,133 100.0% $ 136,468 100.0% $ 185,246 100.0% $ 234,907 100.0% Cost of sales (a) 111,964 92.4% 123,929 90.8% 168,391 90.9% 213,337 90.8% Gross margin (2) 9,169 7.6% 12,539 9.2% 16,855 9.1% 21,570 9.2% Operating expenses 12,094 10.0% 11,978 8.8% 13,740 7.4% 15,504 6.6% (Loss) income from operations (2,925) -2.4% 561 0.4% 3,115 1.7% 6,066 2.6% Interest income, net (739) -0.6% (154) -0.1% (1,049) -0.6% (317) -0.1% (Loss) income before income taxes (2,186) -1.8% 715 0.5% 4,164 2.3% 6,383 2.7% Income tax benefit -- -- -- -- -- -- (2,008) -0.9% (Loss) income prior to cumulative effect of SAB No. 101 adoption (2,186) -1.8% 715 0.5% 4,164 2.3% 8,391 3.6% Cumulative effect of SAB No. 101 adoption (467) -0.4% -- -- -- -- -- -- Net (loss) income (2) (2,653) -2.2% 715 0.5% 4,164 2.3% 8,391 3.6% Net income per common share Basic: Basic net (loss) income per share before cumulative effect of SAB No. 101 adoption $ (0.24) $ 0.08 $ 0.45 $ 1.02 Cumulative effect per share of SAB No. 101 adoption (0.05) -- -- -- --------- --------- --------- --------- Basic net (loss) income per share $ (0.29) $ 0.08 $ 0.45 $ 1.02 ========= ========= ========= ========= Diluted: Diluted net (loss) income per share before cumulative effect of SAB No. 101 adoption $ (0.24) $ 0.08 $ 0.45 $ 1.01 Cumulative effect per share of SAB No. 101 adoption (0.05) -- -- -- --------- --------- --------- --------- Diluted net (loss) income per share $ (0.29) $ 0.08 $ 0.45 $ 1.01 ========= ========= ========= ========= Weighted average common shares outstanding Basic 9,281 9,336 9,256 8,219 ========= ========= ========= ========= Diluted 9,281 9,351 9,305 8,281 ========= ========= ========= =========
-43-
1999 Quarters Ended ------------------------------------------------------------------------------------------ March 31, June 30, September 30, December 31, ------------------- ------------------- ------------------- ------------------ (In thousands, except per share data) Sales (b) $ 124,522 100.0% $ 143,972 100.0% $ 192,844 100.0% $ 199,232 100.0% Cost of sales (b) 114,450 91.9% 131,726 91.5% 179,352 93.0% 184,935 92.8% Gross margin 10,072 8.1% 12,246 8.5% 13,492 7.0% 14,297 7.2% Operating expenses 12,530 10.1% 12,345 8.6% 11,102 5.8% 12,538 6.3% (Loss) income from operations (2,458) -2.0% (99) -0.1% 2,390 1.2% 1,759 0.9% Interest (income) expense, net (565) -0.5% (168) -0.1% (358) -0.2% 1 0.0% (Loss) income before income taxes (1,893) -1.5% 69 0.0% 2,748 1.4% 1,758 0.9% Net (loss) income (1,893) -1.5% 69 0.0% 2,748 1.4% 1,758 0.9% Net (loss) income per common share Basic net (loss) income per share $ (0.20) $ 0.01 $ 0.30 $ 0.19 ========= ========= ========= ========= Diluted net (loss) income per share $ (0.20) $ 0.01 $ 0.30 $ 0.19 ========= ========= ========= ========= Weighted average common shares outstanding Basic 9,466 9,200 9,211 9,212 ========= ========= ========= ========= Diluted 9,466 9,859 9,308 9,215 ========= ========= ========= =========
Due to the adoption of SAB No. 101 and EITF No. 99-19, the quarterly financial data reflected above differs from amounts previously reported in the Company's 1999 filings on Forms 10-Q and 10-K and the Company's 2000 filings on Forms 10-Q as follows: (1) Adjustment to quarterly sales of ($7,136), $7,122, and ($17,548) for the first through the third quarter 2000, respectively, due to the adoption of SAB No. 101. (2) Adjustment to quarterly gross margin and net income or loss of ($611), $441 and ($1,493) for the first through the third quarter 2000, respectively, due to the adoption of SAB No. 101. (a) Reclassification of $993, $7,267, $3,632, and $1,481 in costs against sales due to the adoption of EITF No. 99-19 for the first through the fourth quarter 2000, respectively. (b) Reclassification of $1,027, $4,788, $1,650, and $453 in costs against sales due to the adoption of EITF No. 99-19 for the first through the fourth quarter 1999, respectively. -44- GTSI CORP. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands) Balance at Charged to Balance Beginning Costs and at end Description of Period Expenses Deductions (1) of Period - --------------------------------- --------- ---------- -------------- --------- Year ended December 31, 2000: Allowance for bad debts $ 2,556 $ (10) $ (837) $ 1,709 Year ended December 31, 1999: Allowance for bad debts $ 5,980 $ (902) $(2,522) $ 2,556 Year ended December 31, 1998: Allowance for bad debts $ 4,093 $ 2,097 $ (210) $ 5,980
(1) Adjustments and amounts written off during the period. -45- Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 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 to be held on May 15, 2001, entitled "Election of Directors," "Executive Officers" and "Common Stock Ownership of Principal Stockholders and Management - Compliance with Section 16(a) Beneficial Ownership Reporting Compliance," 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 May 15, 2001, 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 May 15, 2001, 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 May 15, 2001, entitled "Election of Directors - Nominees" and "Executive Compensation and Other Information-Compensation Committee Interlocks and Insider Participation," to be filed with the Commission. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) Financial Statements See the Index included in Item 8 on Page 24 of this Form 10-K. -46- (2) Financial Statement Schedules See the Index included in Item 8 on Page 24 of this Form 10-K. (3) Exhibits 3.1 Restated Certificate of Incorporation 3.2 Bylaws, as amended 10.1 Amended and Restated 1986 Stock Option Plan, (4), including forms of Stock Option Agreements and Stock Purchase Agreement(1)(3) 10.2 Employee Stock Purchase Plan, as amended to date (1)(6) 10.3 GSA Schedule B/C Award/Contract No. GS00K95AGS6407 dated April 1, 1996, issued by the General Services Administration to the Registrant for the three-year period ending March 31, 1999, and amendment thereto dated November 26, 1997 10.4 Officer Severance Plan, as amended to date (15) 10.5 GTSI Employees' 401(k) Investment Plan (3); and Amendment No. 1 (5); Amendment No. 2 and Amendment No. 3 thereto (15) 10.6 U.S. Navy Standard Desktop Computer Companion Contract No. N66032-91-D-0002 dated February 8, 1991; Modification thereof dated June 28, 1991 (4); Modifications during 1992 (6); and Modifications during 1993 (2)(9) 10.7 Authorized Apple Dealer Sales Agreement between Apple Computer, Inc. and the Registrant, effective April 1993 (7) 10.8 U.S. Air Force Desktop IV Microsystems Contract No. F01620-93-D-0001 dated February 2, 1993; Modifications during 1993 (2)(9); and Modifications during the quarter ended March 31, 1994 (10); and Modifications during the quarter ended June 30, 1995 (14) 10.9 Lease dated August 11, 1995 between the Registrant and Security Capital Industrial Trust covering new distribution center facility (15) 10.10 Letter agreement dated January 16, 1996 between the Registrant and Microsoft Corporation (15) 10.11 Settlement Agreement between the Registrant and the U.S. Air Force with respect to the Desktop IV Microsystems Contract No. F01620-93-D-0001 (2)(17) 10.12 Certificate of Designations, Preferences and Rights of Series C 8% Cumulative Redeemable Convertible Preferred Stock of the Registrant filed February 12, 1998 with the Secretary of State of Delaware (18) 10.13 1994 Stock Option Plan, as amended to date (19) -47- 10.14 1996 Stock Option Plan (19) 10.15 Lease dated December 10, 1997 between the Registrant and Petula Associates, Ltd. covering new headquarters facility (excluding attachments and exhibits) (19) 10.16 Second Amended and Restated Business Credit and Security Agreement, dated as of July 28, 1997, among the Registrant, Certain Lenders Named in such agreement, and Deutsche Financial Services Corporation, as a Lender and as Agent (excluding attachments and exhibits) (19) 10.17 Amendment, dated as of July 2, 1998, to Second Amended and Restated Business Credit and Security Agreement, dated as of July 28, 1997, among the Registrant, Certain Lenders Named [in such agreement], and Deutsche Financial Services Corporation, as a Lender and as Agent (23) 10.18 Amendment, dated as of July 2, 1998, to Agreement for Wholesale Financing dated as of June 27, 1996, among the Registrant and Deutsche Financial Services Corporation (23) 10.19 Agreement among the Registrant, BTG, Inc., BTG Technology Systems, Inc. and Concept Automation, Inc. of America dated February 10, 1999 10.20 Amendment, dated as of November 24, 1999 to Second Amended and Restated Business Credit and Security Agreement, dated July 28, 1997, among the Registrant, certain lenders named in such agreement and Deutsche Financial Services Corp., as a Lender and Agent 10.21 Addendum, dated as of November 23, 1999 to Agreement for Wholesale Financing dated June 27, 1996, among the Registrant and Deutsche Financial Services Corp. 10.22 Amendment, dated as of November 17, 2000 to Second Amended and Restated Business Credit and Security Agreement, dated July 28, 1997, among the Registrant, certain lenders named in such agreement and Deutsche Financial Services Corp., as a Lender and Agent 10.23 Employment Agreement dated January 1, 2001 between the Registrant and M. Dendy Young (1) 10.24 Offer Letter dated November 29, 2000 between the Registrant John T. Spotila (1) 10.25 Offer Letter dated March 29, 1999 between the Registrant Robert D. Russell (1) 23.1 Consent of Arthur Andersen LLP -48- (1) Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. (2) Confidential treatment has been granted for portions of this exhibit, and such confidential portions have been removed from this exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended. (3) 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. (4) 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. (5) 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. (6) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19394) for the year ended December 31, 1992. (7) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19394) for the quarter ended March 31, 1993. (8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19394) for the quarter ended September 30, 1993. (9) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19394) for the year ended December 31, 1993. (10) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19394) for the quarter ended March 31, 1994. (11) 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. (12) Incorporated by reference to the Registrant's Annual Report on Form 10-Q (File No. 0-19394) for the year ended December 31, 1994. (13) Incorporated by reference to the Registrant's Current Report on Form 10-K (File No. 0-19394) for the year ended December 31, 1996. (14) Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on January 17, 1995. (15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19394) for the quarter ended June 30, 1995. (16) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19394) for the year ended December 31, 1995. (17) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19394) for the quarter ended March 31, 1996. -49- (18) Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on February 12, 1998. (19) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19394) for the year ended December 31, 1997. (20) Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on May 18, 1998. (21) Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on May 21, 1998. (22) Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on August 5, 1998. (23) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19394) for the quarter ended June 30, 1998. (b) Reports on Form 8-K None. (c) Exhibits See the list of Exhibits in Item 14(a)(3) beginning on Pages 47-48 of this Form 10-K. (d) Financial Statement Schedules See the Index included in Item 8 on Page 24 of this Form 10-K. -50- 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 30, 2001 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 30, 2001 - ----------------------------- Chief Executive Officer M. Dendy Young (Principal Executive Officer) and a Director /S/ ROBERT D. RUSSELL Senior Vice President and March 30, 2001 - ----------------------------- Chief Financial Officer Robert D. Russell (Principal Financial and Accounting Officer) /S/ LEE JOHNSON Director March 30, 2001 - ----------------------------- Lee Johnson /S/ STEVEN KELMAN Director March 30, 2001 - ----------------------------- Steven Kelman, Ph.D. /S/ JAMES J. LETO Director March 30, 2001 - ----------------------------- James J. Leto /S/ LAWRENCE J. SCHOENBERG Chairman Emeritus March 30, 2001 - ----------------------------- Lawrence J. Schoenberg -51- Signature Title Date --------- ----- ---- /S/ JOHN M. TOUPS Director March 30, 2001 - ------------------------------ John M. Toups /S/ DANIEL R. YOUNG Director March 30, 2001 - ------------------------------ Daniel R. Young -52- EX-3.1 2 0002.txt RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF GTSI CORP. GTSI CORP., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: The Corporation's name is GTSI Corp. The Corporation's original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on September 17, 1986. The name under which the Corporation was originally incorporated is TSI Acquisition Corp. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, the provisions of the Corporation's Certificate of Incorporation, as theretofore amended or supplemented, are hereby restated and integrated, but not further amended, to read in their entirety as follows: FIRST: The name of the corporation (which is hereinafter referred to as the "Corporation") is: GTSI Corp. SECOND: The address of the Corporation's registered office in the State of Delaware is The Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The nature of the Corporation's business or purposes to be conducted or promoted is: To carry on and to engage in any lawful business, act or activity for which corporations may be organized under the General Corporation Law of Delaware, and to possess and exercise all the powers and privileges granted by the General Corporation Law of the State of Delaware or by any other law of the State of Delaware or by this Certificate of Incorporation, together with any powers incidental thereto. FOURTH: A. Authorized Capital Stock. The total number of shares of all classes of stock which the Corporation shall have authority to issue is twenty million six hundred eighty thousand eight hundred fifty (20,680,850) shares, consisting of: Six hundred eighty thousand eight hundred fifty (680,850) shares, par value twenty-five cents ($0.25) per share, to be designated Preferred Stock; and Twenty million (20,000,000) shares, par value five mills ($0.005) per share, to be designated Common Stock. B. Preferred Stock to be Issued in Classes. The Preferred Stock may be issued from time to time in one or more classes of any number of shares, provided that the aggregate number of shares issued and not cancelled of any and all such classes shall not exceed the total number of shares of Preferred Stock hereinabove authorized. Each class of Preferred Stock shall be distinctively designated by letter or descriptive words. All classes of Preferred Stock shall rank equally and be identical in all respects except as permitted by the provisions of Paragraph C of this Article FOURTH. C. Authority of Board of Directors. Authority is hereby vested in the Board of Directors from time to time to issue the Preferred Stock as Preferred Stock of any class and in connection with the creation of each such class to fix by resolution or resolutions providing for the issue of shares thereof the voting rights, if any, the designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions of such class to the full extent now or hereafter permitted by this Certificate of Incorporation and the laws of the State of Delaware. The authority of the Board with respect to each class shall include, but not be limited to, determination of the following: (1) The distinctive designation of such class and the number of shares which shall constitute such class, which number may be increased or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors; -1- (2) The dividend rate, if any, of such class, any preferences to or provisions in relation to the dividends payable on the Common Stock or on any other class of Preferred Stock, whether or not the dividends are cumulative or noncumulative, and any limitations, restrictions or conditions on the payment of dividends; (3) Whether the shares of such class shall be subject to redemption and, if such shares are subject to redemption, the price or prices at which, and the terms and conditions on which, the shares of such class may be redeemed by the Corporation; (4) Whether the shares of such class shall be entitled to the benefits of a sinking fund to be applied to the purchase or redemption of shares of such class and if so entitled, the amount of such fund and the manner of its application; (5) The amount or amounts payable upon the shares of such class in the event of any liquidation, dissolution or winding up of the Corporation; (6) Whether the shares of such class shall be made convertible into, or exchangeable for, shares of Common Stock or any other class of Preferred Stock, and, if made so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions or such conversion or exchange; (7) Whether the shares of such class have any voting powers and, if voting powers are so granted, the extent of such voting powers; (8) Whether the issue of any additional shares of such class or of any future class in addition to such class shall be subject to restrictions in addition to the restrictions, if any, on the issue of additional shares imposed in the resolution or resolutions fixing the terms of any outstanding class of Preferred Stock theretofore issued pursuant to this Article FOURTH and, if subject to additional restrictions, the extent of such additional restrictions; and (9) Any other relative rights, preferences and limitations of that class. D. Voting Rights. (1) Except as otherwise provided by law, or this Certificate of Incorporation or by the resolution or resolutions providing for the issue of any class of Preferred Stock, the holders of shares of Preferred Stock, as such holders, (a) shall not have any right to vote, and are hereby specifically excluded from the right to vote, in the election of Directors or for any other purpose, and (b) shall not be entitled to notice of any meeting of stockholders. (2) Subject to the provisions of any applicable law, or of the By-laws of the Corporation as from time to time amended, with respect to the closing of the transfer books or the fixing of a record date for the determination or stockholders entitled to vote and except as otherwise provided by law, or by this Certificate of Incorporation or by the resolution or resolutions providing for the issue of any class of Preferred Stock, the holders of outstanding shares of Common Stock shall exclusively possess voting power for the election of Directors and for all other purposes, each holder of record of shares of Common Stock being entitled to one vote for each share of Common Stock standing in his name on the books of the Corporation. FIFTH: [Intentionally Blank] SIXTH: The Corporation is to have perpetual existence. SEVENTH: The stockholders of the Corporation shall not be personally liable for the payment of the Corporation's debts to any extent whatever. EIGHTH: For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. (1) The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The Board of Directors shall consist of not fewer than two directors nor more than twelve directors. The number of directors which shall constitute the whole Board of Directors shall be fixed, from time to time, exclusively by one or more resolutions adopted by at least two-thirds of the total number of authorized directors of the Corporation (whether or not there exists any -2- vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors). (2) Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, the directors shall be divided into three classes designated as Class 1, Class 2 and Class 3, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following January 1, 2001, the term of office of the Class 1 directors shall expire and Class 1 directors shall be elected for a full term of three years. At the second annual meeting of stockholders following January 1, 2001, the term of office of the Class 2 directors shall expire and Class 2 directors shall be elected for a full term of three years. At the third annual meeting of stockholders following January 1, 2001, the term of office of the Class 3 directors shall expire and Class 3 directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article EIGHTH, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. When the number of directors is changed, as provided above, the Board of Directors shall determine the class or classes to which the increased or decreased number of directors shall be apportioned, provided that the number in each class shall be nearly or equal in number as possible, and provided further, that no decrease in the number of directors shall shorten the term of any incumbent director. (3) Subject to the rights of the holders of any series of Preferred Stock, the Board of Directors or any individual director may be removed from office at any time, but only for cause by the affirmative vote of the holders of two-thirds of the voting power of all of the then outstanding voting stock of the Corporation entitled to vote at an election of directors (the "Voting Stock"), at a special meeting of the stockholders called for such a purpose. For purposes of this Section A.(3), "cause" shall mean (i) conduct as a director of the Corporation or any subsidiary thereof involving willful material misconduct, breach of material fiduciary duty involving personal profit, or gross negligence as to material duties or (ii) conduct, whether or not as a director of the Corporation or any subsidiary thereof, involving dishonesty or breach of trust which is punishable by imprisonment for a term exceeding one year under state or federal law. (4) Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. B. (1) The Corporation's Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of a majority of all voting power of all of the then outstanding Voting Stock. The Board of Directors shall also have the power to adopt, amend or repeal the Corporation's Bylaws. (2) The directors of the Corporation need not be elected by written ballot unless the Bylaws so provide. (3) No action shall be taken by the stockholders of the Corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws. (4) Special meetings of the stockholders of the Corporation may be called, for any purpose or purposes, only by (i) the Chairman of the Board of Directors, (ii) the President or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any -3- such resolution is presented to the Board of Directors for adoption), and will be held at such place, on such date, and at such time as the Board of Directors shall fix. (5) Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Corporation's Bylaws. NINTH: Both the stockholders and the Board of Directors shall have power to hold their meetings either within or without the State of Delaware, and any books of the Corporation (so far as not prohibited by the laws of said State) may be kept outside of the State of Delaware at such place or places as from time to time may be designated by the Board of Directors. TENTH: No director of the Corporation shall be disqualified by his office from dealing or contracting with the Corporation as vendor, purchaser or otherwise, nor shall any contract or other transaction of the Corporation be void or voidable solely by reason of the fact that any of its directors or any firm, partnership, association or other entity of which any of its directors are members or any corporation of which any of its directors are stockholders, directors or officers, is in any way interested in such transaction or contract, provided that the material facts of such interest be disclosed or known to the Board of Directors and provided that the Board of Directors shall authorize, approve or ratify such contract or transaction in good faith by the vote (not counting the vote of any such director) of a majority of a quorum, notwithstanding the presence of any such director at the meeting at which such action is taken. Such director or directors may be counted in determining the presence of a quorum at such meeting. No director shall be liable in any way with respect to any such transaction or contract which shall be authorized, approved or ratified as aforesaid. This Article TENTH shall not be construed to invalidate or in any way affect any contract or other transaction which would otherwise be valid under the common or statutory law applicable thereto. ELEVENTH: (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. -4- (c) To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under paragraphs (a) and (b) of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in such paragraphs (a) and (b). Such determination shall be made: (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceedings, or (2) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article. Such expenses incurred by employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. (f) The indemnification and advancement or expenses provided by, or granted pursuant to, the other subsections of this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. (g) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article ELEVENTH. (h) For the purposes of this Article ELEVENTH, references to "the Corporation" include all constituent corporations absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents as well as the resulting or surviving corporation so that any person who is or was a director, officer, employee or agent of such a constituent corporation or is or was serving at the request of such constituent corporation as director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article ELEVENTH with respect to such a constituent corporation if its separate existence had continued. (i) For purposes of this Article ELEVENTH, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service of a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article ELEVENTH. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this Article ELEVENTH shall, unless otherwise provided, when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. -5- TWELFTH: No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation law, or (iv) for any transaction from which the director derived an improper personal benefit. THIRTEENTH: Except as set forth in this Article THIRTEENTH or as otherwise specifically required by law, no alteration, amendment or repeal of any provision of this Certificate of Incorporation shall be made unless such alteration, amendment or repeal has been first proposed by the Corporation's Board of Directors upon the affirmative vote of at least two-thirds of the directors then in office at a duly constituted meeting of the Board of Directors called for such purpose, and thereafter approved by the Corporation's stockholders by the affirmative vote of the holders of at least a majority of the shares entitled to vote thereon at a duly called annual or special meeting; provided, however, that if such alteration, amendment or repeal is to the provisions set forth in this Article THIRTEENTH or in Article EIGHTH hereof, such alteration, amendment or repeal must be approved by the affirmative vote of the holders of at least 66-2/3 percent of the then outstanding stock of the Corporation entitled to vote thereon rather than a majority. * * * * This Restated Certificate of Incorporation has been duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, GTSI Corp. has caused this Restated Certificate of Incorporation to be signed and executed in its name and behalf by its duly authorized Chief Executive Officer and attested by its duly authorized Secretary, on this 31st day of July 2000, in accordance with Section 103(a)(2) of the General Corporation Law of the State of Delaware. GTSI CORP. ATTEST: By: /s/ M. Dendy Young ----------------------- M. Dendy Young, Chief Executive Officer /s/ Judith B. Kassel --------------------------- Judith B. Kassel, Secretary -6- EX-10.22 3 0003.txt FOURTH AMENDMENT EXHIBIT 10.22 FOURTH AMENDMENT THIS FOURTH AMENDMENT ("Amendment") is entered into as of the 17th day of November, 2000 by and among Deutsche Financial Services Corporation, as Agent and a Lender ("Agent"), the other Lenders signatories hereto ("Lenders") and GTSI Corp. (f/k/a Government Technology Services, Inc. ("Borrower"). RECITALS Agent, Lenders (and/or their successors by assignment, as applicable) and Borrower are parties to that certain Second Amended and Restated Business Credit and Security Agreement dated as of July 28, 1997 (as amended from time to time, the "Credit Agreement"). Lenders and Agent now desire to amend certain provisions of the Credit Agreement subject to the terms hereof. NOW, THEREFORE, in consideration of the forgoing premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Amendments to Credit Agreement. Upon the Amendment Effective Date (as defined in Section 2 below), the Credit Agreement shall be amended as follows: A. Name Change. All references in the Agreement to "Government Technology Services, Inc." shall be deemed to be references to "GTSI Corp." B. Name Change. All references in the Agreements to "Crestar Bank" shall be deemed to be references to "SunTrust Bank, the successor by merger to Crestar Bank." C. Credit Facility Fee. Section 3.4(d) of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "(d) Credit Facility Fee. Borrower agrees to pay Agent for the account of all Lenders an annual credit facility fee of Seventy-five Thousand Dollars ($75,000) (the "Credit Facility Fee). The Credit Facility Fee shall be payable quarterly, in arrears, in equal installments of Eighteen Thousand Seven Hundred Fifty Dollars ($18,750). Once received by DFS, no Credit Facility Fee shall be refundable by DFS for any reason." D. Unused Line Fee. Section 3.4(e) of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "(e) Unused Line Fee. To the extent that the Borrower's average daily borrowing during any "Seasonal Period" is less than fifty percent (50%) of the total of all of the Lenders' "Seasonal Period Commitments" for such Seasonal Period, Borrower agrees to pay Agent for the account of all Lenders an unused line fee of fifteen one hundredths of one percent (0.15%) per annum on the amount by which fifty percent (50%) of the total of the Seasonal Period Commitments for such Seasonal Period exceeds Borrower's average daily borrowing during such "Seasonal Period". The terms "Seasonal Period" and "Seasonal Period Commitment" shall be as set forth on Exhibit A of the Credit Agreement." -1- E. Collateral/Inspection Fees. Section 3.4(f) of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "(f) Collateral/Inspection Fees. Borrower will pay a fee to DFS, for its own account (even if other Lenders accompany the Agent on such review), in the amount of Three Thousand Seven Hundred Fifty Dollars ($3,750) per review for Collateral reviews and any other reviews performed under the Loan Documents as frequently as Agent shall reasonably determine, but at least quarterly. Borrower agrees that such fees are not interest but are rather reimbursements for out-of-pocket and allocated overhead expenses incurred in conducting such audits, reviews, examinations and inspections." F. Termination. Section 4.1 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "4.1 Termination. This Agreement may be terminated at any time by Agent or Borrower upon ninety (90) days written notice received by the other party or ,if Borrower is in Default hereunder, Agent may terminate in the exercise of its rights and remedies with no prior notice of termination to Borrower. Any termination of this Agreement by Borrower or Agent will have the effect of accelerating the maturity of all Obligations not then otherwise due. 4.1.1 Effect of Termination. Borrower will not be relieved from any Obligations to Agent arising out of DFS' advances or commitments made before the effective termination date of this Agreement. Agent will retain all of its rights, interests and remedies hereunder until Borrower has paid all of Borrower's Obligations to DFS. All waivers set forth within this Agreement will survive any termination of this Agreement." G. Financial Covenants. Section 9.3.1 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "9.3.1 Amounts. Borrower agrees that it will: (a) as of the last day of each calendar quarter set forth below, maintain a Tangible Net Worth plus Subordinated Debt in the combined amount of not less than the amount shown below for the period corresponding thereto: Period Amount Calendar quarter ending 9/30/00 $40,000,000 Calendar quarter ending 12/31/00 $40,000,000 Calendar quarter ending 3/31/01 $40,000,000 Calendar quarter ending 6/30/01 $40,000,000; (b) as of the last day of each calendar quarter set forth below, maintain a ratio of Debt minus Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than the amount shown below for the period corresponding thereto: -2- Period Ratio Calendar quarter ending 09/30/00 7.0 to 1.0 Calendar quarter ending 12/31/00 4.0 to 1.0 Calendar quarter ending 3/31/01 4.0 to 1.0 Calendar quarter ending 6/30/01 4.0 to 1.0; (c) as of the last day of each calendar quarter set forth below, maintain a ratio of Current Assets to current liabilities of not less than the amount shown below for the period corresponding thereto: Period Ratio Calendar quarter ending 9/30/00 1.1 to 1.0 Calendar quarter ending 12/31/00 1.2 to 1.0 Calendar quarter ending 3/31/01 1.2 to 1.0 Calendar quarter ending 6/30/01 1.2 to 1.0; (d) for the fiscal year of Borrower ending December 31, 2000, and each fiscal year-end thereafter, Borrower shall achieve net income, before giving effect to provisions for income taxes, of at least Two Million Dollars ($2,000,000.00). Prior to September 30, 2001, Agent and Borrower shall renegotiate the above financial covenants for application to any subsequent periods of this Agreement. If on or prior to September 30, 2001, the parties fail to execute a written amendment to this Agreement providing for such revised financial covenants for any subsequent periods of this Agreement, then the above financial covenants in effect for the calendar quarter ending September 30, 2001, shall be and remain in effect, until such amendment is executed and in full force and effect. For purposes of this paragraph: (i) "Tangible Net Worth" means the book value of Borrower's assets less liabilities (including as liabilities all recorded reserves for contingencies and other potential liabilities), excluding from such assets all Intangibles; (ii) "Intangibles" means and includes general intangibles (as that term is defined in the UCC); accounts receivable and advances due from officers, directors, member, owner, employees, stockholders and affiliates; leasehold improvements net of depreciation; licenses; good will; prepaid expenses (except for those determined by Agent, in its sole discretion, not to be Intangible); escrow deposits (except for those determined by Agent, in its sole discretion, not to be Intangible); covenants not to compete; the excess of cost over book value of acquired assets; franchise fees; organizational costs; finance reserves held for recourse obligations; capitalized research and development costs; and such other similar items as DFS may from time to time determine in DFS' sole discretion; (iii) "Debt" means all of Borrower's liabilities and indebtedness for borrowed money of any kind and nature whatsoever, whether direct or indirect, absolute or contingent, and including obligations under capitalized leases, guaranties or with respect to which Borrower has pledged assets to -3- secure performance, whether or not direct recourse liability has been assumed by Borrower; (iv) "Subordinated Debt" means all of Borrower's Debt which is subordinated to the payment of Borrower's liabilities to the Lenders by an agreement in form and substance satisfactory to Agent; and (v) "Current Assets" means Borrower's current assets. The foregoing terms will be determined in accordance with GAAP consistently applied, and, if applicable, on a consolidated basis ("Financial Covenants")." 2. Consent to Stock Repurchase. Lenders previously consented to Borrower's purchase of its stock from third-party shareholders up to Five Million Two Hundred Fifty Thousand Dollars ($5,250,000) in the Third Amendment dated November 24, 2000 among Agent, Lenders and Borrower ("Third Amendment"). Borrower has requested that such amount be increased to Six Million One Hundred Thousand Dollars ($6,100,000). Lenders hereby consent to Borrower's purchase of its stock, provided that (i) the aggregate purchase price of all stock so purchased (including stock previously purchased pursuant to the consent contained in the Third Amendment), shall not exceed $6,100,000; and (ii) Borrower shall not breach any financial covenant set forth in Section 9.3.1 of the Credit Agreement as a result of Borrower's payment of the purchase price for such stock. 3. Conditions Precedent. Notwithstanding the foregoing, this Amendment shall not be effective unless and until satisfaction of the following terms and conditions, each as acceptable to Agent, in its sole discretion (the date on which all such terms and conditions are satisfied being the "Amendment Effective Date): (a) execution and delivery of this Amendment by all parties hereto; and (b) such other and further documents and agreements as Agent may determine in connection with any of the foregoing. 4. Miscellaneous. Except to the extent specifically amended herein, all terms and conditions of the Credit Agreement and the other Loan Documents are hereby ratified and reaffirmed and shall remain in full force and effect. Capitalized terms used but not defined herein shall have the meanings given them in the Credit Agreement. Borrower waives notice of Agent's and each Lender's acceptance of this Amendment. Agent and each Lender reserves all of their respective rights and remedies under the Credit Agreement and other Loan Documents. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above. GTSI Corp. By: Name: Title: DEUTSCHE FINANCIAL SERVICES CORPORATION, as Agent and a Lender By: Name: Title: -4- SUNTRUST BANK, a Lender By: _________________________________ Name: Title: Date: FLEET CAPITAL CORPORATION, a Lender By: Name: Title: Date: -5- EX-10.23 4 0004.txt EMPLOYMENT AGREEMENT EXHIBIT 10.23 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of January 1, 2001 ("Effective Date"), by and between GTSI Corp., a Delaware corporation ("Employer"), and M. Dendy Young ('Employee"); WHEREAS, Employer desires to employ Employee as Employer's president and chief executive officer and to have Employee as a member of Employer's board of directors (the "Board"); WHEREAS, Employer desires to ensure that, if a Change of Control (as defined below) appears possible, Employee will be in a secure position from which he can objectively engage in any potential deliberations or negotiations respecting such Change of Control without fear of any direct or implied threat to his employment, status and responsibilities; and WHEREAS, Employee desires to be employed by Employer and to have the foregoing assurances; NOW, THEREFORE, in consideration of the mutual promises contained herein, and for other good and valuable consideration, the adequacy of which is hereby acknowledged, Employer and Employee, each intending to be legally bound, agree as follows: 1. Term. The term of Employee's employment hereunder shall commence on January 1, 2001 and shall continue until December 31, 2001 (the "Term"), except as otherwise provided in Section 6. This Agreement shall be automatically renewed for successive one-year terms unless either party gives notice to the other party not less than 180 days prior to expiration of the initial term or any renewal term that it does not intend to renew this Agreement, or unless this Agreement is otherwise terminated in accordance with Section 6. 2. Duties (a) Offices. During the Term, and as provided herein, Employee shall serve as a member of Employer's Board, and as Employer's president and chief executive officer, and the Board shall re-nominate Employee as a director of Employer and reappoint Employee as Employer's president and chief executive officer, and Employee shall perform the duties of those positions, as assigned to him by the Board. Employer agrees, however, that Employee will be assigned only duties of the type, nature and dignity normally assigned to the president and chief executive officer of a corporation of the size, stature and nature of Employer. During the Term, Employee shall report directly to the Board. (b) Full-Time Basis. During the Term, Employee shall devote, on a full-time basis, his services, skills and abilities to his employment hereunder, excepting periods of vacation, illness or Disability (as defined below). 3. Compensation (a) Salary. During the Term, as compensation for services rendered by Employee hereunder, Employer shall pay to Employee $300,000 per year, reviewed annually by the Board of Directors, payable biweekly in accordance with Employer's standard payroll schedule, plus a targeted -1- annual bonus of $300,000, payable periodically in accordance with the Company's then current Bonus Plan for Senior Officers. (b) Tax Withholdings. Employer shall withhold from Employee's compensation hereunder and pay to the appropriate governmental agencies payroll taxes, including income, social security, and unemployment compensation taxes, required by the federal, state and local governments with jurisdiction over Employer. (c) Options and Restricted Stock. Annually upon renewal of this Agreement, the Board shall consider the granting of options or restricted stock to Employee; such grants or denial of grants shall be at the Board's sole discretion. 4. Benefits. During the Term, Employee shall be entitled to such comparable fringe benefits and perquisites as may be provided to any or all of Employer's senior officers pursuant to policies established at any time, and from time to time, by the Board. These fringe benefits and perquisites shall include Employee's participation in compensatory, benefit and incentive plans and arrangements, including stock option and stock purchase plans, deferred compensation and profit participation plans, as well as holidays, group health insurance, short term and long term disability insurance and life insurance, and supplemental executive health care benefits. Also, during the Term, Employee shall be entitled to 20 Business Days paid leave per annum and to accrue unused leave from year to year and to be reimbursed for the costs of physical examinations up to $500 per annum. 5. Expenses and Other Perquisites. Employer shall reimburse Employee for all reasonable and proper business expenses incurred by him in the performance during the Term of his duties hereunder, in accordance with Employer's customary practices for senior officers, and provided such business expenses are reasonably documented. Further, Employer shall reimburse Employee for the monthly dues to the Tower Club. In addition, during the Term, Employer shall continue to provide Employee with an office and suitable office fixtures, telephone services, and secretarial assistance of a nature appropriate to Employee's position and status. 6. Termination (a) By Employer (i) Termination for Cause. Employer may, for Cause (as defined below), terminate the Term at any time upon 10 Business Days prior notice to Employee. In any event, as of the Termination Date, Employee shall be relieved of all of his duties hereunder and Employee shall not be entitled to the accrual or provision of any compensation or benefit after the Termination Date, but Employee shall be entitled to the provision of all compensation and other benefits that shall have accrued as of the Termination Date, including all vested Options, paid leave benefits, and reimbursement of incurred business expenses. (ii) Termination Without Cause Employer may, in its sole discretion, without Cause, terminate the Term at any time by providing Employee with 180 days prior notice. Upon termination of the Term under this Section 6(a)(ii), Employer shall be obligated to pay Employee an amount equal to Employee's annual base salary in effect as of the Termination Date plus bonus monies equal to the previous year's bonus payments ("Severance Payment"). The Severance Payment shall be paid during the 12 months following the Termination Date and shall be paid in 24 biweekly payments, in accordance with Employer's standard payroll schedule, during such 12 months. The bonus monies shall be paid at the same time as they were paid during the previous year. Employee shall be entitled to the provision of all compensation and other benefits that shall have accrued as of the Termination Date, including all -2- vested Options, paid leave benefits, and reimbursement of incurred business expenses. The option exercise period would be extended for twelve months to be coterminous with Severance Payment. (iii) Definition of Cause. Termination by Employer of Employee's employment for "Cause" means termination as a result of (1) deliberate and premeditated acts against the Employer's best interests; or (2) acts or omissions involving unacceptable performance or conduct (examples of which include, but are not limited to: failure or refusal to perform assigned duties or to follow Employer's policies, as determined in the sole discretion of Employer; commission of sexual harassment or other employment practice liabilities; excessive absenteeism; unlawful use or possession of drugs or misuse of legal drugs or alcohol; misappropriation of an Employer asset or opportunity; the offer, payment, solicitation or acceptance of any bribe or kickback with respect to Employer's business; the assertion, representation or certification of any false claim or statement to a customer of Employer; or indictment or conviction for any felony whatsoever or for any misdemeanor involving moral turpitude);. (b) Death or Disability. The Term shall be terminated immediately and automatically upon Employee's death or "Disability." The term "Disability" shall mean Employee's inability to perform all of the essential functions of his position hereunder for a period of 26 consecutive weeks or for an aggregate of 150 Business Days during any 12-month period by reason of illness, accident or any other physical or mental incapacity, as may be permitted by applicable law. Employee's capability to continue performance of Employee's duties hereunder shall be determined by a panel composed of two independent medical doctors appointed by the Board and one appointed by Employee or his designated representative. Upon termination of the Term under this Section 6(b), Employee shall not be entitled to the accrual or provision of any compensation or benefit after the Termination Date, but Employee shall be entitled to the provision of all compensation and other benefits that shall have accrued as of the Termination Date, including all vested Options, paid leave benefits, and reimbursement of incurred business expenses. (c) By Employee (i) Employee may, in his sole discretion, without cause, terminate the Term at any time by providing Employer with 90 days written notice. If Employee exercises such termination right, Employer may, at its option, at any time after receiving such notice from Employee, relieve him of his duties and terminate the Term at any time prior to the expiration of said notice period. If the Term is terminated by Employee pursuant to this Section 6(c)(i), Employee shall be entitled to the provision of all compensation and other benefits that shall have accrued as of the Termination Date, including all vested Options, paid leave benefits, and reimbursement of incurred business expenses, but shall not be entitled to any further accrual or provision of any other compensation or benefits after the Termination Date. (ii) If, during the Term, a Change of Control (as defined below) occurs and, without his consent, Employee is assigned duties materially inconsistent with his position and status with Employer hereunder, Employee may, in his sole discretion, terminate the Term upon 5 days' notice to Employer. If Employee exercises such termination right, Employer may, at its Option, at any time after receiving such notice from Employee, relieve him of his duties hereunder and terminate the Term at any time prior to the expiration of said notice period. If this Agreement is terminated by Employee or Employer pursuant to this Section 6(c)(ii), Employee shall receive, on or before the Termination Date, a lump sum equal to one year's salary plus bonuses (paid in the prior 12 months) plus Employee shall be entitled to the provision of all compensation and other benefits that shall have accrued as of the Termination Date, including all vested Options, paid leave benefits, and reimbursement of incurred business expenses. (d) Change of Control. For purposes of this Section 6, a "Change of Control" shall be deemed to have occurred upon the happening of any of the following events: (i) any "person," including a "group," as such terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 as -3- amended, and the rules promulgated thereunder (collectively the "Exchange Act"), other than a trustee or other fiduciary holding voting securities of Employer ("Voting Securities") under any employment benefit plan, becomes the beneficial owner, as defined under the Exchange Act, directly or indirectly, whether by purchase or acquisition or agreement to act in concert or otherwise, of 35% or more of the outstanding Voting Securities; (ii) the stockholders of Employer approve a merger or consolidation of Employer with any other corporation, other than a merger or consolidation which would result in the Voting Securities of Employer outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being the surviving entity) more than 50% of the combined voting power of the Voting Securities of Employer or such surviving entity outstanding immediately after such merger or consolidation; or (iii) Employer's stockholders approve an agreement to merge, consolidate, liquidate, or sell all or substantially all of Employer's assets. 7. Non-Waiver. It is understood and agreed that one party's failure at any time to require the performance by the other party of any of the terms, provisions, covenants or conditions hereof shall in no way affect the first party's right thereafter to enforce the same, nor shall the waiver by either party of the breach of any term, provision, covenant or condition hereof be taken or held to be a waiver of any succeeding breach. 8. Severability. If any provision of this Agreement conflicts with the law under which this Agreement is to be construed, or if any such provision is held invalid or unenforceable by a court of competent jurisdiction or any arbitrator, such provision shall be deleted from this Agreement and the Agreement shall be construed to give full effect to the remaining provisions thereof. 9. Governing Law. This Agreement shall be interpreted, construed and governed according to the laws of the Commonwealth of Virginia, without regard to the conflict of law provisions thereof. 10. Construction of this Agreement and Certain Terms and Phrases. Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms "hereof," "herein," "hereby" and derivative or similar words refer to this entire Agreement and not to any particular provision of this Agreement; and (iv) the terms "Section" and "Attachment" refer to the specified Section and Attachment, respectively, of this Agreement. The words "including," "include" and "includes" are not exclusive and shall be deemed to be followed by the words "without limitation"; if exclusion is intended, the word "comprising" is used instead. The word "or" shall be construed to mean "and/or" unless the context clearly prohibits that construction. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified. For purposes of this Agreement, Business Days shall mean any day other than a Sunday, Saturday or other day on which banking institutions are authorized or obligated to close in New York, New York. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The parties have participated jointly in the negotiation and drafting of this Agreement. If an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Both Employee and Employer have received independent legal advice with respect to the advisability of entering into this Agreement and neither has been entitled to rely upon nor has in fact relied upon the advice of the other party or such other party's counsel in entering into this Agreement. The -4- paragraph headings and captions contained in this Agreement are for convenience only and shall not be construed to define, limit or affect the scope or meaning of the provisions hereof. All references herein to Sections shall be deemed to refer to Sections of this Agreement. 11. Entire Agreement. This Agreement contains and represents the entire agreement of Employer and Employee and supersedes all prior agreements, representations or understandings, oral or written, express or implied with respect to the subject matter hereof. Notwithstanding this provision, however, nothing in this Agreement shall affect Employee's stock option rights granted prior to the Effective Date of this Agreement. This Agreement may not be modified or amended in any way unless in writing signed by each of Employer and Employee. 12. Assignment. Neither this Agreement nor any rights or obligations of Employer or Employee hereunder may be assigned by Employer or Employee without the other party's prior written consent. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of Employer and Employee and their heirs, successors and assigns. 13. Notices. All notices required or permitted hereunder shall be in writing and shall be deemed properly given if delivered personally or sent by certified or registered mall, postage prepaid, return receipt requested, or sent by telegram, telex, fax or similar form of telecommunication, and shall be deemed to have been given when received. Any such notice or communication shall be addressed: (a) if to Employer, to Chief Financial Officer, 3901 Stonecroft Boulevard, Chantilly, Virginia 20151; or (b) if to Employee, to his last known home address on file with Employer; or to such other address as Employer or Employee shall have furnished to the other in writing. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement effective as of the date first above-written. GTSI Corp. M. Dendy Young By: Signature: Print Name: _________________________ Print Title: __________________________ -5- EX-10.24 5 0005.txt OFFER LETTER OF JOHN T. SPOTILA EXHIBIT 10.24 OFFER LETTER OF JOHN T. SPOTILA GTSI Corp. ("GTSI") is pleased to offer you the position of Executive Vice President, Chief Operating Officer, and General Counsel, reporting directly to me. We would like your employment to commence as soon as possible, but no later than January 1, 2001. Your target compensation will be $400,010. This will be made up of a base salary of $235,300 (i.e. $9,804.17 semi-monthly) plus participation in the Executive Incentive Compensation plan. At 100% goal attainment, your annual target bonus will be 70% of base salary annualized, equaling $164,710, and includes the opportunity to double this amount. GTSI will guarantee 100% of the bonus during your first six months as an active employee of GTSI (i.e. through June, 2001). The incentive is based on the Executive plan, which, today, is dependent on GTSI achieving its EBT goals. You will also be eligible for a one-time bonus of $20,000 to use to help defray actual expenses that you incur if you should you move closer to the corporate office. These monies should be used within 12 months of your start date and evidence of your move should be presented prior to the bonus being paid. If you should leave within a one-year period of joining GTSI you will be required to repay a pro-rated amount of the bonus to GTSI. You will be eligible, on the first of the month following your hire date, to join the GTSI benefits plan which would include life insurance, comprehensive medical, dental and vision insurance for yourself and dependents on a contributory basis if you so elect. Detailed information concerning your complete benefits package will be provided to you upon employment. You will be eligible for four weeks of vacation each calendar year. As with all GTSI employees, you will be subject to all Company policies and procedures. If your employment ceases for any reason other than for "cause"(1) you will receive a severance equal to 6 months' base salary paid out over the following six months. The option exercise period would be extended for five months to be coterminous with the salary. In the case of a "change in control,"(2) you will receive immediate vesting of all outstanding stock options. As part of your compensation package, I will recommend to the Compensation Committee of the Company's Board of Directors that the Committee grant to you a nonstatutory stock option ("Option"), effective as of the date of grant (the "Grant Date"), to purchase 180,000 shares of the Company's Common Stock. The exercise price will be equal to the closing price of the Company's Common Stock - ---------- (1) Cause - Termination by GTSI of an officer's employment for "Cause" means termination as a result of (i) acts or omissions involving unacceptable performance or conduct (examples of which include, but are not limited to: failure or refusal to perform assigned duties or to follow Company policies, as determined in the sole discretion of the Company; commission of sexual harassment; excessive absenteeism; unlawful use or possession of drugs or misuse of legal drugs or alcohol; misappropriation of a Company asset or opportunity; the offer, payment, solicitation or acceptance of any bribe or kickback with respect to the Company's business; the assertion, representation or certification of any false claim or statement to a Company customer; or indictment or conviction for any felony whatsoever or for any misdemeanor involving moral turpitude); (ii) inability for any reason to perform the essential functions of the position; or (iii) other conduct deemed by the Company to be inappropriate for an officer or harmful to the Company's interests or reputation. (2) Change of control is defined as (i) control of 50% or more of outstanding shares of GTSI; (ii) a change in a majority of the Company Board of Directors if the change occurred during any 12 consecutive months, and the new directors were not elected by the Company's shareholders or by a majority of the directors who were in office at the beginning of the 12 months; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation. -1- on the Grant Date or, if there has been no trading in the Company's Common Stock on the Grant Date, then the immediately preceding date upon which the Company's Common Stock is so traded (as reported the following business day in The Wall Street Journal). 50,000 options will vest on the Grant Date. Your remaining options will vest and be exercisable, cumulatively, in four equal annual installments with the first installment vesting on the first anniversary of the Grant Date, and will be subject to the terms and provisions of the stock option agreement evidencing the grant of the Option. Your Option shall expire, to the extent not previously exercised, upon the earlier of seven years from the date of initial vesting or three months after you cease to be a GTSI employee. Since this stock option offer is by law subject to approval by GTSI's Board of Directors or a Committee thereof, no one at GTSI can promise or ensure such approval. Nonetheless, I envisage Committee approval without problem. To comply with the Immigration Reform and Control Act, you will be required to verify citizenship by completing the enclosed form and presenting the requested documents on the first day of employment. Employment is contingent upon satisfactory references, successful completion of pre-employment drug screening, and the completion of a GTSI Corp. non-disclosure form. GTSI Corp is committed to maintaining its competitive position in the employment marketplace. Over the years, we have made progressive changes in our employment benefits package in order to continue this positive position. However, it is agreed that neither this offer of employment, its acceptance, nor the maintenance of personnel policies, procedures, and benefits creates a contract of employment. Please be advised that it is GTSI Corporate's policy that salary issues are discussed between an employee and manager only. Customer Relationship Management (CRM) is a fundamental principle upon which GTSI Corp. is going forward into the next Millennium. CRM, as implemented through our contact database, is a unifying strategy that manages all forms of communication with our customers, thereby increasing the value of GTSI Corp. to our customers, and the value of our customers to GTSI Corp. To make this effective, we need the support and commitment of every GTSI employee. By executing this letter, you represent and warrant to GTSI that you are not currently subject to any express or implied contractual obligations to any of your former employers under any secrecy, non-competition or other agreements or understandings, except for any such agreements of which you have, prior to the date of your execution of this letter, furnished copies to me. This letter contains our entire understanding with the respect to your employment with GTSI and supersedes all prior or contemporaneous representations, promises or agreements concerning this subject, whether in written or oral form, and whether made to or with you by any employee or other person affiliated with GTSI of any actual or perceived agent. John, we believe you will provide GTSI with the creativity and experience to contribute to continued GTSI growth. We also believe that GTSI can provide you with opportunities for professional growth and financial return. We look forward to the commencement of your employment with GTSI and expect a mutually fulfilling and rewarding relationship. Please acknowledge your acceptance of this offer by signing this letter, faxing it to me at 703-222-5275, and sending the original to me by return mail along with your completed application of employment. -2- EX-10.25 6 0006.txt OFFER LETTER OF ROBERT D. RUSSELL EXHIBIT 10.25 OFFER LETTER OF ROBERT D. RUSSELL Government Technology Services, Inc. ("GTSI") is pleased to offer you the position of Senior Vice President and Chief Financial Officer, reporting directly to me. We would like your employment to commence as soon as possible, preferably no later than April 15, 1999. Your starting annual base salary will be $150,000 (i.e. $6,250.00 semi-monthly ). In addition to your base salary, you will be eligible to participate in the Executive Incentive Compensation plan. At 100% goal attainment, your annual target bonus will be 40% of base salary annualized, equaling $210,000. This incentive is based on quantitative and qualitative targets to be determined within your first 30 days of employment. If your duties or responsibilities are materially modified without your consent, or in the case of a "change in control," and if your employment ceases for any reason other than for "cause"(3) you will receive a severance equal to 6 months' base salary and immediate vesting of all outstanding stock options. Change of control is defined as (i) control of 50% or more of outstanding shares of GTSI; (ii) a change in a majority of the Company Board of Directors if the change occurred during any 12 consecutive months, and the new directors were not elected by the Company's shareholders or by a majority of the directors who were in office at the beginning of the 12 months; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation. Cash payments will be made in installments according to the payroll schedule then in effect. You will be eligible, on the first of the month following your hire date, to join the GTSI benefits plan which would include life insurance, comprehensive medical, dental and vision insurance for yourself and dependents on a contributory basis if you so elect. Detailed information concerning your complete benefits package will be provided to you upon employment. As with all GTSI employees, you will be subject to all Company policies and procedures. As part of your compensation package, I will recommend to the Compensation Committee of the Company's Board of Directors that the Committee grant to you a nonstatutory stock option ("Option"), effective as of the date on which your employment with the Company commences (the "Grant Date"), to purchase 50,000 shares of the Company's Common Stock. The exercise price will be equal to the closing price of the Company's Common Stock on the - ---------- (3) Cause - Termination by GTSI of an officer's employment for "Cause" means termination as a result of (i) acts or omissions involving unacceptable performance or conduct (examples of which include, but are not limited to: failure or refusal to perform assigned duties or to follow Company policies, as determined in the sole discretion of the Company; commission of sexual harassment; excessive absenteeism; unlawful use or possession of drugs or misuse of legal drugs or alcohol; misappropriation of a Company asset or opportunity; the offer, payment, solicitation or acceptance of any bribe or kickback with respect to the Company's business; the assertion, representation or certification of any false claim or statement to a Company customer; or indictment or conviction for any felony whatsoever or for any misdemeanor involving moral turpitude); (ii) inability for any reason to perform the essential functions of the position; or (iii) other conduct deemed by the Company to be inappropriate for an officer or harmful to the Company's interests or reputation. -1- March 29, 1999 Page 2 of 2 Grant Date or, if there has been no trading in the Company's Common Stock on the Grant Date, then the immediately preceding date upon which the Company's Common Stock is so traded (as reported the following business day in The Wall Street Journal). Your Option will vest and be exercisable, cumulatively, in four equal annual installments with the first installment vesting on the date of grant, and will be subject to the terms and provisions of the stock option agreement evidencing the grant of the Option. Your Option shall expire, to the extent not previously exercised, upon the earlier of seven years from the date of initial vesting or three months after you cease to be a GTSI employee. Since this stock option offer is by law subject to approval by GTSI's Board of Directors or a Committee thereof, no one at GTSI can promise or ensure such approval. Nonetheless, I envisage Committee approval without problem. To comply with the Immigration Reform and Control Act, you will be required to verify citizenship by completing the enclosed form and presenting the requested documents on the first day of employment. Employment is contingent upon completion of a GTSI application, non-disclosure form and satisfactory references. This offer is contingent upon successful completion of pre-employment drug screening. By executing this letter, you represent and warrant to GTSI that you are not currently subject to any express or implied contractual obligations to any of your former employers under any secrecy, non-competition or other agreements or understandings, except for any such agreements of which you have, prior to the date of your execution of this letter, furnished copies to me. As with every GTSI employee, you reserve the right to terminate your employment at any time and we reserve the right to terminate your employment at will; however, we hope and expect that this will be a long and mutually beneficial relationship. This letter contains our entire understanding with the respect to your employment with GTSI and supersedes all prior or contemporaneous representations, promises or agreements concerning this subject, whether in written or oral form, and whether made to or with you by any employee or other person affiliated with GTSI of any actual or perceived agent. We believe you will provide GTSI with the creativity and experience desired to contribute to continued GTSI growth. We also believe that GTSI can provide you with opportunities for professional growth and financial return. We look forward to the commencement of your employment with GTSI and expect a mutually fulfilling and rewarding relationship. Please acknowledge your acceptance of this offer by signing this letter, and returning the original to me within one week. -2- EX-23.1 7 0007.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 5, 2001 included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-44363, 33-55090, 333-29439, 333-62681, 333-78199 and 333-44922). ARTHUR ANDERSEN LLP Vienna, Virginia March 23, 2001 -----END PRIVACY-ENHANCED MESSAGE-----