10-Q 1 g10q-26291.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 COMMISSION FILE NO. 0-19394 GTSI CORP. (Exact name of registrant as specified in its charter) DELAWARE 54-1248422 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3901 STONECROFT BOULEVARD CHANTILLY, VA 20151-1010 (Address and zip code of principal executive offices) 703-502-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Shares Outstanding at November 1, 2001 ---------------------------------- ---------------------------------------- Common Stock, $0.005 par value 8,146,905 ================================================================================
GTSI CORP. AND SUBSIDIARY QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2001 TABLE OF CONTENTS PAGE ----------------- ---- COVER PAGE.........................................................................................................1 TABLE OF CONTENTS..................................................................................................2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000.....................................................3 Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2001 and 2000...............................4 Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000................................................5 Notes to Consolidated Condensed Financial Statements.............................................6 ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................................................9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................14 PART II - OTHER INFORMATION.......................................................................................15 ITEM 1. LEGAL PROCEEDINGS ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ITEM 3. DEFAULTS UPON SENIOR SECURITIES ITEM 4. OTHER INFORMATION ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K SIGNATURES........................................................................................................16
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GTSI CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited) SEPTEMBER 30, DECEMBER 31, 2001 2000 ----------------- ---------------- ASSETS Current assets: Cash $ 137 $ 79 Accounts receivable, net 135,812 137,181 Merchandise inventories 105,518 53,570 Other current assets 26,378 18,269 ----------------- ---------------- Total current assets 267,845 209,099 Property and equipment, net 12,076 12,830 Other assets 18,995 5,136 ----------------- ---------------- Total assets $ 298,916 $ 227,065 ================= ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable to banks $ 16,524 $ 11,925 Note payable, current - 500 Accounts payable 204,997 134,071 Accrued liabilities 7,591 10,249 Accrued warranty liabilities 6,621 8,695 ----------------- ---------------- Total current liabilities 235,733 165,440 Notes payable, net of current portion - 1,000 Other liabilities 5,030 2,145 ----------------- ---------------- Total liabilities 240,763 168,585 ----------------- ---------------- Stockholders' equity Prefered Stock - $0.25 par value, 680,850 shares authorized; none issued or outstanding at September 30, 2001 and December 31, 2000 - - Common stock - $0.005 par value 20,000,000 shares authorized 9,806,084 issued and 8,146,905 outstanding at September 30, 2001; and 20,000,000 shares authorized, 9,806,084 issued and 7,956,272 outstanding at December 31, 2000 49 49 Capital in excess of par value 43,245 43,484 Retained earnings 22,413 22,933 Treasury stock, 1,659,179 shares at September 30, 2001 and 1,849,812 shares at December 31, 2000, at cost (7,554) (7,986) ----------------- ---------------- Total stockholders' equity 58,153 58,480 ----------------- ---------------- Total liabilities and stockholders' equity $ 298,916 $ 227,065 ================= ================ The accompanying notes are an integral part of these consolidated condensed financial statements.
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GTSI CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except share data) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ------------------------------------------------------------------------------------- Sales $ 203,077 $ 185,246 $ 503,455 $ 442,847 Cost of sales 186,899 168,391 461,672 404,285 ------------------------------------------------------------------------------------- Gross margin 16,178 16,855 41,783 38,562 Operating expenses 14,853 13,740 45,908 37,811 ------------------------------------------------------------------------------------- Income (loss) from operations 1,325 3,115 (4,125) 751 ------------------------------------------------------------------------------------- Interest income (2,036) (1,114) (3,675) (2,566) Interest expense 91 65 396 624 ------------------------------------------------------------------------------------- Interest income, net (1,945) (1,049) (3,279) (1,942) ------------------------------------------------------------------------------------- Income (loss) before income 3,270 4,164 (846) 2,693 taxes and cumulative effect of SAB No. 101 adoption Income tax provision (benefit) 1,260 - (326) - ------------------------------------------------------------------------------------- Net income (loss) before 2,010 4,164 (520) 2,693 cumulative effect of SAB No. 101 adoption Cumulative effect of SAB No. 101 adoption - - - 467 ------------------------------------------------------------------------------------- Net loss $ 2,010 $ 4,164 $ (520) $ 2,226 ===================================================================================== Basic net income (loss) per share before cumulative effect of SAB No. 101 adoption $ 0.24 $ 0.45 $ (0.06) $ 0.29 ===================================================================================== Diluted net income (loss) per share before cumulative effect of SAB No. 101 adoption $ 0.22 $ 0.45 $ (0.06) $ 0.28 ===================================================================================== Basic net income (loss) per share $ 0.24 $ 0.45 $ (0.06) $ 0.24 ===================================================================================== Diluted net income (loss) per share $ 0.22 $ 0.45 $ (0.06) $ 0.23 ===================================================================================== Weighted average shares outstanding Basic 8,256 9,256 8,153 9,290 ===================================================================================== Diluted 9,225 9,305 8,153 9,490 ===================================================================================== The accompanying notes are an integral part of these consolidated condensed financial statements.
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GTSI CORP. AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 ------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (520) $ 2,226 Depreciation and amortization 3,285 2,839 Cumulative effect of SAB No. 101 adoption - 467 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: (3,470) 11,949 ---------------------- -------------------- Net cash provided by (used in) operating activities: (705) 17,481 ---------------------- -------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Cost of property and equipment (2,530) (7,565) ---------------------- -------------------- Net cash used in investing activities (2,530) (7,565) ---------------------- -------------------- CASH FLOWS FROM FINANCING ACTIVITIES: (Payments of) proceeds from bank notes, net 4,599 (9,479) Payments of note payable (1,500) (500) Proceeds from exercises of stock options 1,593 531 Purchase of treasury stock (1,399) (532) ---------------------- -------------------- Net cash (used in) provided by financing activities 3,293 (9,980) ---------------------- -------------------- Net decrease in cash 58 (64) Cash at beginning of period 79 149 ---------------------- -------------------- Cash at end of period $ 137 $ 85 ====================== ==================== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 566 $ 840 Income taxes $ - $ - The accompanying notes are an integral part of these consolidated condensed financial statements.
-5- GTSI CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited, consolidated financial statements of GTSI Corp. ("GTSI" or the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. This report should be read in conjunction with the audited financials for the year ended December 31, 2000 and the accompanying Notes to the Financial Statements, contained in the Company's 2000 Annual Report on Form 10-K. In the opinion of Management, all adjustments, consisting primarily of normal recurring adjustments, necessary for a fair presentation of interim period results have been made. The interim results reflected in the consolidated financial statements are not necessarily indicative of results expected for the full year, or future periods. NEW ACCOUNTING PRONOUNCEMENTS. In December 1999, the SEC 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 defer generally the recognition of revenue from two to seven days as compared to the Company's previous method. During the fourth quarter of 2000, the Company adopted the provisions of SAB No. 101 retroactive to January 1, 2000. The Company implemented the guidance set forth in SAB No. 101 by recording a charge to income of $467,000 representing the cumulative effect of adopting SAB No. 101 on January 1, 2000. The Emerging Issues Task Force ("EITF") has issued EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." Consistent with the requirements under SAB No. 101, EITF No. 99-19 provides guidance regarding the income statement presentation of revenue based on either (a) the gross amount billed to a customer because it has earned revenue from the sale of the goods or services or (b) the net amount retained (that is, the amount billed to a customer less the amount paid to a supplier) because it has earned a commission or fee. During the fourth quarter of 2000, and on a retroactive basis for all periods presented, the financial statements were reclassified to reflect the provisions of EITF No. 99-19. Adoption of EITF No. 99-19 had no impact on our reported gross margin or net income, but merely resulted in the reduction of previously reported sales and cost of sales for our resold software maintenance agreements of approximately $3.6 million for the quarter ended September 30, 2000, and $11.9 million for the nine months ended September 30, 2000. In September 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires the Company to record derivatives on the balance sheet as assets or liabilities measured at fair value. SFAS No. 133 is effective as of January 1, 2001. The adoption of SFAS No. 133 had no effect on the Company's financial statements. -6- 2. NOTES PAYABLE TO BANKS On May 2, 1996, the Company executed a three-year credit facility with a bank (the "Principal Lender") for $40.0 million and a one-year credit facility with the other lenders (collectively, the "Lenders") for an additional $55.0 million (collectively, the "Credit Facility"). Additionally, on June 27, 1996, the Company executed a separate $10.0 million facility with the Principal Lender for inventory financing of vendor products (the "Wholesale Financing Facility"). On July 28, 1997, the Company and its banks executed the Second Amended and Restated Business Credit and Security Agreement (the "Credit Agreement") to modify some of the terms and conditions, as well as the amounts available under the Credit Facility and the Wholesale Financing Facility. These modifications included the revision of the Credit Facility's term to one year with a one year automatic renewal. On 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 percentage points. The Wholesale Financing Facility was also amended effective December 1, 1999 to $50.0 million throughout the fiscal year. On November 17, 2000, the Company and its banks executed an amendment, effective December 1, 2000, for the continuation of the Credit Agreement with a 90-day written termination notice upon receipt by either party and, among other things, increased the Company's Stock Repurchase authorization from third-party stockholders to $6.1 million, up from $5.25 million in the previous Amendment. All other material terms of the Credit Agreement remained the same. On February 28, 2001, the Company and its banks executed an amendment, for the establishment of a reserve to facilitate certain payments to its vendors via Automated Clearing House "ACH" transfers. The amendment also increased the Company's Stock Repurchase authorization from third-party stockholders by an additional $4.7 million, notwithstanding the $6.1 million previously authorized from the Fourth Amendment dated November 17, 2000. On March 13, 2001, the Wholesale Financing Facility was amended to $35.0 million throughout the fiscal year. Borrowing is limited to 85% of eligible accounts receivable. The Credit Facility is secured by substantially all of the operating assets of the Company. Current obligations are first funded and then all cash receipts are automatically applied to reduce outstanding borrowings. The Credit Facility also contains certain covenants that include restrictions on the payment of dividends and the repurchase of the Company's Common Stock, as well as provisions specifying compliance with certain quarterly and annual financial statistical ratios. At September 30, 2001, the Company was in compliance with all financial covenants set forth in the Credit Facility. -7- 3. PROPERTIES The Company's executive offices are located in an approximately 100,500 square foot facility in Chantilly, Virginia under a lease expiring in November 2009, with one five-year option. GTSI's warehousing and distribution operations are also located in Chantilly, Virginia in a separate 200,000 square foot facility under a lease expiring in December 2006. The Company has a branch sales office occupying 139 square meters in Mannheim, Germany. In addition, the Company has branch sales offices in Calverton, Maryland, under a month to month lease, beginning on March 14, 2001. The Company also leases a 20,000 square foot distribution center in Chattanooga, Tennessee under a one-year renewable option, exercised and effective April 1, 2001. 4. COMMITMENTS AND CONTINGENCIES The Company is occasionally a defendant in litigation incidental to its business. The Company believes that none of such litigation currently pending against it, individually or in the aggregate, will have a material adverse effect on the Company's financial condition or results of operations. As of September 30, 2001, the Company holds in its inventory approximately $1.7 million of business intelligence software. Contractually, the Company has exclusive rights to sell this business intelligence software to the U.S. Department of Defense through December 31, 2001 and believes that it has a commitment from the software vendor to extend this exclusivity. Management is currently negotiating with the software vendor to formally extend this exclusive resale arrangement and upgrade rights through December 31, 2002, but as yet has not satisfactorily completed this negotiation. Through September 30, 2001, the Company has made no sales of this product. At this time, however, management believes that the Company will recover the cost of this inventory through sales in the normal course of business. If management is unable to extend the sales exclusivity or upgrade rights granted by the vendor, or is otherwise unable to sell the software, this would result in an impairment of all or a portion of the $1.7 million inventory balance. Management expects to complete its negotiation with the software vendor during the fourth quarter of 2001 and will reassess its conclusions related to inventory impairment at that point. ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto included elsewhere in this Report, as well as the Company's consolidated financial statements and notes thereto incorporated into its Annual Report on Form 10-K for the year ended December 31, 2000. Historical results and percentage relationships among any amounts in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period. OVERVIEW GTSI Corp. 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 -8- convenient and cost-effective centralized source for microcomputer and workstation products through its competitive pricing, broad product selection and procurement expertise. The Company provides its vendors with a low-cost marketing and distribution channel to the millions of end users comprising the government market, while virtually insulating these vendors from most of the complex government procurement rules and regulations. Changes in sales throughout the Company's history have been attributable to increased or decreased unit sales, to expansion of the Company's product offerings; to the addition of new vendors; and to the addition or expiration of sales contract vehicles (e.g., the addition of the SEWP III Contract and the MMAD Contract, and the expiration of the SEWP II Contract). The Company's financial results have fluctuated seasonally, and may continue to do so in the future, because of the Government's buying patterns which have historically favorably impacted the last two calendar quarters and adversely affected the first two calendar quarters. The Company's business strategy is to continue to focus on higher-end product-based solutions, to broaden its product offering, to remain a low-cost, reliable provider of commodity products. The Company also focuses on bringing new technologies to government customers. -9- RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages that selected items within the statement of operations bear to sales and the annual percentage changes in the dollar amounts of such items.
PERCENTAGE CHANGE PERCENTAGE OF SALES --------------------------------- ---------------------------------------------- THREE NINE MONTHS MONTHS THREE NINE ENDED ENDED MONTHS ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2000 TO 2000 TO 2001 2000 2001 2000 2001 2000 ---------------------- ------------------------ --------------------------------- Sales 100.0% 100.0% 100.0% 100.0% 9.6% 13.7% Cost of sales 92.0 90.9 91.7 91.3 11.0% 14.2% ----------- ---------- ------------ ----------- Gross margin 8.0 9.1 8.3 8.7 -4.0% 8.4% ----------- ---------- ------------ ----------- Operating expenses: Selling, general, and administrative 6.8 6.9 8.5 7.9 7.2% 21.9% Depreciation and amortization 0.6 0.5 0.7 0.6 20.6% 15.7% ----------- ---------- ------------ ----------- Total operating expenses 7.4 7.4 9.2 8.5 8.1% 21.4% ----------- ---------- ------------ ----------- Income (loss) from operations 0.6 1.7 (0.9) 0.2 -57.5% -649.1% Interest income, net (1.0) (0.6) (0.7) (0.4) 85.4% 68.8% ----------- ---------- ------------ ----------- Income (loss) before taxes 1.6 2.3 (0.2) 0.6 -21.5% -131.4% Income tax provision (benefit) 0.6 0.0 (0.1) 0.0 100.0% 100.0% ----------- ---------- ------------ ----------- Net loss before cumulative effect of 1.0 2.3 (0.1) 0.6 -51.7% -119.3% SAB No. 101 adoption Cumulative effect of SAB No. 101 - - - 0.1 0.0% -100.0% adoption ----------- ---------- ------------ ----------- Net income (loss) 1.0 2.3 (0.1) 0.5 -51.7% -123.3% =========== ========== ============ ===========
-10- The following table sets forth, for the periods indicated, the approximate sales by category, along with the related percentages of total sales:
Three months ended September 30, Nine months ended September 30, ---------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------------- GSA Schedules $ 76,885 37.8% $ 66,332 35.8% $ 138,748 27.6% $ 158,066 35.7% IDIQ Contracts 80,375 39.6% 89,714 48.4% 251,257 49.9% 211,798 47.8% Open Market 28,339 14.0% 20,892 11.3% 75,407 15.0% 49,367 11.2% Other Contracts 17,478 8.6% 8,309 4.5% 38,043 7.5% 23,616 5.3% ---------------------------------------------------------------------------------------------------- Total $ 203,077 100.0% $ 185,247 100.0% $ 503,455 100.0% $ 442,847 100.0% ====================================================================================================
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2000 SALES. Sales consist of revenues from product shipments and services rendered net of allowances for customer returns and credits. Revenues for the third quarter of 2001 were $203.1 million, compared to $185.2 million in the third quarter of 2000, or an increase of 9.6%. GROSS MARGIN. Gross margin is sales less cost of goods sold, which includes product cost, freight, warranty maintenance cost and certain other overhead expenses related to the cost of acquiring products. Gross margin percentages vary over time and may change significantly depending on the mix of customer's use of available contract vehicle and the mix of product sold. Gross margin in the current quarter decreased by 1.1 percentage points to 8.0%, compared to a gross margin of 9.1% in the third quarter of 2000. The decrease in gross margin percentage reflects a combination of tighter contract margins over those recorded in the third quarter of 2000 and a shift in the mix of contracts to lower margin contracts. OPERATING EXPENSES. Total operating expenses for the three months ended September 30, 2001 increased $1.1 million, or 8.1%, from the same period in 2000. The increase in operating expenses primarily resulted from increased personnel costs to achieve increased sales for the second half of 2001 and beyond. Expressed as a percentage of total sales, total operating expenses was unchanged at 7.4% compared to the same period in 2000. INTEREST INCOME. Net interest income in the third quarter of 2001 increased to $1.9 million compared to $1.0 million in the same period in 2000 due primarily to an increase in prompt payment discounts relating to strategic inventory purchases. INCOME TAX. The Company recorded a tax provision of $1.3 million for the third quarter of 2001 based on the effective rate of approximately 39%. No provision for income tax had been recognized with respect to the Company's income from operations for the third quarter of 2000 due to the reversal of tax valuation allowance that fully offset the Company's current tax expenses for the third quarter of 2000. -11- NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2000 SALES. In the nine-month period ended September 30, 2001, revenues grew $60.6 million, or 13.7%, to $503.5 million, compared to $442.8 million in the same period in 2000. GROSS MARGIN. Gross margin expressed as a percent of sales in the nine-month period ended September 30, 2001 was 8.3%, down from a gross margin of 8.7% for the first nine months of 2000. OPERATING EXPENSES. Total operating expenses for the nine-month period ended September 30, 2001 increased $8.1 million, or 21.4%, from the same period in 2000. The increase in operating expenses primarily resulted from increased personnel costs to support increased sales for the second half of 2001 and beyond. Expressed as a percentage of total sales, total operating expenses increased to 9.2% from 8.5% in the comparable period of 2000. INTEREST EXPENSE. Net interest income for the nine-month period ended September 30, 2001 increased to $3.3 million compared to $1.9 million in the same period in 2000 due primarily to a increase in prompt payment discounts relating to strategic inventory purchases. INCOME TAX. The Company recorded a tax benefit of $326,000 for the nine-month period ended September 30, 2001 based on the effective rate of approximately 39%. No provision for income tax had been recognized with respect to the Company's income from operations for the first nine-months of 2000 due to the reversal of tax valuation allowance that fully offset the Company's current tax expenses for the period. EFFECT OF INFLATION The Company believes that inflation has not had a material effect on its operations. However, if inflation increases in the future it could temporarily adversely affect the profitability of GTSI's sales under its Government fixed-price contracts, which generally preclude the Company from passing on inflation-related or other increases in product costs to Government customers during the term of a pre-existing contract. The Company mitigates this risk in part by often obtaining agreements from certain of its suppliers prohibiting them from increasing their prices to GTSI during fixed-price, term contracts. SEASONAL FLUCTUATIONS AND OTHER FACTORS The Company has historically experienced and expects to continue to experience significant seasonal fluctuations in its operations as a result of Government buying and funding patterns, which also impact the buying patterns of GTSI's prime contractor customers. These buying and funding patterns historically have had a significant positive effect on GTSI's bookings in the third quarter ending September 30 each year (the Government's fiscal year end), and consequently on sales and net income in the third and fourth quarters of each year. Quarterly financial results are also affected by the timing of the award of and shipments of products under government contracts, price competition in the microcomputer and workstation industries, the addition of personnel or other expenses in anticipation of sales growth, product line changes and expansions, and the timing and costs of changes in customer and product mix. In addition, customer order deferrals in anticipation of new product releases by leading microcomputer and workstation hardware and software manufacturers, delays in vendor shipments of new or existing products, a shift in sales mix to more complex requirements contracts with more complex service costs, and vendor delays in the processing of incentives and credits due GTSI, have occurred (all of which are also likely to occur in the future) and 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. -12- Additionally, legislation is periodically introduced in Congress that may change the Government's procurement practices. GTSI cannot predict whether any legislative or regulatory proposals will be adopted or, if adopted, the impact upon its operating results. Changes in the structure, composition and/or buying patterns of the Government, either alone or in combination with competitive conditions or other factors, could adversely affect future results. As of September 30, 2001, the Company holds in its inventory approximately $1.7 million of business intelligence software. Contractually, the Company has exclusive rights to sell this business intelligence software to the U.S. Department of Defense through December 31, 2001 and believes that it has a commitment from the software vendor to extend this exclusivity. Management is currently negotiating with the software vendor to formally extend this exclusive resale arrangement and upgrade rights through December 31, 2002, but as yet has not satisfactorily completed this negotiation. Through September 30, 2001, the Company has made no sales of this product. At this time, however, management believes that the Company will recover the cost of this inventory through sales in the normal course of business. If management is unable to extend the sales exclusivity or upgrade rights granted by the vendor, or is otherwise unable to sell the software, this would result in an impairment of all or a portion of the $1.7 million inventory balance. Management expects to complete its negotiation with the software vendor during the fourth quarter of 2001 and will reassess its conclusions related to inventory impairment at that point. NEW ACCOUNTING PRONOUNCEMENTS. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on the application of generally accepted accounting principles to revenue recognition issues in financial statements. SAB No. 101 clarifies the appropriate timing of revenue recognition when products are shipped to customers. The impact to the Company of the adoption of SAB No. 101 is to generally defer the recognition of revenue from two to seven days as compared to the Company's previous method. During the fourth quarter of 2000, the Company adopted the provisions of SAB No. 101 retroactive to January 1, 2000. The Company implemented the guidance set forth in SAB No. 101 by recording a charge to income of $467,000 representing the cumulative effect of adopting SAB No. 101 on January 1, 2000. The Emerging Issues Task Force ("EITF") has issued EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." Consistent with the requirements under SAB No. 101, EITF No. 99-19 provides guidance regarding the income statement presentation of revenue based on either (a) the gross amount billed to a customer because it has earned revenue from the sale of the goods or services or (b) the net amount retained (that is, the amount billed to a customer less the amount paid to a supplier) because it has earned a commission or fee. During the fourth quarter of 2000, and on a retroactive basis for all periods presented, the financial statements were reclassified to reflect the provisions of EITF No. 99-19. Adoption of EITF No. 99-19 had no impact on our reported gross margin or net income, but merely results in the reduction of previously reported sales and cost of sales for our resold software maintenance agreements of approximately $3.6 million for the quarter ended September 30, 2000, and $11.9 million for the six months ended September 30, 2000. In September 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires the Company to record derivatives on the balance sheet as assets or liabilities measured at fair value. SFAS No. 133 is effective as of January 1, 2001. The adoption of SFAS No. 133 had no effect on the Company's financial statements. -13- LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 2001, the Company's operating activities used $705,000 of cash flow, compared to $17.4 million of cash flow provided by operating activities in the same period in 2000. The decrease in cash flow relates primarily to the Company's increased inventory purchases in the first nine months of 2001 versus the same period in 2000. Investing activities used cash of approximately $2.5 million during the nine-month period ended September 30, 2001 compared to $7.5 million for the same period in 2000 reflecting the strategic timing of the investment in the Company's computers and software, including Customer Relationship Management initiatives. During the nine-month period ended September 30, 2001, the Company's financing activities provided cash of approximately $3.3 million, primarily related to borrowings under the Company's Credit Facilities and payment against a note payable. The Company also received $1.6 million from exercises of stock options and purchased $1.4 million of treasury stock. At September 30, 2001 the Company had $24.7 million available for borrowing under its credit facility. On May 2, 1996, the Company executed a three-year credit facility with a bank (the "Principal Lender") for $40.0 million and a one-year credit facility with the other lenders (collectively, the "Lenders") for an additional $55.0 million (collectively, the "Credit Facility"). Additionally, on June 27, 1996, the Company executed a separate $10.0 million facility with the Principal Lender for inventory financing of vendor products (the "Wholesale Financing Facility"). On July 28, 1997, the Company and its banks executed the Second Amended and Restated Business Credit and Security Agreement (the "Credit Agreement") to modify some of the terms and conditions, as well as the amounts available under the Credit Facility and the Wholesale Financing Facility. These modifications included the revision of the Credit Facility's term to one year with a one year automatic renewal. On, 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. On February 28, 2001, the Company and its banks executed an amendment, for the establishment of a reserve to facilitate certain payments to its vendors via Automated Clearing House "ACH" transfers. The -14- amendment also increased the Company's Stock Repurchase authorization from third-party stockholders by an additional $4.7 million, notwithstanding the $6.1 million previously authorized from the Fourth Amendment dated November 17, 2000. On March 13, 2001, the Wholesale Financing Facility was amended to $35.0 million throughout the fiscal year. Borrowing is limited to 85% of eligible accounts receivable. The Credit Facility is secured by substantially all of the operating assets of the Company. Current obligations are first funded and then all cash receipts are automatically applied to reduce outstanding borrowings. The Credit Facility also contains certain covenants that include restrictions on the payment of dividends and the repurchase of the Company's Common Stock, as well as provisions specifying compliance with certain quarterly and annual financial statistical ratios. At September 30, 2001, the Company was in compliance with all financial covenants set forth in the Credit Facility. The Company anticipates that it will continue to rely primarily on operating cash flow, bank loans and vendor credit to finance its operating cash needs. The Company believes that such funds should be sufficient to satisfy the Company's near term anticipated cash requirements for operations. Nonetheless, the Company may seek additional sources of capital, including permanent financing over a longer term at fixed rates, to finance its working capital requirements. The Company believes that such capital sources will be available to it on acceptable terms, if needed. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Form 10-Q, including certain documents incorporated herein by reference, contains "forward-looking" statements that involve certain risks and uncertainties. Actual results may differ materially from results express or implied by such forward-looking statements, based on numerous factors. Such factors include, but are not limited to, competition in the government markets, buying patterns of the Company's customers, general economic and political conditions, results of negotiations with the Company's lenders concerning a new credit facility, changes in laws and government procurement regulations, and other risks described in this Form 10-Q and in the Company's other SEC filings. For these statements, the Company claims the protection of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Inapplicable. -15- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - Inapplicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - Inapplicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Inapplicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Inapplicable ITEM 5. OTHER INFORMATION - Inapplicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) REPORTS ON FORM 8-K: None. -16- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 15, 2001 GTSI CORP. By: /s/ Dendy Young -------------------------------------------------- Dendy Young Chairman and Chief Executive Officer By: /s/ Robert D. Russell -------------------------------------------------- Robert D. Russell Senior Vice President and Chief Financial Officer -17-