-----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, HzQ3204jCOqsKS1RM0mVdDVDMB8bwzAQJ7j5bS++jZVfO0pJjmnBTapZu9lx+jOK tHHIAAEaPDW97jsLqOh1hA== 0001133884-02-000360.txt : 20020415 0001133884-02-000360.hdr.sgml : 20020415 ACCESSION NUMBER: 0001133884-02-000360 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-19394 FILM NUMBER: 02597042 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-K405 1 g10k405-27428.txt 10-K405 - -------------------------------------------------------------------------------- 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, 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, VIRGINIA 20151-1010 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 502-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.005 PAR VALUE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on March 1, 2002, as reported on The Nasdaq Stock Market, was $62,277,531. The number of shares outstanding of the registrant's Common Stock on March 1, 2002, was 8,194,412. 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 9, 2002 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 recognized information technology ("IT") solutions leader, providing products and services to federal, state and local government customers worldwide. (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, workstation, software and networking solutions through its broad selection of popular products and services at competitive prices. The Company specializes in understanding both the various IT needs and the procurement processes of Government customers. GTSI sells to most departments and agencies of the Government, state governments and systems integrators and prime contractors selling to the government market. In 2001, GTSI's sales directly to Government agencies, to prime contractors for resale to Government agencies and to state and local government agencies accounted for 85%, 13% and 2% of sales, respectively. GTSI currently offers access to approximately 250,000 IT products from approximately 1,200 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, Inc. ("Cisco"), International Business Machines Corp. ("IBM"), Apple Computer, Inc. ("Apple") and Toshiba America Information Systems, Inc. ("Toshiba"). The Company provides its partners with a low-cost marketing and distribution channel to the many end-users constituting the government market, while substantially insulating these partners from the complex government procurement rules and regulations. GTSI fulfills most 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 overnight to any of the 48 contiguous states, 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 enterprise solutions and to broaden its product offerings, while remaining a low-cost, reliable 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 partner and customer relationships necessary to be a leader in this market. As a result, GTSI's marketing and sales force is effective at reaching and servicing the Government market, which consists of procurement and contracting officers, information resource managers, CIOs (Chief Information Officers) and Government IT executives, 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 hundreds of millions of dollars in sales. The Company holds a wide range of Government contracts, including multimillion dollar, multiyear contracts with the Department of Defense ("DoD") and certain civilian agencies, as well as several multiple award schedules and blanket purchasing agreements ("BPA's") with a variety of DoD and civilian agencies (generally, "contract vehicles"). GTSI also serves as a subcontractor providing products and services to companies holding Government contracts, the two largest of which are supporting Lockheed Martin Corporation on the NASA Outsourcing Desktop Initiative and Jet Propulsion Laboratory contracts and DynCorp on the FBI's Trilogy contract. The Company intends to continue to identify and pursue those contract vehicles that best leverage GTSI's broad product selection, services, distribution capabilities and partner relationships. FOCUS ON INFORMATION TECHNOLOGY. 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 (local area network) and WANs (wide area network). In 1996, GTSI began focusing on internet and intranet products and services and entered into an agreement with Hewlett-Packard to add its Unix-Based server products. In 1998, GTSI began offering a full range of professional services to Government agencies. These services include project management, help desk support, LAN management support, basic hardware support, continuous training support, asset management, IT planning as well as technical assessment and evaluation. The Company adds other complementary IT products and expanded systems integration services as business needs dictate. FOCUS ON CUSTOMER SERVICE. In the Company's process orientation and interaction with its many customers, Company employees focus on providing high quality customer services 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. PROVIDE A CENTRALIZED SOURCE FOR PROCURING IT 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 savings of -3- 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 PARTNER RELATIONSHIPS. To provide a centralized source of products and solutions for its customers, GTSI maintains strong relationships with leading hardware, software and service partners. GTSI offers its partners a wide range of marketing and sales services, which provide them with access to the millions of end-users constituting the government market. In addition, the Company substantially insulates its partners from the procurement regulatory complexities, costs, extensive paperwork and complicated billing requirements associated with the government market. THE GOVERNMENT PROCUREMENT PROCESS The Company's 2001 revenues were derived primarily from sales directly to government departments and agencies 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, BPA and indefinite delivery/indefinite quantity contracts ("IDIQ"). GSA SCHEDULE CONTRACTS In 2001, GTSI held the GSA IT Schedule and Schedule 36 contracts. Products offered under the IT Schedule contract include workstations, desktops, laptops, notebooks, servers, laser printers, 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 was to expire on March 31, 2002, however, in late March 2002 the Government formally exercised its first five-year option (there are three five-year options) to extend the IT Schedule through 2007. Schedule 36 is for the supply of Hewlett-Packard printer toner cartridges. Schedule 36 expired on September 30, 2001 and the Company consolidated the product offering from Schedule 36 onto the IT Schedule contract prior to its expiration. 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. Agencies, however, 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. GSA Schedule contract awards are based on numerous 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 partners 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 -4- 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 within 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 the customers the partner's warranty and to provide for on-site or depot maintenance at a prepaid fixed fee. GTSI's GSA Schedule contracts also contain price reduction clauses requiring that GTSI pass on to Government customers certain reduced prices GTSI may receive from its partners during a contract's term, but prohibits GTSI from passing on partner price increases for a period of one year. To mitigate the potential adverse impact of any such price increase, the Company requires substantially all partners acting as suppliers to GTSI under its GSA Schedule contracts to provide GTSI with supply and price protection. The GSA Schedule includes an economic price adjustment clause that permits the Company to increase contract prices 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 (the contract provides no preset delivery schedules or minimum purchase levels) 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 Government-issued credit cards. 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 partners to offer reduced BPA prices to the Government. The BPA sales vehicle allows the Company to focus specific partner relationships on specific customers. 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 pursues formal Government bids. Substantially all of these bids are awarded on a "best value" to the Government basis (which, depending on the bid, can be a combination of price, technical expertise, past performance on other Government contracts and other factors). GTSI seeks to use its partner contacts, purchasing power, distribution strength and procurement expertise to compete successfully for the business. These major procurements may equal millions of dollars in total revenues, span many years, and provide a purchasing vehicle for many agencies. 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 contract term at a specified level or at specified levels varying over time) and IDIQ. In some cases, various government agencies levy a fee on purchases made by departments outside of the agency that awarded the contract. These fees are collected by the Company and, as under the GSA Schedule contract, remitted to the respective agency on a contract specified payment schedule. -5- 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 (value added resellers) and commercial resellers. OPEN MARKET Many microcomputer and workstation products may also be sold 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 partner'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 and negotiates subcontracts with the prime contractors when either the volume of business or relationship timeframe dictates the need. 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 to market and sell successfully 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. Under applicable Government regulations, GTSI qualified as a "small business" under several of the contracts and BPAs it held during 2001 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 -6- having to establish small business subcontracting plans to compete for certain large Government contracts. GTSI no longer qualifies as a small business for new contract awards. Although most government contracts entered into before February 1998 will not be affected by this business size 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. Such actions include 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 quantify the extent of the effect, 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 civil or criminal liability. During the term of any suspension or debarment by any Government agency, the contractor could be prohibited from competing for or being awarded any contract by any Government agency. In addition, substantially all of the Company's Government contracts are terminable at any time at the Government's convenience or upon default. Upon termination of a Government contract for default, the Government may also seek to recover from the defaulting contractor the increased costs of procuring the specified goods and services from a different contractor. The effect of any of these possible Government actions or the adoption of new or modified procurement regulations or practices could adversely affect the Company. The Company has historically experienced and expects to continue to experience significant seasonal fluctuations in its operations as a result of Government buying and funding patterns. Although these patterns have historically led to sales being concentrated in the Company's third and fourth quarters, the seasonality and the unpredictability of the factors affecting such seasonality make GTSI's quarterly and yearly financial results difficult to predict and subject to significant fluctuation. 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. PRODUCTS, SOLUTIONS AND SERVICES GTSI is the leading, dedicated Business-to-Government provider of IT solutions. Founded in 1983, GTSI has over 19 years of government-focused experience making it one of the most experienced, stable IT solutions providers to federal, state and local agencies. GTSI's complete product and solution offering, technical expertise, logistics strengths, extensive contracts portfolio, sales knowledge, customer relationships, and proven performance record make GTSI equally valuable to government customers and technology partners. A pioneer in government-focused electronic commerce, GTSI also offers simplified buying through its website, WWW.GTSI.COM. The Company continuously monitors sales of existing and emerging technologies to ensure that it offers its customer's state-of-the-art technology products and solutions. -7- HARDWARE. GTSI has strong strategic relationships with established global market leaders including Hewlett-Packard, Compaq, Panasonic, IBM, EMC, Xerox, SONY, Sun Microsystems, Apple, and Cisco. In addition to reselling platform solutions, peripherals carried by the Company include disk drives, CD-ROM and DVD drives, printers, monitors, modems and related products. GTSI's networking products, including LANs, WANs, MANs (metropolitan area network) and PANs (personal area network), are supplemented by the Company's services, which include assisting customers in selecting, configuring, installing and maintaining networks. SOFTWARE. The Company remarkets computer software solutions from substantially every leading Windows-based software publisher, as well as leading UNIX, Linux and Apple products. The Company's software partners include Microsoft, Symantec, IBM/Lotus, Art Technology Group ("ATG"), Veritas, MicroStrategy, Adobe, and Citrix. The Company has subset specialization in web development and personalization software. SOLUTIONS. The Company has 13 technology and solutions teams, each including technical, business development and management professionals dedicated to selling and supporting systems and solutions in a specific technology area (such as enterprise storage, mobile and wireless, and web portal and internet technology) or for a particular partner product line (such as Sun Microsystems, Compaq, HP and Microsoft). MARKETING AND SALES The Company's marketing personnel develop and manage the Company's marketing, branding and positioning activities on a worldwide basis. These activities communicate the Company's capabilities and value proposition in an effort to acquire new customers and improve retention of existing customers. Most marketing activities are funded by the Company's partners. Each marketing activity is integrated to provide comprehensive awareness, brand consistency and maximize return on investment. The Company's marketing activities include sponsorship of major trade shows and customer events, advertising in government-focused publications and broadcast media, direct marketing of catalogs and brochures, management of a commerce web site located at gtsi.com, e-mail marketing, outbound telemarketing, field sales campaigns and various sales-related incentive programs. GTSI recognizes 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 IT decision-makers. The Company conducts frequent customer surveys to assess the opinions and interests of our customer base. The Company utilizes the Siebel Customer Relationship Management application for managing its customer database and for maintaining customer relationship information. This database contains an extensive list of agency procurement and contracting officers, information resource managers, senior policy makers, technology influencers, end-users, systems integrators, VARs and prime contractors. GTSI uses this database, among other things, for targeting its marketing efforts and data-mining for various market research purposes. -8- PARTNER RELATIONSHIPS To offer its customers a centralized source for their microcomputer and workstation needs, the Company establishes and maintains relationships with key partners 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 partners vary widely, but typically permit the Company to purchase product for resale to at least the government market. Virtually none of the Company's partner agreements requires the Company to purchase any specified quantities of product. The Company typically requires partners acting as suppliers to GTSI under its term Government contracts to provide GTSI with supply and price protection for the duration of such contracts. Other than supply agreements under term Government contracts, the Company's partner agreements are typically terminable by the partner on short notice, at will or immediately upon default by GTSI and may contain limitations on partner liability. These partner agreements also generally permit GTSI to return previous product purchases at no charge within certain time limits for a restocking fee or in exchange for other products of such partner. The Company also purchases some products from independent distributors. Partners provide the Company with various forms of marketing and sales assistance, including sales incentives and market development funds. Partners provide sell-through and other sales incentives in connection with certain product promotions. Additionally, key partners participate with the Company in cooperative advertising and sales events and typically provide funding which partially offsets the costs of such efforts. A reduction in or discontinuance of any of these incentives or significant delays in receiving reimbursements could have a material adverse effect on the Company. The Company must continue to obtain products at competitive prices from leading partners to provide a centralized source of price-competitive products for its customers and to be awarded government contracts. Although almost all of GTSI's partners 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. GTSI believes its relationships with its key partners to be good. The Company, however, could be adversely affected if one or more key partners determined to sell directly to the Government (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 to restrict their products from being carried on a GSA Schedule contract. -9- CUSTOMERS The Company's customers are primarily federal, state and local government agencies and prime contractors to the Government, including systems integrators. In 2001, 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 government customer (agency) accounted for greater than 5% of the Company's 2001 sales, aggregate 2001 sales to the Government's Departments of the Army, Navy and Air Force were 17.2%, 9.6% and 20.1%, respectively, of GTSI's 2001 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 or buying patterns of the Government could affect the Company's future operating results. BACKLOG At February 28, 2002 and December 31, 2001, the Company's total backlog of orders was approximately $99.6 million and $76.6 million, respectively, as compared with approximately $54.8 million and $71.0 million at February 28, 2001 and December 31, 2000, respectively. Total backlog consists of written purchase orders received and accepted by GTSI but not yet recognized as revenue. 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 For certain products that it sells, GTSI provides post-sale field service 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. COMPETITION The government microcomputer and workstation market is very competitive and subject to rapid change. GTSI competes with certain leading microcomputer 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 2001, certain manufacturers selling directly to the Government have gained -10- 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 partner 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 4, 2002, the Company had 608 employees, including 377 in sales, marketing and contract management; 164 in operations; and 67 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 2008, 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, 2002, with two one-year options. ITEM 3. LEGAL PROCEEDINGS. The Company is occasionally a defendant in litigation incidental to its business. The Company believes that the litigation currently pending against it will not individually or in the aggregate have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable. -11- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. STOCK DATA. The Company's common stock trades on The Nasdaq Stock Market under the symbol "GTSI." As of December 31, 2001, there were 199 record holders of the Company's common stock. As of March 15, 2002, there were 236 record holders and approximately 3,200 beneficial holders of the Company's common stock. The following table sets forth, for the periods indicated, the high and low closing prices for the Company's common stock based on information updated by the Nasdaq Stock Market. ----------------------- ------------------------ 2001 2000 ------------ ----------- ---------- ----------- ------------ Quarter High Low High Low ------------ ----------- ---------- ----------- ------------ First 6.25 3.34 6.75 2.75 ------------ ----------- ---------- ----------- ------------ Second 7.06 5.09 3.75 2.63 ------------ ----------- ---------- ----------- ------------ Third 7.10 5.70 5.13 2.63 ------------ ----------- ---------- ----------- ------------ Fourth 9.47 6.00 4.13 2.75 ------------ ----------- ---------- ----------- ------------ 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 20151-1010. 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 Thursday, May 9, 2002, 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, 2001, 2000, and 1999 are derived from, and are qualified in their entirety by reference to, the Company's audited consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K. The December 31, 2001, -12- 2000, and 1999, 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, 2001 2000 1999 1998 1997 -------------- -------------- ------------ ------------ ------------ INCOME STATEMENT DATA: Sales $ 783,496 $ 677,755 $ 660,570 $ 593,571 $ 486,377 Cost of sales 718,370 617,622 610,463 541,934 450,454 -------------- -------------- ------------ ------------ ------------ Gross margin 65,126 60,133 50,107 51,637 35,923 -------------- -------------- ------------ ------------ ------------ Operating Expense: Selling, general and administrative 57,002 49,382 44,931 44,660 36,940 Depreciation and amortization 4,407 3,934 3,584 3,661 3,539 -------------- -------------- ------------ ------------ ------------ Total operating expenses 61,409 53,316 48,515 48,321 40,479 -------------- -------------- ------------ ------------ ------------ Income (loss) from operations 3,717 6,817 1,592 3,316 (4,556) Interest (income) expense, net (3,707) (2,259) (1,090) 977 548 -------------- -------------- ------------ ------------ ------------ Income (loss) before taxes 7,424 9,076 2,682 2,339 (5,104) Income tax provision (benefit) 2,938 (2,008) - - - -------------- -------------- ------------ ------------ ------------ Net income (loss) before cumulative effect of SAB No. 101 adoption 4,486 11,084 2,682 2,339 (5,104) Cumulative effect of SAB 101 adoption - 467 - - - -------------- -------------- ------------ ------------ ------------ Net income (loss) $ 4,486 $ 10,617 $ 2,682 $ 2,339 $ (5,104) ============== ============== ============ ============ ============ Net income per common share Basic: Basic net income (loss) per share before cumulative effect of SAB No. 101 adoption $ 0.55 $ 1.23 $ 0.29 $ 0.27 $ (0.76) Cumulative effect per share of SAB No. 101 adoption - (0.05) - - - -------------- -------------- ------------ ------------ ------------ Basic net income (loss) per share $ 0.55 $ 1.18 $ 0.29 $ 0.27 $ (0.76) ============== ============== ============ ============ ============ Diluted: Diluted net income (loss) per share before cumulative effect of SAB No. 101 adoption $ 0.50 $ 1.20 $ 0.29 $ 0.26 $ (0.76) Cumulative effect per share of SAB No. 101 adoption - (0.05) - - - -------------- -------------- ------------ ------------ ------------ Diluted net income (loss) per share $ 0.50 $ 1.15 $ 0.29 $ 0.26 $ (0.76) ============== ============== ============ ============ ============ Weighted average common shares outstanding Basic 8,144 9,021 9,271 8,700 6,733 ============== ============== ============ ============ ============ Diluted 9,049 9,225 9,314 8,909 6,733 ============== ============== ============ ============ ============
-13-
(In thousands) December 31, 2001 2000 1999 1998 1997 -------------- -------------- ------------ ------------ ------------ BALANCE SHEET DATA: Working capital $ 34,968 $ 43,659 $ 44,350 $ 42,206 $ 30,860 Total assets 252,452 227,065 186,333 161,090 137,464 Notes payable to banks 20,186 11,925 9,479 14,889 21,569 Total liabilities 189,387 168,585 133,137 105,766 97,590 Stockholders' equity 63,065 58,480 53,196 55,324 39,874
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the Consolidated Financial Statements and Notes. Historical results and percentage relationships among any amounts in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period. OVERVIEW GTSI is a recognized information technology (IT) solutions leader, providing products and services to federal, state, and local government customers worldwide. For nearly two decades GTSI has served the public sector by teaming up with global IT leaders such as Hewlett - Packard, Panasonic, Microsoft, IBM, Sun and Cisco. GTSI seeks to deliver maximum value through its broad range of products, extensive contract portfolio, and ISO 9000-registered logistics. Through its Technology Teams, GTSI delivers "best of breed" products and services to help its customers realize strong value for their IT investments. The Technology Teams consist of technical experts that analyze, design, install and support a wide range of integrated IT solutions in such areas as high performance computing, advanced networking, mobile and wireless solutions, web portals, high availability storage and information assurance. GTSI continues to broaden its leadership in electronic commerce and procurement through its federally focused website, gtsi.com that provides customized shopping zones to meet customers' personalized needs. GTSI is headquartered in Northern Virginia, outside of Washington, D.C. 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, Unix servers/workstation and internet products), to the addition/removal of vendors (e.g., the addition of Cisco, EMC, Tachyon, RIM, and the removal of Nexar and Everex), and to the addition or expiration of sales contract vehicles (e.g., the addition of the SEWP III, ADMC, IT2 and the MMAD Contracts, and the expiration of the SEWP II, PC-3, SII PC/LAN, and Portables 3 Contracts). 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 affected 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, and to remain a low-cost, and high-reliability provider of commodity products. The Company also focuses on bringing new technologies to government customers. RESULTS OF OPERATIONS -14- 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, -------------------------------------- ---------------------------- 2001 2000 1999 2000 to 2001 1999 to 2000 ------------ ------------ ------------ ------------- -------------- INCOME STATEMENT DATA: Sales 100.0% 100.0% 100.0% 15.6% 2.6% Cost of sales 91.7% 91.1% 92.4% 16.3% 1.2% ------------ ------------ ------------ Gross margin 8.3% 8.9% 7.6% 8.3% 20.0% Operating expense: Selling, general and administrative 7.2% 7.3% 6.8% 15.4% 9.9% Depreciation and amortization 0.6% 0.6% 0.5% 12.0% 9.8% ------------ ------------ ------------ Total operating expenses 7.8% 7.9% 7.3% 15.2% 9.9% ------------ ------------ ------------ Income from operations 0.5% 1.0% 0.3% -45.5% 328.2% Interest (income) expense, net -0.5% -0.3% -0.2% 64.1% 107.2% ------------ ------------ ------------ Income before taxes 1.0% 1.3% 0.5% -18.2% 238.4% Income tax provision (benefit) 0.4% -0.3% 0.0% -246.3% -100.0% ------------ ------------ ------------ Net income before cumulative effect of SAB 101 adoption 0.6% 1.6% 0.5% -59.5% 313.3% Cumulative effect of SAB 101 adoption 0.0% 0.0% 0.0% -100.0% 100.0% ------------ ------------ ------------ Net income 0.6% 1.6% 0.5% -57.7% 295.9% ============ ============ ============
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) 2001 2000 1999 --------------------------- ---------------------------- ---------------------------- Hardware $570.3 72.8% $507.0 74.8% $514.4 77.9% Software 158.3 20.2% 131.5 19.4% 123.7 18.7% Services 54.9 7.0% 39.3 5.8% 22.5 3.4% ------------ ------------ ------------- ------------- ------------- ------------- Total $783.5 100% $677.8 100% $660.6 100% ============ ============ ============= ============= ============= =============
-15-
Contract Vehicles ---------------------------- ---------------------------- ---------------------------- (Dollars in millions) 2001 2000 1999 ---------------------------- ---------------------------- ---------------------------- GSA Schedules $238.4 30.4% $230.6 34.0% $261.6 39.6% IDIQ 355.5 45.4% 327.1 48.2% 307.3 46.5% Open Market 133.3 17.0% 79.7 11.8% 76.8 11.6% Other Contracts 56.3 7.2% 40.4 6.0% 14.9 2.3% ------------- ------------- ------------- ------------- ------------- ------------ Total $783.5 100% $677.8 100% $660.6 100% ============= ============= ============= ============= ============= ============ Vendor Category --------------------------- ---------------------------- ---------------------------- (Dollars in millions) 2001 2000 1999 --------------------------- ---------------------------- ---------------------------- Hewlett-Packard $135.0 17.2% $160.0 23.6% $166.40 25.2% Panasonic 92.4 11.8% 93.3 13.7% 68.5 10.4% Microsoft 88.0 11.2% 63.7 9.4% 75.8 11.5% Cisco 80.4 10.3% 37.2 5.5% 34.0 5.1% Sun 63.0 8.0% 53.4 7.9% 47.5 7.2% Compaq 53.5 6.8% 41.3 6.1% 51.6 7.8% EMC2 47.5 6.1% 4.0 0.6% 0.1 0.0% Dell 31.9 4.1% 6.5 1.0% 11.3 1.7% IBM 20.7 2.6% 18.4 2.7% 9.2 1.4% Other 171.1 21.8% 200.0 29.5% 196.2 29.7% ------------ ------------ ------------- ------------- ------------- ------------- Total $783.5 100% $677.8 100% $660.6 100% ============ ============ ============= ============= ============= =============
2001 COMPARED WITH 2000 SALES. Sales consist of revenues from products delivered and services rendered, net of allowances for customer returns and credits. Net sales in 2001 increased $105.7 million, or 15.6% over 2000. Sales increased in all product categories and contract vehicles. The largest increase was an approximately $53.6 million, or 67.3%, increase in sales sold under open market conditions. Indefinite delivery/indefinite quantity ("IDIQ") contracts increased $28.4 million, or 8.7%. The Other Contract sales category showed an increase of $15.9 million, or 39.4% and sales under the Company's GSA schedules increased $7.8 million, or 3.4%. Sales sold under Open Market contracts were up $53.6 million due to several large orders with Civilian and State and Local customers and prime contractors and the wider product breadth offered under open market conditions. IDIQ contract sales were up $28.7 million led by increased sales on the Scientific and Engineering Workstation Procurement ("SEWP") contract due to the wide product offering and the ability of all Government agencies to purchase under this contract. Sales on the Army PC-3 and Portable 3 vehicles were down $46.1 million combined year over year due to the expiration of the Portable 3 vehicle and the Army switching its buying patterns to the new Army Desktop and Mobile Commuting ("ADMC") vehicle which the Company treats as a GSA schedule type contract. -16- Sales on Other Contracts were up $15.9 million led by strong sales to new prime contractor of $29.7 million offset by decreased sales in the Company's Panasonic distribution business of $11.0 million. The increase of $7.7 million in the Company's GSA schedules is due to sales on the newly awarded Army ADMC BPA and Federal Reserve Bank BPA's. Net sales directly off the GSA Schedule fell $17.6 million due to less reliance on the GSA schedule as a result of a broader contract base which gave the Company and its customers greater flexibility. Total booked backlog at December 31, 2001, was approximately $76.6 million compared to $71.0 million at December 31, 2000. Total booked backlog was $99.6 million at February 28, 2002, compared to $54.8 million at February 28, 2001. Total booked backlog consists of written purchase orders received and accepted by GTSI but not yet recognized as revenue. Backlog fluctuates significantly from quarter to quarter because of the seasonality of Government ordering patterns and the periodic inventory shortages resulting from constrained products. GROSS MARGIN. Gross margin increased $5.0 million, or 8.3%, to $65.1 million from $60.1 million in 2000. Gross margin as a percentage of sales decreased to 8.3% in 2001, as compared to a gross margin of 8.9% in 2000. Gross margin as a percentage of sales was lower in 2001 versus 2000 due to a shift from higher margin customer-specific IDIQ contracts to lower margin GSA contract vehicles, government wide acquisition contracts ("GWACs"), and other lower margin contracts. Margins were also affected by a shift in contract vehicles from sole-source and dual award IDIQ vehicles to vehicles where multiple vendors are on contract, increasing competition. Warranty administration, inventory management, and freight costs as a percentage of sales were substantially unchanged for the year ending December 31, 2001, compared with the previous year. OPERATING EXPENSES. Total operating expenses for 2001 increased $8.1 million, or 15.2%, to $61.4 million from $53.3 million in 2000, however they decreased as a percentage of sales to 7.8% from 7.9%. This increase in operating expense primarily reflects the Company's implementation of its plan to hire additional sales personnel intended to achieve increased sales in 2001 and beyond. INTEREST INCOME. Net interest income is the amount of interest income and prompt payment discounts partially offset by interest expense on borrowings. Net interest income increased by $1.4 million, from $2.3 million to $3.7 million, or 64.1%, in 2001 compared to 2000. Interest income increased by $1.3 million and interest expense decreased $153,000 over 2000. The increase in interest income is primarily due to a $1.6 million increase in interest income from lease receivables partially offset by a $280,000 decrease in other interest income. INCOME TAXES. The Company's effective tax rate in 2001 was 39.6% resulting in a tax provision of $2.9 million in 2001. The Company anticipates that its ongoing effective tax rate will be approximately 40%. 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 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%. -17- Sales on Other Contracts were up $25.5 million 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 partially as a result of increased sales on the combined SEWP contract vehicles of $49.6 million. 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 did not 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 decreased $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 generally to defer 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 $71.0 million compared to $54.9 million at December 31, 1999. Total booked backlog was $54.8 million at February 28, 2001, compared to $55.0 million at February 29, 2000. Total booked backlog consists of written purchase orders received and accepted by GTSI but not yet recognized as revenue. Backlog fluctuates significantly from quarter to quarter because of the seasonality of Government ordering patterns and the periodic inventory shortages resulting from constrained products. 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 lower and freight costs were $2.1 million lower than in 1999. Freight costs decreased from 1.2% of sales in 1999 to 0.86% 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. -18- 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 INCOME. Net interest income is the amount of interest income and prompt payment discounts partially offset by interest expense on borrowings. 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 affected 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%. CRITICAL ACCOUNTING POLICIES We have included below our policies, which are both important to our financial condition and operating results and require management's most difficult, subjective and complex judgments in determining the underlying estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, as they require assumptions that are inherently uncertain. REVENUE RECOGNITION. We recognize revenue from hardware product sales when the title to the products sold passes to the customer, with provisions established for estimated product returns. Based on our standard shipping terms, title generally passes upon the customer's receipt of the products. We recognize revenues under sales type lease arrangements in accordance with the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases." We recognize revenue from software products in accordance with the provisions of American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition." Revenue from software product sales is recognized when persuasive evidence of an arrangement exists, the software has been delivered, the fee is fixed or determinable and collection is probable. We recognize net revenues from sales of third party software maintenance contracts at the time of the sale. ALLOWANCE FOR DOUBTFUL ACCOUNTS. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experiences and any specific customer collection issues that we have identified. While such losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same loss rates that we have in the past. SALES OF LEASE RECEIVABLES. We periodically sell lease receivables to unrelated financing companies. We account for our sales of lease receivables in accordance with SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125." In accordance with the criteria set forth in SFAS No. 140, lease receivables -19- amounting to $39.8 million and $6.7 million, in 2001 and 2000 respectively, were accounted for as sales and, as a result, the related receivables have been excluded from the accompanying balance sheets. INVENTORIES. We value our inventory at the lower of average cost or market value of the inventory. Whenever possible, we try to order inventory only as needed. However, we do maintain inventory related to certain products or vendors. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based on assumptions about future demand and market conditions. Our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess or obsolete inventory. In the future, if our inventory is determined to be overvalued, we will be required to recognize such costs in our cost of goods sold at the time of such determination. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. LONG-LIVED ASSETS. Long-lived assets, consisting primarily of property and equipment and capitalized software, are currently reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed pursuant to Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." We determine impairment by comparing the carrying value of these long-lived assets to the estimated undiscounted future cash flows expected to result from the use of these assets and their eventual disposition. The cash flow projection used to make this assessment is consistent with the cash flow projections we use internally to assist us in making key decisions. In the event we determine that an impairment exists, a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the assets, which is generally determined by using quoted market prices or valuation techniques such as the discounted present value of expected future cash flows, appraisals, or other pricing models as appropriate. WARRANTIES. We offer warranties on sales under certain products specific to the terms of the customer agreements. Our standard warranties require us to repair or replace defective products reported to us during such warranty period at no cost to the customer. We record an estimate for warranty related costs based on our actual historical return rates and repair costs at the time of sale. While our warranty costs have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same warranty return rates or repair costs that we have in the past. A significant increase in product return rates, or a significant increase in the costs to repair products sold, could have a material adverse impact on our operating results for the period or periods in which such events occur. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) approved SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001. The amortization of existing goodwill will cease on December 31, 2001. Any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new method of testing goodwill and certain intangibles for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The adoption of these standards will not have a material effect on the company's consolidated financial statements or its results of operations. -20- In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The purpose of this statement is to develop consistent accounting for asset retirement obligations and related costs in the financial statements and provide more information about future cash outflows, leverage and liquidity regarding retirement obligations and the gross investment in long-lived assets. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company will be required to implement SFAS No. 143 on January 1, 2003. The Company does not believe that adoption of this standard will have a material effect on its consolidated financial statements or its results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," which supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Though it retains the basic requirements of SFAS No. 121 regarding when and how to measure an impairment loss, SFAS No. 144 provides additional implementation guidance. SFAS No. 144 applies to long-lived assets to be held and used or to be disposed of, including assets under capital leases of lessees; assets subject to operating leases of lessors; and prepaid assets. SFAS No. 144 also expands the scope of a discontinued operation to include a component of an entity, and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not believe that adoption of this standard will have a material effect on its consolidated financial statements or results of its operations. EFFECT OF INFLATION The Company believes that inflation has not had a material effect on its operations. If, however, inflation increases in the future it could temporarily adversely affect the profitability of GTSI's sales under its Government fixed-price contracts, which generally preclude the Company from passing on inflation-related or other increases in product costs to Government customers during the term of a pre-existing contract. The Company mitigates this risk in part by often obtaining agreements from certain of its suppliers prohibiting them from increasing their prices to GTSI during the term of fixed-price contracts. SEASONAL FLUCTUATIONS AND OTHER RISK 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 affect the buying patterns of GTSI's prime contractor customers. These buying and funding patterns historically have had a significant positive effect on GTSI's bookings in the third quarter ending September 30 each year (the 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 -21- 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. As of December 31, 2001, the Company holds in its inventory approximately $1.7 million of business intelligence software. Contractually, the Company has the right to sell this business intelligence software to various Government agencies through June 30, 2003. The Company purchased this software in December, 1999. Through December 31, 2001, the Company has made no sales of this product. At this time, management believes that the Company will recover the cost of the business intelligence software inventory through sales in the normal course of business. If management is unable to sell the software, this would result in an impairment of all or a portion of the $1.7 million inventory balance. LIQUIDITY AND CAPITAL RESOURCES During 2001, the Company's operating activities used approximately $3.2 million of cash, compared to $7.6 million provided by operations in 2000. Significant factors affecting cash used in operating activities in 2001 include increases in accounts receivable of $6.6 million, lease receivables of $20.4 million, and inventories of $7.9 million, offset by a corresponding increase in accounts payable of $17.3 million, a decrease in other assets of $7.1 million, and a decrease of $3.3 million in other liabilities. The increase in accounts receivable was primarily attributed to an increase of $6.0 million in various receivables due from vendors. Trade accounts receivables are substantially unchanged year-over-year despite increased sales due to improved collection practices throughout 2001. The increase in lease receivables is due primarily to equipment leases to a prime contractor in support of its seat management contract with government agencies. The decrease in other assets was primarily due to a decrease in prepaid inventory of $7.0 million. The increase in accounts payable was primarily due to an increase in trade accounts payable of $18.7 million due to increased shipments in the period. Investing activities used cash of approximately $3.6 million in 2001 primarily for the Company's investment in a proprietary fulfillment system, designed to improve efficiency throughout the Company. The Company's financing activities provided approximately $6.9 million of cash during 2001 due to an increase in the Company's outstanding borrowing under its line-of-credit of $8.3 million and $2.9 million in proceeds from stock options exercised, partially offset by $2.8 million used to repurchase the common stock of the Company, and payment of $1.5 million on the remaining balance of notes payable. 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, -22- 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. On February 28, 2001, the Company and its banks executed the fifth amendment, effective March 7, 2001, which gave SunTrust Bank the right to establish a $7.5 million reserve to facilitate Automated Clearing House ("ACH") transfers. Consent was also given to authorize the Company's stock repurchase from third-party stockholders in an additional amount not to exceed $4.7 million provided the aggregate amount of stock held by the Company did not exceed $12.9 million. All other material terms of the Credit Agreement remained the same. As of December 31, 2001, 2000, and 1999, respectively, the Company's interest rate on the Credit Facility was 3.68%, 8.40%, and 8.24%, respectively. Amounts due to the Lenders of $20.2 million as of December 31, 2001 are classified as current liabilities up from $11.9 million as of December 31, 2000. The available portion of the Credit Facility was approximately $29.8 million at December 31, 2001, down from $38.1 million at December 31, 2000. Borrowing is limited to 85% of eligible accounts receivable. The Credit Facility is secured by substantially all of the Company's operating assets. 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 ratios. At December 31, 2001, the Company was in compliance with all financial covenants set forth in the credit facility. -23- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company has a $50.0 million Credit Facility indexed at LIBOR plus 1.75%. This variable rate Credit Facility subjects the Company to cash flow exposure resulting from changes in interest rates. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for historical information, all of the statements, expectations and assumptions contained in the foregoing material are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995, as amended) that involve a number of risks and uncertainties. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Private Securities Reform Act of 1995, as amended, and by other applicable securities laws. It is possible that the assumptions made by management -- including, but not limited to, those relating to favorable gross margins, a favorable mix of contracts, benefits of a more efficient operation, future contract awards, returns on new product programs, profitability, and increased control of operating costs -- may not materialize. Actual results may differ materially from those projected or implied in any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to revise publicly the forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risks factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on the Form 10-Q to be filed by the Company subsequent to this Annual Report on Form 10-K and any Current Reports on Form 8-K filed by the Company. -24- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Financial Statements and Schedule of GTSI Corp. and Subsidiary are filed as part of this Form 10-K. Supplemental unaudited quarterly financial data is included in Note 11 of Notes to Consolidated Financial Statements.
Index to Financial Statements and Schedule Page - ------------------------------------------ ---- FINANCIAL STATEMENTS: Report of Independent Public Accountants 26 Consolidated Balance Sheets as of December 31, 2001 and 2000 27 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 28 Consolidated Statements of Changes in Stockholders' Equity for the years ended 29 December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 30 2000 and 1999 Notes to Consolidated Financial Statements 31-46 SCHEDULE: Schedule II - Valuation and Qualifying Accounts 47
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. -25- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To GTSI Corp.: We have audited the accompanying consolidated balance sheets of GTSI Corp. and subsidiary (GTSI Corp., formerly Government Technology Services, Inc., a Delaware corporation) as of December 31, 2001 and 2000, 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, 2001. These financial statements are the responsibility of GTSI Corp.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GTSI Corp. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /S/ ARTHUR ANDERSEN LLP Vienna, Virginia February 14, 2002 -26- GTSI CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, (In thousands, except share amounts) 2001 2000 ------------------ ----------------- ASSETS Current assets: Cash $ 114 $ 79 Accounts receivable, net 138,385 131,780 Lease receivables, current 11,781 5,401 Merchandise inventories 61,434 53,570 Other current assets 10,238 18,269 ------------------ ----------------- Total current assets 221,952 209,099 Property and equipment, net 11,974 12,830 Lease receivables, net of current portion 17,378 3,367 Other assets 1,148 1,769 ------------------ ----------------- Total assets $ 252,452 $ 227,065 ================== ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 20,186 $ 11,925 Note payable, current - 500 Accounts payable 151,379 134,071 Accrued liabilities 8,977 10,249 Accrued warranty liabilities 6,442 8,695 ------------------ ----------------- Total current liabilities 186,984 165,440 Note payable, net of current portion - 1,000 Other liabilities 2,403 2,145 ------------------ ----------------- Total liabilities 189,387 168,585 ------------------ ----------------- 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 8,162,612 outstanding at December 31, 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 43,434 43,484 Retained earnings 27,419 22,933 Treasury stock, 1,643,472 shares at December 31, 2001, and 1,849,812 shares at December 31, 2000, at cost (7,837) (7,986) ------------------ ----------------- Total stockholders' equity 63,065 58,480 ------------------ ----------------- Total liabilities and stockholders' equity $ 252,452 $ 227,065 ================== ================= The accompanying notes are an integral part of these consolidated balance sheets.
-27- GTSI CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, (In thousands, except per share amounts) 2001 2000 1999 ------------ ------------ ---------- Sales $ 783,496 $ 677,754 $660,570 Cost of sales 718,370 617,621 610,463 ------------ ------------ ---------- Gross margin 65,126 60,133 50,107 Operating expenses 61,409 53,316 48,515 ------------ ------------ ---------- Income from operations 3,717 6,817 1,592 Interest and financing income (4,501) (3,206) (1,742) Interest expense 794 947 652 ------------ ------------ ---------- Interest income, net (3,707) (2,259) (1,090) ------------ ------------ ---------- Income before income taxes and cumulative effect of SAB No. 101 adoption 7,424 9,076 2,682 Income tax provision (benefit) 2,938 (2,008) - ------------ ------------ ---------- Net income before cumulative effect of SAB No. 101 adoption 4,486 11,084 2,682 Cumulative effect of SAB No. 101 adoption - (467) - ------------ ------------ ---------- Net income $ 4,486 $ 10,617 $ 2,682 ============ ============ ========== Net income per common share Basic Basic net income per share before cumulative effect of SAB No. 101 adoption $ 0.55 $ 1.23 $ 0.29 Cumulative effect per share of SAB No. 101 adoption - (0.05) - ------------ ------------ ---------- Basic net income per share $ 0.55 $ 1.18 $ 0.29 ============ ============ ========== Diluted Diluted net income per share before cumulative effect of SAB No. 101 adoption $ 0.50 $ 1.20 $ 0.29 Cumulative effect per share of SAB No. 101 adoption - (0.05) - ------------ ------------ ---------- Diluted net income per share $ 0.50 $ 1.15 $ 0.29 ============ ============ ========== Weighted average common shares outstanding Basic 8,144 9,021 9,271 ============ ============ ========== Diluted 9,049 9,225 9,314 ============ ============ ========== The accompanying notes are an integral part of these consolidated financial statements.
-28-
GTSI CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended December 31, 2001, 2000, and 1999 ---------------------------------------------------------------------------------------- Preferred Stock Common Stock ------------------------------------ Capital Total Shares Shares Excess of Retained Treasury Stockholders' (In thousands) Issued Amount Issued Amount Par Value Earnings Stock Equity ---------------------------------------------------------------------------------------- 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 Common stock repurchase - - - - - - (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 ========================================================================================= Stock options exercised - - - - (50) - 2,996 2,946 Common stock repurchase - - - - - - (2,847) (2,847) Net income - - - - - 4,486 - 4,486 ----------------------------------------------------------------------------------------- Balance, December 31, 2001 - $ - 9,806 $ 49 $ 43,434 $ 27,419 $(7,837) $ 63,065 ========================================================================================= The accompanying notes are an integral part of these consolidated financial statements.
-29- GTSI CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, (In thousands) 2001 2000 1999 -------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,486 $ 10,617 $ 2,682 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Cumulative effect of SAB No. 101 adoption - 467 - Depreciation and amortization 4,407 3,934 3,584 Loss on disposal of property and equipment 26 134 288 Deferred income tax provision (benefit) 1,572 (4,334) (440) (Decrease) increase in cash due to changes in assets and liabilities: Accounts receivable, net (6,605) (12,404) (21,702) Lease receivables (20,391) (8,768) - Merchandise inventories (7,864) (6,751) (4,939) Other assets 7,080 (8,809) 223 Accounts payable 17,308 30,200 28,389 Accrued liabilities and warranty liabilities (3,525) 4,276 1,553 Other liabilities 258 (974) 657 -------------- -------------- -------------- Net cash (used in) provided by operating activities: (3,248) 7,588 10,295 -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (3,577) (4,271) (5,004) Payments from BTG settlement - - 132 -------------- -------------- -------------- Net cash used in investing activities: (3,577) (4,271) (4,872) -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payment of) bank notes, net 8,261 2,446 (5,410) Payment of note payable (1,500) (500) - Common stock repurchase (2,847) (6,046) - Proceeds from stock options exercised 2,946 713 97 -------------- -------------- -------------- Net cash provided by (used in) financing activities: 6,860 (3,387) (5,313) -------------- -------------- -------------- Net increase (decrease) in cash 35 (70) 110 Cash at beginning of year 79 149 39 -------------- -------------- -------------- Cash at end of year $ 114 $ 79 $ 149 ============== ============== ============== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 907 $ 1,429 $ 571 Income taxes $ 2,509 $ - $ - The accompanying notes are an integral part of these consolidated financial statements.
-30- GTSI CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GTSI Corp. ("GTSI", or the "Company", formerly named Government Technology Services, Inc.) operates in a single business segment and resells 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." 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 acquisition was financed by the payment of cash of approximately $9.7 million and the issuance of 15,375 shares of Series C 8% Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"), having a liquidation preference of $15.4 million. On May 12, 1998, the Company's stockholders approved a proposal to convert the Series C Preferred Stock into 3,000,000 shares of Common Stock valued at $5.125 per share. The acquisition of the BTG Division was accounted for using the purchase method of accounting. The financial statements include the results of operation of the BTG Division since the acquisition date. On February 10, 1999, the Company entered into subsequent agreements with BTG related to the reacquisition of a portion of GTSI common stock 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 of which 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. The final payment under this note was made on July 16, 2001. Additionally, on October 23, 2000, the Company purchased the remaining 1.3 million shares of GTSI stock held by BTG for $4.25 a share or $5.53 million. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION. The consolidated financial statements include the accounts of GTSI and its wholly-owned subsidiary, Falcon. All significant intercompany accounts and transactions are eliminated in consolidation. ACCOUNTING ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The most significant estimates include the allowance for doubtful accounts, reserves for excess or obsolete inventory, reserves for asset impairment, and reserves for future costs to be incurred under the Company's warranty programs. REVENUE RECOGNITION. Revenue 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. The Company also recognizes revenue under sales-type lease arrangements in accordance with the provisions of Statements of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases." 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 -31- 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 was 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. Beginning with 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 resulted in the reduction of previously reported sales and cost of sales for our resold software maintenance agreements of approximately $13.4 million and $7.9 million for 2000 and 1999 respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS. At December 31, 2001 and 2000, the recorded values of financial instruments such as accounts receivable and payable and notes payable to banks approximated their fair values, based on the short-term maturities of these instruments. As of December 31, 2001 and 2000, the Company believes the carrying amount of its current and long-term lease receivables approximates its fair value since the lease receivables are discounted at an interest rate that approximates market. ACCOUNTS RECEIVABLE. Accounts receivable principally represents amounts collectible from the Government and prime contractors to the Government. Other accounts receivable result from items billed to suppliers under various agreements involving the sale of their products. The Company performs ongoing credit evaluations of its non-governmental customers but generally does not require collateral to support any outstanding obligation owed to GTSI. Allowances for potential uncollectible amounts are estimated and deducted from total accounts receivable. LEASE RECEIVABLES. The Company sells products to certain customers under sales-type lease arrangements. The Company accounts for its sales-type leases according to the provisions of SFAS No. 13, "Accounting for Leases," and accordingly, has recognized a current and long-term receivable, net of unearned finance income on the accompanying balance sheets. SALES OF LEASE RECEIVABLES. The Company periodically sells lease receivables to various, unrelated, financing companies. The Company accounts for its sales of lease receivables in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125." In accordance with the criteria set forth in SFAS No. 140, lease receivables amounting to $39.8 million and $6.7 million, in 2001 and 2000 -32- respectively, were accounted for as sales and, as a result, the related receivables have been excluded from the accompanying balance sheets. MERCHANDISE INVENTORIES. Merchandise inventories are valued at the lower of cost or market. Cost is determined using a weighted average method. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost less accumulated depreciation. 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, 2001, 2000, and 1999, is amortization expense of $ -, $ -, and $114,000, respectively. IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, consisting primarily of property and equipment and capitalized software, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed pursuant to Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Company determines impairment by comparing the carrying value of these long-lived assets to the estimated undiscounted future cash flows expected to result from the use of these assets and their eventual disposition. In the event the Company determines that an impairment exists, a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the assets, which is generally determined by using quoted market prices or valuation techniques such as the discounted present value of expected future cash flows, appraisals, or other pricing models as appropriate. ACCRUED WARRANTY LIABILITIES. The Company offers warranties on sales under certain products specific to the terms of the customer agreements. Standard warranties require repair or replacement of defective products reported during the warranty period at no cost to the customer. The Company records an estimate for warranty expenses related to costs based on its actual historical return rates and repair costs at the time of sale. INCOME TAXES. The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are computed based on the estimated future tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. SFAS No. 109 requires that a valuation allowance be established when necessary to reduce deferred tax assets to amounts expected to be realized. EARNINGS PER SHARE. In accordance with SFAS No. 128, "Earnings Per Share," the Company presents basic and diluted earnings per share on the face of the statements of operations for all periods presented. Basic earnings per share excludes dilution and is computed by dividing income available to common 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, 2001, 2000 and 1999, diluted weighted average common shares outstanding includes the dilutive effect of options if exercised of 905,000, 204,000 and 43,000 shares respectively. -33- INTEREST AND FINANCING INCOME. For the years ended December 31, 2001, 2000, and 1999, interest and financing income includes $2.2 million, $2.1 million, and $1.0 million, respectively, of financing income earned on prompt payment of vendor invoices and $1.7 million, $0.1 million, and $ -, respectively, of interest income from lease receivables. 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. CONCENTRATION OF CREDIT RISK. The Company's customers are primarily federal, state and local government agencies and prime contractors to the Government, including systems integrators. In 2001, 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 (agency) accounted for greater than 5% of the Company's 2001 sales, aggregate 2001 sales to the Government's Departments of the Army, Navy and Air Force were 17.2%, 9.6% and 20.1%, respectively, of GTSI's 2001 sales. OUTSTANDING CHECKS. Included in accounts payable at December 31, 2001 and 2000, are approximately $11.9 million and $14.0 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 2001 the Financial Accounting Standards Board (FASB) approved SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001. The amortization of existing goodwill will cease on December 31, 2001. Any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new method of testing goodwill and certain intangibles for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The Company's adoption of these standards will not have a material effect on its consolidated financial statements or its results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The purpose of this statement is to develop consistent accounting for asset retirement obligations and related costs in the financial statements and provide more information about future cash outflows, leverage and liquidity regarding retirement obligations and the gross investment in long-lived assets. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company will be required to implement SFAS No. 143 on January 1, 2003. The Company does not believe that adoption of this standard will have a material effect on its consolidated financial statements or its results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," which supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Though it retains the basic requirements of SFAS -34- No. 121 regarding when and how to measure an impairment loss, SFAS No. 144 provides additional implementation guidance. SFAS No. 144 applies to long-lived assets to be held and used or to be disposed of, including assets under capital leases of lessees; assets subject to operating leases of lessors; and prepaid assets. SFAS No. 144 also expands the scope of a discontinued operation to include a component of an entity, and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not believe that adoption of this standard will have a material effect on its consolidated financial statements or results of its operations. 2. ACCOUNTS RECEIVABLE The composition of accounts receivable as of December 31, 2001 and 2000, is as follows (in thousands):
2001 2000 --------------- --------------- Trade accounts receivable $ 117,815 $ 116,825 Vendor and other receivables 21,983 16,664 --------------- --------------- 139,798 133,489 Less: Allowance for uncollectible accounts (1,413) (1,709) --------------- --------------- Accounts receivable, net $ 138,385 $ 131,780 =============== ===============
3. LEASE RECEIVABLES The Company sold products to certain customers under sales-type lease arrangements. Leasing arrangements were for two to three years and carry market interest rates ranging from 7.83 to 10.20 percent. Total future minimum lease payments and unearned finance income due under the sales-type leases are as follows (in thousands):
Unearned Total Lease Finance Net Principal Payments Due Income Due ------------------ --------------- ------------------ 2002 $ 14,007 $ 2,226 $ 11,781 2003 12,939 1,165 11,774 2004 5,830 227 5,604 ------------------ --------------- ------------------ Total lease receivables $ 32,776 $ 3,617 $ 29,159 ================== =============== ==================
At December 31, 2001, 97.5% of the lease receivables were due from one customer. 4. PROPERTY AND EQUIPMENT The composition of property and equipment as of December 31, 2001 and 2000, is as follows (in thousands): -35-
2001 2000 --------------- ---------------- Office furniture and equipment $ 11,066 $ 10,286 Computer software and website development costs 15,289 12,685 Leasehold improvements 4,832 4,797 --------------- ---------------- 31,187 27,768 Less accumulated depreciation and amortization (19,213) (14,938) --------------- ---------------- Property and equipment, net $ 11,974 $ 12,830 =============== ================ Depreciation and amortization expense $ 4,407 $ 3,934 =============== ================
Depreciation and amortization expense on property and equipment and leasehold improvements was $4,407, $3,934, and $3,470, in 2001, 2000, and 1999 respectively. 5. 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. -36- On February 28, 2001, the Company and its banks executed the fifth amendment, effective March 7, 2001, which gave SunTrust Bank the right to establish a $7.5 million reserve to facilitate Automated Clearing House ("ACH") transfers. Consent was also given to authorize the Company's stock repurchase from third-party stockholders in an additional amount not to exceed $4.7 million provided the aggregate amount of stock held by the Company did not exceed $12.9 million. All other material terms of the Credit Agreement remained the same. As of December 31, 2001, 2000, and 1999, respectively, the Company's interest rate on the Credit Facility was 3.68%, 8.40%, and 8.24%, respectively. Amounts due to the Lenders of $20.2 million as of December 31, 2001, are classified as current liabilities up from $11.9 million as of December 31, 2000, and the available portion of the Credit Facility was approximately $29.8 million at December 31, 2001, up from $38.1 million at December 31, 2000. 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 ratios. At December 31, 2001, the Company was in compliance with all financial covenants set forth in the Credit Facility. The following information pertains to the notes payable to banks for the years ended December 31, 2001, 2000, and 1999 (dollars in thousands):
2001 2000 1999 ----------- ----------- ----------- Weighted average interest rate................... 5.7% 8.2% 7.5% Weighted average borrowings...................... $ 13,500 $ 9,600 $ 4,100
6. INCOME TAXES The components of the provision (benefit) for income taxes for the years ended December 31, 2001, 2000, and 1999 are as follows (in thousands):
2001 2000 1999 --------------- --------------- -------------- Current taxes : Federal $ 1,079 $ 1,923 $ 370 State 287 403 70 --------------- --------------- -------------- 1,366 2,326 440 Deferred taxes: Federal 1,398 (4,063) (397) State 174 (271) (43) --------------- --------------- -------------- 1,572 (4,334) (440) --------------- --------------- -------------- Income tax provision (benefit) $ 2,938 $ (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 -37- of these assets was now more likely than not. Accordingly, the valuation allowance was eliminated. Significant components of the Company's deferred taxes as of December 31, 2001 and 2000 were as follows (in thousands):
December 31, ---------------------------- 2001 2000 ---------------------------- Deferred tax assets: Accounts receivable and inventory allowances $ 546 $ 864 Intangible assets 1,512 1,682 Accrued warranty 2,460 2,985 Bid and proposal costs 502 446 Vacation accrual 388 326 Depreciation 368 61 Rent abatement 97 96 Other reserves 526 692 ---------------------------- Total deferred tax assets 6,399 7,152 ---------------------------- Deferred tax liabilities: Web site development costs and capitalized software 1,457 638 ---------------------------- Total deferred tax liabilities 1,457 638 ---------------------------- Net deferred tax assets reported $ 4,942 $ 6,514 ============================
The Company's effective tax rate for the years ended December 31, 2001, 2000, and 1999 differs from the statutory rate for federal income taxes as a result of the following factors:
2001 2000 1999 ------------------- --------------- ---------------- Statutory rate 34.0% 34.0% 34.0% State income taxes, net of Federal tax benefit 4.6% 4.5% 4.0% Valuation allowance 0.0% -59.3% -39.8% Other 1.0% -1.3% 1.8% ------------------- --------------- ---------------- 39.6% -22.1% - =================== =============== ================
7. STOCKHOLDERS' EQUITY STOCK OPTIONS AND WARRANTS. The Company has two combination incentive and non-statutory stock option plans, the "1996 Plan" and the "1994 Plan," that provide for the granting of options to employees (both plans) and non-employee directors (only under the 1996 Plan) to purchase up to 2,500,000 and 300,000 shares, respectively, of the Company's common stock. In addition, in May 1997 the Company's Board of Directors adopted the 1997 Non-Officer Stock Option Plan (the "1997 Plan"). The 1997 Plan provides for the granting of non-statutory stock options only to employees other than officers and directors to purchase up to 300,000 shares of the Company's common stock. Until its expiration on March 15, 1996, the Company had another combination incentive and non-statutory stock option plan, the "1986 Plan," that provided for the granting of options to employees to purchase up to 1,100,000 shares of the Company's common stock. Under the 1997, 1996, 1994 and 1986 Plans, options have a term of up to ten years, generally vest over four years and option prices are required to be at not -38- 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 Average Exercise Remaining Shares Per Share Price Per Share Life - ------------------------------------------------------------------------------------------------------------------------ 1997 PLAN: 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 Granted - Forfeited or canceled (13,792) 2.88-4.88 3.41 Exercised (112,917) 2.88-5.38 4.42 Outstanding at December 31, 2001 153,258 $2.88-5.25 $4.16 4.3 - ------------------------------------------------------------------------------------------------------------------------ 1996 PLAN: 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 Granted 233,000 4.00-6.40 6.03 Forfeited or canceled (55,916) 2.88-4.00 3.46 Exercised (252,084) 2.88-5.25 3.82 Outstanding at December 31, 2001 1,377,250 $2.81-6.40 $4.30 5.4 - ------------------------------------------------------------------------------------------------------------------------ 1994 PLAN: 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
-39-
Exercised (6,500) 2.88 2.88 Outstanding at December 31, 2000 249,500 2.88-12.88 5.70 Granted - - - Forfeited or canceled - - - Exercised (34,500) 2.88-3.50 3.24 Outstanding at December 31, 2001 215,000 $2.88-12.88 $ 6.10 3.8 - ------------------------------------------------------------------------------------------------------------------------ 1986 PLAN: 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 Granted - - - Forfeited or canceled (7,000) 10.25 10.25 Exercised - - - Outstanding at December 31, 2001 - $ - $ - - - ------------------------------------------------------------------------------------------------------------------------ NONSTATUTORY STOCK OPTIONS: 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 Granted 400,000 3.81-6.76 4.73 Forfeited or canceled (87,500) 3.81-5.25 4.34 Exercised (147,500) 3.75-5.25 4.21 Outstanding at December 31, 2001 1,160,000 $3.13-10.50 $ 4.60 4.5 - ------------------------------------------------------------------------------------------------------------------------ FOR ALL PLANS: Outstanding at December 31, 2001 2,905,508 $2.81-12.88 $ 4.55 4.9
-40-
OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 2001 OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------------------------------- ---------------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE RANGE OF EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE PRICES 12/31/01 LIFE(YEARS) PRICE 12/31/01 PRICE - -------------------- ----------------- ------------------ -------------- ------------------ -------------- $1.43 - 2.85 75,000 5.4 2.81 75,000 2.81 2.85 - 4.28 1,853,083 4.9 3.61 1,236,415 3.68 4.28-5.70 465,425 4.5 5.06 449,675 5.06 5.70-7.13 352,000 6.4 6.27 73,000 6.23 7.13-8.55 9,000 2.0 7.31 9,000 7.31 9.98-11.40 100,000 2.6 10.50 100,000 10.50 11.40-12.83 48,000 0.0 12.50 48,000 12.50 12.83-14.25 3,000 2.4 12.88 3,000 12.88 - -------------------- ----------------- ------------------ -------------- ------------------ -------------- $1.43- 14.25 2,905,508 4.9 4.55 1,994,090 4.64 ==================== ================= ================== ============== ================== ==============
The Company follows the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans, as allowed under SFAS No. 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 No. 123, the Company's net income and net income per share would have changed to the pro forma amounts (in thousands, except net income per share amounts) indicated below.
2001 2000 1999 ------------ ------------ ------------- Net income - pro forma $3,425 $9,697 $1,340 Net income per share - pro forma (basic) 0.42 1.08 0.14 Net income per share - pro forma (diluted) 0.38 1.05 0.14
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
2001 2000 1999 --------------- --------------- --------------- Average expected life 4.4 years 5.0 years 7.0 years Risk free interest rate 4.50% 4.95% 6.00% Volatility 75.9% 75.9% 68.0% Dividend yield - - -
At December 31, 2001, in the 1997 Plan, options for 95,925 shares were exercisable and 30,492 options were available for grant; in the 1996 Plan, options for 848,666 shares were exercisable and 859,916 options were available for grant; in the 1994 Plan, options for 161,999 shares were exercisable and 26,300 options were available for grant; and in the 1986 Plan, no options for shares were exercisable. -41- STOCK PURCHASE PLAN. The Company has established an Employee Stock Purchase Plan ("ESPP"). Eligible employees may elect to set aside, through payroll deduction, up to 15% of their compensation to purchase common stock of the Company. The maximum number of shares that an eligible employee may purchase during any offering period is equal to 5% of such employee's compensation for the 12 calendar-month period prior to the commencement of an offering period divided by 85% of the fair market value of a share of common stock on the first day of the offering period. The ESPP is implemented through one offering during each six-month period beginning January 1 and July 1. The ESPP purchase price is 85% of the lower of the fair market value of a share of common stock on the first day or the last day of the offering period. In the offering periods ended June 30, 2001 and December 31, 2001, employees purchased 68,465 and 57,563 shares, respectively, at prices of $2.68 and $5.02, respectively. In the offering periods ended June 30, 2000 and December 31, 2000, employees purchased 27,221 and 43,007, 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 shares, respectively, at prices of $3.51 and $2.34, respectively. The weighted average fair market value of shares under the ESPP was $3.75, $2.53, and $2.73 in 2001, 2000, and 1999, respectively. The Company has reserved 750,000 shares of common stock for the ESPP, of which 344,147 were available for future issuance as of December 31, 2001. 8. 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 December 31, 2001, the Company holds in its inventory approximately $1.7 million of business intelligence software. Contractually, the Company has the right to sell this business intelligence software to various Government agencies through June 30, 2003. The Company purchased this software in December, 1999. Through December 31, 2001, the Company has made no sales of this product. At this time, management believes that the Company will recover the cost of the business intelligence software inventory through sales in the normal course of business. If management is unable to sell the software, this would result in an impairment of all or a portion of the $1.7 million inventory balance. The Company leases office and warehouse space and various equipment under noncancelable operating leases. In October 1997, the Company executed a ten-year lease for an 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 recorded leasehold improvements in the amount of $2.0 million, as well as a liability for deferred rent of $2.0 million in conjunction with the build-out improvements. The asset and liability are being amortized over the life of the lease. The Company leases a warehouse and distribution facility in Chantilly, Virginia, in a separate 200,000 square-foot facility under a lease expiring in December 2006. 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 -42- its one year lease renewal option for the Chattanooga facilities effective April 1, 2001. Rent expense for the years ended December 31, 2001, 2000, and 1999 was approximately $2.1 million, $2.0 million, and $2.1 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 and 2002 for one year terms ending on December 31, 2001 and 2002, respectively. Collective future minimum lease payments as of December 31, 2001, are as follows (in thousands): Operating YEAR ENDING DECEMBER 31, Leases ------------------------ -------------- 2002 $ 2,017 2003 2,041 2004 2,049 2005 2,095 2006 2,081 Thereafter 2,515 -------------- Total minimum lease payments $ 12,798 ============== 9. 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 2001, 2000, and 1999 the Company contributed a total of $799,847, $662,164, and $242,917 to the Plan, respectively. 10. SEGMENT REPORTING In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires certain information about operating segments to be presented in the financial statements and in condensed financial statements of interim periods. The Company has determined that through December 31, 2001, it operated as one business segment as defined by SFAS No. 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 No. 131 is considered a single customer. -43- 11. QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables set forth selected unaudited quarterly financial data and the percentages such items represent of sales. The quarterly financial data reflect, in the opinion of the Company, all normal and recurring adjustments necessary to present fairly the results of operations for such periods. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends.
2001 QUARTERS ENDED ----------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------------------- ---------------------- --------------------- ------------------------- (In thousands, except per share data) Sales $ 149,288 100.0% $ 151,090 100.0% $ 203,077 100.0% $ 280,041 100.0% Cost of sales 136,523 91.4% 138,250 91.5% 186,899 92.0% 256,698 91.7% Gross margin 12,765 8.6% 12,840 8.5% 16,178 8.0% 23,343 8.3% Operating expenses 15,358 10.3% 15,697 10.4% 14,853 7.3% 15,501 5.5% (Loss) income from operations (2,593) -1.7% (2,857) -1.9% 1,325 0.7% 7,842 2.8% Interest income, net (655) -0.4% (679) -0.4% (1,945) -1.0% (428) -0.2% (Loss) income before income taxes (1,938) -1.3% (2,178) -1.4% 3,270 1.6% 8,270 3.0% Income tax (benefit) provision (747) -0.5% (839) -0.6% 1,260 0.6% 3,264 1.2% Net (loss) income (1,191) -0.8% (1,339) -0.9% 2,010 1.0% 5,006 1.8% Net (loss) income per common share Basic $ (0.15) $ (0.16) $ 0.24 $ 0.62 ============= ============= =============== ============= Diluted $ (0.15) $ (0.16) $ 0.22 $ 0.54 ============= ============= =============== ============= Weighted average common shares outstanding Basic 8,042 8,157 8,256 8,119 ============= ============= ============== ============= Diluted 8,042 8,157 9,225 9,258 ============= ============= ============== =============
-44-
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 ========= ========= ========= =========
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 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 of 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 of 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 of 2000, respectively. -45- 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, 2001: Allowance for bad debts $ 1,709 $ 171 $ (467) $ 1,413 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
(1) Adjustments and amounts written off during the period. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. -46- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item is incorporated by reference to the sections of the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 9, 2002 entitled "Election of Directors," "Executive Officers" and "Common Stock Ownership of Principal Stockholders and Management -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 9, 2002 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 9, 2002, 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 9, 2002, entitled "Election of Directors - Class 2 Nominees" and "Compensation of Directors" and "Executive Compensation and Other Information-Employment Agreements and Termination of Employment and Change of Control Arrangements," to be filed with the Commission. 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 25 of this Form 10-K. (2) FINANCIAL STATEMENT SCHEDULES See the Index included in Item 8 on Page 25 of this Form 10-K. (3) EXHIBITS 3.1 Restated Certificate of Incorporation (23) -47- 3.2 Bylaws, as amended (12) 10.1 Amended and Restated 1986 Stock Option Plan, (3), including forms of Stock Option Agreements and Stock Purchase Agreement (1)(2) 10.2 Employee Stock Purchase Plan, as amended to date (1)(5) 10.3 Officer Severance Plan, as amended to date (14) 10.4 GTSI Employees' 401(k) Investment Plan (2); and Amendment No. 1 (4); Amendment No. 2 and Amendment No. 3 thereto (14) 10.5 Lease dated August 11, 1995 between the Registrant and Security Capital Industrial Trust covering new distribution center facility (14) 10.6 Letter agreement dated January 16, 1996 between the Registrant and Microsoft Corporation (14) 10.7 1994 Stock Option Plan, as amended to date (17) 10.8 1996 Stock Option Plan (17) 10.9 Lease dated December 10, 1997 between the Registrant and Petula Associates, Ltd. covering new headquarters facility (excluding attachments and exhibits) (17) 10.10 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) (17) 10.11 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 (21) 10.12 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 (21) 10.13 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 (22) 10.14 Addendum, dated as of November 23, 1999 to Agreement for Wholesale Financing dated June 27, 1996, among the Registrant and Deutsche Financial Services Corp. (22) 10.15 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 (23) -48- 10.16 Employment Agreement dated January 1, 2001 between the Registrant and M. Dendy Young (1)(23) 10.17 Offer Letter dated November 29, 2000 between the Registrant and John T. Spotila (1)(23) 10.18 Offer Letter dated March 29, 1999 between the Registrant and Robert D. Russell (1)(23) 10.19 Separation Agreement dated October 8, 2001 between Registrant and Joel A. Lipkin (1) 10.20 Offer Letter dated June 28, 2001 between Registrant and Terri Allen (1) 23.1 Consent of Arthur Andersen LLP 99 Confirmation Letter -49- (1) Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. (2) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-41351) filed with the Commission on June 21, 1991. (3) Incorporated by reference to Pre-effective Amendment No. 3 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-41351) filed with the Commission on September 20, 1991. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-55090) filed with the Commission on November 25, 1992. (5) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19394) for the year ended December 31, 1992. (6) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19394) for the quarter ended March 31, 1993. (7) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19394) for the quarter ended September 30, 1993. (8) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19394) for the year ended December 31, 1993. (9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19394) for the quarter ended March 31, 1994. (10) Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on August 31, 1994, as amended by Form 8-K/A No. 1 filed with the Commission on October 31, 1994. (11) Incorporated by reference to the Registrant's Annual Report on Form 10-Q (File No. 0-19394) for the year ended December 31, 1994. (12) Incorporated by reference to the Registrant's Current Report on Form 10-K (File No. 0-19394) for the year ended December 31, 1996. (13) Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on January 17, 1995. (14) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19394) for the quarter ended June 30, 1995. (15) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19394) for the year ended December 31, 1995. (16) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19394) for the quarter ended March 31, 1996. (17) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19394) for the year ended December 31, 1997. -50- (18) Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on May 18, 1998. (19) Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on May 21, 1998. (20) Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Commission on August 5, 1998. (21) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19394) for the quarter ended June 30, 1998. (22) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19394) for the year ended December 31, 1999. (23) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19394) for the year ended December 31, 2000. (B) REPORTS ON FORM 8-K No reports on Form 8-K have been filed by the Registrant during the last quarter of the period covered by this Form 10-K. (C) EXHIBITS See the list of Exhibits in Item 14(a)(3) beginning on Pages 47 of this Form 10-K. (D) FINANCIAL STATEMENT SCHEDULES See the Index included in Item 8 on Page 25 of this Form 10-K. -51- 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 29, 2002 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 29, 2002 - ------------------------------------ Chief Executive Officer M. Dendy Young (Principal Executive Officer) and a Director /s/ Robert D. Russell Senior Vice President and March 29, 2002 - ------------------------------------ Chief Financial Officer Robert D. Russell (Principal Financial and Accounting Officer) /s/ Lee Johnson Director March 29, 2002 - ------------------------------------ Lee Johnson /s/ Steven Kelman Director March 29, 2002 - ------------------------------------ Steven Kelman, Ph.D. /s/ James J. Leto Director March 29, 2002 - ------------------------------------ James J. Leto /s/ Lawrence J. Schoenberg Chairman Emeritus March 29, 2002 - ------------------------------------ Lawrence J. Schoenberg /s/ John M. Toups Director March 29, 2002 - ------------------------------------ John M. Toups /s/ Daniel R. Young Director March 29, 2002 - ------------------------------------ Daniel R. Young
-52- EX-10.19 3 gex10_19-27428.txt SEPARATION AGREEMENT EXHIBIT 10.19 SEPARATION AGREEMENT EMPLOYMENT SEPARATION AGREEMENT THIS EMPLOYMENT SEPARATION AGREEMENT (the "Agreement"), which includes Exhibits A and B which are incorporated by this reference, is entered into by and between GTSI CORP., a Delaware corporation ("GTSI"), and JOEL A. LIPKIN ("Former Employee"). It will become effective as set forth in Section 14.18 (the "Effective Date"). RECITALS A. Former Employee ceased to be an employee and officer of GTSI on October 4, 2001 (the "Termination Date"). B. Former Employee desires to receive the benefits set forth in this Agreement. Former Employee's receipt of these benefits is contingent upon Former Employee's entering into this Agreement and undertaking the obligations it sets forth. C. GTSI and Former Employee desire to set forth their respective rights and obligations with respect to Former Employee's separation from GTSI and to settle and resolve all matters concerning Former Employee's past services to GTSI. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and conditions in this agreement, the receipt and sufficiency of which are hereby acknowledged, GTSI and Former Employee agree as follows: 1. DEFINITIONS The following terms shall have the meanings set forth below: 1.1 "INCLUDES;" "INCLUDING." Except where followed directly by the word "only," the terms "includes" or "including" shall mean "includes, but is not limited to," and "including, but not limited to," respectively. 1.2 "SEPARATION PERIOD." The term "Separation Period" shall mean the six months immediately following the Termination Date. 2. MUTUAL REPRESENTATIONS, WARRANTIES AND COVENANTS Each party represents, warrants and covenants (with respect to itself/himself only) to the other party that, to its/his respective best knowledge and belief as of the date of each party's respective signature below: 2.1 FULL POWER AND AUTHORITY. It/he has full power and authority to execute, enter into and perform its/his obligations under this Agreement; this Agreement, after execution by both parties, will be 1 a legal, valid and binding obligation of such party enforceable against it/him in accordance with its terms; it/he will not act or omit to act in any way which would materially interfere with or prohibit the performance of any of its/his obligations hereunder, and no approval or consent other than as has been obtained of any other party is necessary in connection with the execution and performance of this Agreement. 2.2 EFFECT OF AGREEMENT. The execution, delivery and performance of this Agreement and the consummation of the transactions it contemplates: (a) will not interfere or conflict with, result in a breach of, constitute a default under or violation of any of the terms, provisions, covenants or conditions of any contract, agreement or understanding, whether written or oral, to which either party is a party (including, in the case of GTSI, its bylaws and articles of incorporation as amended to date) or to which it/he is bound; and (b) will not conflict with or violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental agency or court having jurisdiction of such party. 3. CONFIDENTIALITY OBLIGATIONS DO NOT TERMINATE Former Employee acknowledges that any confidentiality, proprietary rights or nondisclosure agreement(s) in favor of GTSI which he may have entered into in connection with his employment (the "Nondisclosure Agreement") with GTSI will survive any termination of such employment, and nothing in this Agreement shall be construed as terminating, limiting or otherwise affecting any such Nondisclosure Agreement(s) or Former Employee's obligations thereunder. Without limiting the generality of the foregoing, no time period set forth in this Agreement shall shorten or limit the term of any such Nondisclosure Agreement(s), which term shall continue as set forth therein. 4. COMPANY PROPERTY On or before the effective date, Former Employee agrees to return to GTSI any and all GTSI assets or property which have come into his possession or control. 5. STOCK OPTIONS Exhibit A sets forth a complete list of any and all stock options, warrants and other rights to purchase capital stock of GTSI which have been previously issued to Former Employee and which have vested as of the date hereof. This list includes certain additional options over and above those which had vested as of the date of this Agreement. As consideration to Former Employee under this Agreement these additional options will vest as of the Effective Date. All other outstanding stock options granted to Former Employee will immediately expire upon the Effective Date. 6. PURCHASE OF STOCK BY GTSI Promptly after the Effective Date referred to in Section 14.18 below, Former Employee will exercise all of his options to purchase capital stock of GTSI, as listed on Exhibit A, and will then concurrently transfer good and merchantable title to all of such capital stock back to GTSI, free and clear of any liens, rights or claims of third parties, at a price of $6.25 per share. Upon receipt of clear title to the above capitol stock, GTSI will promptly complete the purchase and issue to Former Employee payment of the net proceeds from such transactions. 2 7. CONFIDENTIAL INFORMATION AND TRADE SECRETS 7.1 Former Employee recognizes, acknowledges and agrees that GTSI is the owner of proprietary rights in certain confidential sales and marketing information, programs, tactics, systems, methods, processes, compilations of technical and non-technical information, records and other business, financial, sales, marketing and other information and things of value. To the extent that any or all of the foregoing constitute valuable trade secrets and/or confidential and/or privileged information of GTSI, Former Employee further agrees as follows: (a) That, except with prior written authorization from GTSI's CEO or COO, for purposes related to GTSI's best interests, he will not directly or indirectly duplicate, remove, transfer, disclose or utilize, nor knowingly allow any other person to duplicate, remove, transfer, disclose or utilize, any property, assets, trade secrets or other things of value, including, but not limited to, records, techniques, procedures, systems, methods, market research, distribution arrangements, advertising and promotional materials, lists of past, present or prospective customers, and data prepared for, stored in, processed by or obtained from, an automated information system belonging to or in the possession of GTSI which are not intended for and have not been the subject of public disclosure. Former Employee agrees to safeguard all GTSI trade secrets in his possession or known to him at all times so that they are not exposed to, or taken by, unauthorized persons and to exercise his reasonable efforts to assure their safekeeping. This subsection shall not apply to information that (i) is now or later becomes generally known to the public or competitors of GTSI (other than as a result of a breach of this Agreement); (ii) Former Employee lawfully obtains from any third party who has lawfully obtained such information without any obligation of confidentiality; or (iii) is later published or generally disclosed to the public by GTSI. Former Employee shall bear the burden of showing that any of the foregoing exclusions applies to any information or materials. (b) That all improvements, discoveries, systems, techniques, ideas, processes, programs and other things of value made or conceived in whole or in part by Former Employee with respect to any aspects of GTSI's current or anticipated business while an employee of GTSI are and remain the sole and exclusive property of GTSI, and Former Employee has disclosed all such things of value to GTSI and will cooperate with GTSI to ensure that the ownership by GTSI of such property is protected. All of such property of GTSI in Former Employee's possession or control, including, but not limited to, all personal notes, documents and reproductions thereof, relating to the business and the trade secrets or confidential or privileged information of GTSI has already been, or shall be immediately, delivered to GTSI. 7.2 Former Employee further acknowledges that as the result of his prior service as an officer and employee of GTSI, he has had access to, and is in possession of, information and documents protected by the attorney-client privilege and by attorney work product doctrine, such as information relating to acquisitions and Board of Directors' correspondence. Former Employee understands that the privilege to hold such information and documents confidential is GTSI's, not his personally, and that he will not disclose the information or documents to any person or entity without the express prior written consent of the CEO or COO or Board of GTSI unless he is required to do so by law. 7.3 Former Employee's obligations set forth in this Section 7 shall be in addition to, and not instead of, Former Employee's obligations under any written Nondisclosure Agreement. 7.4 Former Employee acknowledges and agrees that the services rendered by him to GTSI in the course of his prior employment were of a special and unique character, and that breach by him of any provision of the covenants set forth in this Section 7 will cause GTSI irreparable injury and damages. 3 Former Employee expressly agrees that GTSI shall be entitled, in addition to all other remedies available to it whether at law or in equity, to injunctive and other equitable relief to secure their enforcement. 7.5 The parties expressly agree that the covenants contained in this Section 7 are reasonable in scope, duration and otherwise; however, if any of the restraints provided in these covenants are adjudicated to be excessively broad as to area or time or otherwise, such restraint shall be reduced to whatever extent is reasonable and the restraint shall be fully enforced in such modified form. Any provisions of such covenants not so reduced shall remain in full force and effect. 8. PROHIBITION AGAINST DISPARAGEMENT GTSI and Former Employee each agree that during the Separation Period any communication, whether oral or written, occurring on or off the premises of GTSI, made by it/him or its/his agent to any person or entity (including, without limitation, any GTSI employee, customer, vendor, supplier and any competitor and any person associated with any media) which in any way relates to his or to GTSI or to GTSI's directors, officers, management or employees: (1) will be truthful; and (2) will not disparage or undermine the reputation or business practices of Former Employee or GTSI or its directors, officers, management or employees. The only exceptions to the foregoing shall be: (1) truthful statements privately made to (a) the CEO or COO of GTSI, or their designated representatives, (b) any member of GTSI's Board of Directors, (c) GTSI's auditors, (d) inside or outside counsel of GTSI, (e) Former Employee's counsel or (f) Former Employee's spouse; (2) truthful statements lawfully compelled and made under oath; (3) truthful statements made to specified persons upon and in compliance with prior written authorization from or in connection with formal legal or administrative proceedings, GTSI's CEO or COO or Board; and (4) truthful statements made by GTSI's CEO or COO to specified persons upon and in compliance with prior authorization from Former Employee asking them to respond to inquiries from such specified persons. 9. COOPERATION Former Employee agrees that during the Separation Period he will cooperate fully and reasonably with GTSI in connection with any future or currently pending matter, proceeding, investigation, litigation or threatened litigation: (1) directly or indirectly involving GTSI (which, for purposes of this section, shall include GTSI and each of its current and future subsidiaries, successors or permitted assigns); or (2) directly or indirectly involving any director, officer or employee of GTSI (with regard to matters relating to such person(s) acting in such capacities with regard to GTSI business). Such cooperation shall include making himself available upon reasonable notice at reasonable times and places to consult with and to testify truthfully (at GTSI's expense for reasonable, pre-approved out-of-pocket travel costs in any action as reasonably requested by the CEO or COO or the Board of Directors. Former Employee further agrees to promptly notify GTSI's CEO or COO in writing in the event that he receives any legal process or other communication purporting to require or request him to produce testimony, documents, information or things in any manner related to GTSI, its directors, officers or employees, and that he will not produce testimony, documents, information or other things with regard to any pending or threatened lawsuit or proceeding regarding GTSI without giving GTSI prior written notice of the same and reasonable time to protect its interests with respect thereto. Former Employee further promises that during the Separation Period when so directed by the CEO or COO or the Board of Directors, he will make himself available to attend any such legal proceeding and will truthfully respond to any questions in any manner concerning or relating to GTSI and will produce all documents and things in his possession or under his control which in any manner concern or relate to GTSI. 4 10. SOLE ENTITLEMENT Former Employee acknowledges and agrees that his sole entitlement to compensation, payments of any kind, monetary and non-monetary benefits and perquisites with respect to his prior GTSI relationship (as an officer and employee) is as set forth in this Agreement, stock option agreements, and COBRA. 11. MUTUAL RELEASE OF CLAIMS 11.1 Former Employee forever releases and discharges GTSI and the predecessor corporation of GTSI as well as the successors, current or prior stockholders of record, officers, directors, heirs, predecessors, assigns, agents, employees, attorneys and representatives of each of them, past or present, from any and all cause or causes of action, actions, judgments, liens, indebtedness, damages, losses, claims, liabilities, expenses and demands of any kind or character whatsoever, whether known or unknown, anticipated or not anticipated, whether or not previously brought before any state or federal agency, court or other governmental entity which are existing on or arising prior to the date of this Agreement and which, directly or indirectly, in whole or in part, relate or are attributable to, connected with, or incidental to the previous employment of Former Employee by GTSI, the separation of that employment, and any dealings between the parties concerning Former Employee's employment existing prior to the date of execution of this Agreement, excepting only claims arising from a breach by GTSI of this Agreement including those obligations recited herein or to be performed hereunder, including but not limited to any and all claims of discrimination on account of sex, race, age, handicap, veteran status, national origin or religion, and claims or causes of action based upon any equal employment opportunity laws, ordinances, regulations or orders, including but not limited to Title VII of the Civil Rights Act of 1964 and the Age Discrimination In Employment Act, the Americans With Disabilities Act, Executive Order 11246, the Rehabilitation Act and any applicable state or local anti-discrimination statutes; claims for breach of any contract, agreement or promises made prior to this date; claims for wrongful termination actions of any type, breach of express or implied covenant of good faith and fair dealing; intentional or negligent infliction of emotional distress; claims for libel, slander or invasion of privacy; provided, however, that Former Employee and GTSI agree that Former Employee does not waive any rights or claims under the Age Discrimination In Employment Act that may arise after the execution of this document by Former Employee. This proviso is intended to exclude from release only claims "that arise after" execution of this document by Former Employee as provided for by the Older Workers Benefit Protection Act. This release also applies to any claims or rights that Former Employee might have or assert with respect to any claims or rights, if any, concerning any GTSI bonus plan applicable to GTSI officers. Nothing contained in this Section 11.1 shall affect any rights, claims or causes of action which Former Employee may have (1) as a stockholder of GTSI; (2) to indemnification by GTSI, to the extent required under the provisions of GTSI's Certificate of Incorporation, GTSI's By-Laws, the Delaware General Corporation Law, insurance or contracts, with respect to matters relating to Former Employee's prior service as an officer, employee and agent of GTSI; (3) to make claims against or seek contribution from anyone not released by the first sentence of this Section 11.1with respect to any matter or anyone released by the first sentence of this Section 11.1 with respect to any matter not released thereby; or (4) with respect to GTSI's performance of this Agreement. 11.2 GTSI forever releases and discharges Former Employee, and his heirs, from any and all cause or causes of action, actions, judgments, liens, indebtedness, damages, losses, claims, liabilities, expenses and demands of any kind or character whatsoever, whether known or unknown, anticipated or not anticipated, whether or not previously brought before any state or federal agency, court or other governmental entity which are existing on or arising prior to the date of this Agreement and which, directly or indirectly, in whole or in part, relate or are attributable to, connected with, or incidental to the 5 previous employment of Former Employee by GTSI, the separation of that employment, and any dealings between the parties concerning Former Employee's employment existing prior to the date of execution of this Agreement, excepting only claims arising from a breach by Former Employee of this Agreement including those obligations recited herein or to be performed hereunder. Nothing contained in this Section 11.2 shall affect any rights, claims or causes of action which GTSI may have to make claims against or seek contribution from anyone not released by the first sentence of this Section 11.2 with respect to any matter or anyone released by the first sentence of this Section 11.2 with respect to any matter not released thereby; or with respect to Former Employee's performance of this Agreement. 12. ASSIGNMENT Former Employee represents and warrants that he has not assigned, transferred or granted or purported to assign, transfer or grant any claims, entitlement, matters, demands or causes of action herein released, disclaimed, discharged or terminated, and agrees to indemnify and hold harmless GTSI from and against any and all costs, expense, loss or liability incurred by GTSI as a consequence of any such assignment, transfer or grant. 13. FORMER EMPLOYEE REPRESENTATIONS Notwithstanding that this Agreement may be entered into subsequent to the Termination Date, except as listed by Former Employee on Exhibit B, from the period beginning on the Termination Date to this Agreement's Effective Date, Former Employee represents and warrants that he has not acted or omitted to act in any respect which involves fraud or malfeasance towards GTSI or which directly or indirectly would have constituted a violation of Sections 7, 8 or 9 herein had this Agreement then been in effect. 14. MISCELLANEOUS 14.1 NOTICES. All notices and demands referred to or required herein or pursuant hereto shall be in writing, shall specifically reference this Agreement and shall be deemed to be duly sent and given upon actual delivery to and receipt by the relevant party (which notice, in the case of GTSI, must be from an officer of GTSI) or five days after deposit in the U.S. mail by certified or registered mail, return receipt requested, with postage prepaid, addressed as follows (if, however, a party has given the other party due notice of another address for the sending of notices, then future notices shall be sent to such new address): (a) If to GTSI: GTSI Corp. 3901 Stonecroft Boulevard Chantilly, Virginia 20151"0808 Attn: Chief Operating Officer (b) If to Former Employee: Joel A. Lipkin 1638 Montmorency Drive Vienna, VA 22182 14.2 LEGAL ADVICE AND CONSTRUCTION OF AGREEMENT. Both GTSI and Former Employee have received (or have voluntarily and knowingly elected not to receive) independent legal advice with respect to the advisability of entering into this Agreement and neither has been entitled to rely upon or has in fact relied upon the legal or other advice of the other party or such other party's counsel (or employees) in entering into this Agreement. In Former Employee's case, he is/was expressly advised by GTSI of his right to consult an attorney to review this Agreement. Each party has participated in the drafting and 6 preparation of this Agreement, and, accordingly, in any construction or interpretation of this Agreement, the same shall not be construed against any party by reason of the source of drafting. 14.3 PARTIES' UNDERSTANDING. GTSI and Former Employee state that each has carefully read this Agreement, that it has been fully explained to it/him by its/his attorney (or that it/he has voluntarily and knowingly elected not to receive such explanation), that it/he fully understands its final and binding effect, that the only promises made to it/him to sign the Agreement are those stated above, and that it/he is signing this Agreement voluntarily. 14.4 RECITALS AND SECTION HEADINGS. Each term of this Agreement is contractual and not merely a recital. All recitals are incorporated by reference into this Agreement. Captions and section headings are used herein for convenience only, are no part of this Agreement and shall not be used in interpreting or construing it. 14.5 ENTIRE AGREEMENT. This Agreement constitutes a single integrated contract expressing the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous oral and written agreements and discussions with respect to the subject matter hereof. Notwithstanding the foregoing, the parties understand and agree that any Nondisclosure Agreement and all other written agreements between Former Employee and GTSI are separate from this Agreement and, subject to the terms and conditions of each such agreement, shall survive the execution of this Agreement, and nothing contained in this Agreement shall be construed as affecting the rights or obligations of either party set forth in such agreements. 14.6 SEVERABILITY. In the event any provision of this Agreement or the application thereof to any circumstance shall be held by a court of competent jurisdiction to be invalid, illegal or unenforceable, or to be excessively broad as to time, duration, geographical scope, activity, subject or otherwise, it shall be construed to be limited or reduced so as to be enforceable to the maximum extent allowed by applicable law as it shall then be in force, and if such construction shall not be feasible, then such provision shall be deemed to be deleted herefrom in any action before that court, and all other provisions of this Agreement shall remain in full force and effect. 14.7 AMENDMENT AND WAIVER. This Agreement and each provision hereof may be amended, modified, supplemented or waived only by a written document specifically identifying this Agreement and signed by each party hereto. Except as expressly provided in this Agreement, no course of dealing between the parties hereto and no delay in exercising any right, power or remedy conferred hereby or now or hereafter existing at law, in equity, by statute or otherwise, shall operate as a waiver of, or otherwise prejudice, any such rights, power or remedy. 14.8 CUMULATIVE REMEDIES. None of the rights, powers or remedies conferred herein shall be mutually exclusive, and each such right, power or remedy shall be cumulative and in addition to every other right, power or remedy, whether conferred herein or now or hereafter available at law, in equity, by statute or otherwise. 14.9 SPECIFIC PERFORMANCE. Each party hereto may obtain specific performance to enforce its/his rights hereunder and each party acknowledges that failure to fulfill its/his obligations to the other party hereto would result in irreparable harm. 14.10 VIRGINIA LAW AND LOCATION. This Agreement was negotiated, executed and delivered within the Commonwealth of Virginia, and the rights and obligations of the parties hereto shall be construed and enforced in accordance with and governed by the internal laws (and not the conflict of 7 laws) of the Commonwealth of Virginia applicable to the construction and enforcement of contracts between parties resident in Virginia which are entered into and fully performed in Virginia. 14.11 FORCE MAJEURE. Neither GTSI nor Former Employee shall be deemed in default if its/his performance of obligations hereunder is delayed or become impossible or impracticable by reason of any act of God, war, fire, earthquake, strike, civil commotion, epidemic, or any other cause beyond such party's reasonable control. 14.12 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14.13 SUCCESSORS AND ASSIGNS. Neither party may assign this Agreement or any of its rights or obligations hereunder (including, without limitation, rights and duties of performance) to any third party or entity, and this Agreement may not be involuntarily assigned or assigned by operation of law, without the prior written consent of the non-assigning party, which consent may be given or withheld by such non-assigning party in the sole exercise of its discretion, except that GTSI may assign this Agreement to a corporation acquiring: (1) 50% or more of GTSI's capital stock in a merger or acquisition; or (2) all or substantially all of the assets of GTSI in a single transaction; and except that Former Employee may transfer or assign his rights under this Agreement voluntarily, involuntarily or by operation of law upon or as a result of his death to his heirs, estate and/or personal representative(s). Any prohibited assignment shall be null and void, and any attempted assignment of this Agreement in violation of this section shall constitute a material breach of this Agreement and cause for its termination by and at the election of the other party hereto by notice. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and, except as otherwise provided herein, their respective legal successors and permitted assigns. 14.14 PAYMENT PROCEDURE. All payments by GTSI to Former Employee or by Former Employee to GTSI may be by, at the paying party's election, cash, wire transfer or check. Neither party may reduce any payment or obligation due by any amount owed or believed owed to the other party under any other agreement, whether oral or written, now in effect or later entered into. 14.15 SURVIVAL. The definitions, representations and warranties herein as well as obligations set forth in Sections 7, 10, 11,12 and 14 shall survive any termination of this Agreement for any reason whatsoever. 14.16 NO ADMISSION. Neither the entry into this Agreement nor the giving of consideration hereunder shall constitute an admission of any wrongdoing by GTSI or Former Employee. 14.17 LIMITATION OF DAMAGES. Except as expressly set forth herein, in any action or proceeding arising out of, relating to or concerning this Agreement, including any claim of breach of contract, liability shall be limited to compensatory damages proximately caused by the breach and neither party shall, under any circumstances, be liable to the other party for consequential, incidental, indirect or special damages, including but not limited to lost profits or income, even if such party has been apprised of the likelihood of such damages occurring. 14.18 EFFECTIVE DATE. Former Employee expressly acknowledges that he has been advised that he has 14 days to review this Agreement before making a decision to execute it. This Agreement shall become effective upon execution of this Agreement by Former Employee (the "Effective Date"). 8 GTSI CORP. JOEL A. LIPKIN By: /s/ John T. Spotila Signature: /s/ Joel Lipkin ------------------------------------- ------------------------ Joel A. Lipkin Print Name: John T. Spotila ----------------------------- Print Title: Executive V.P. & C.O.O. ---------------------------- Date: October 8, 2001 Date: October 8, 2001 ----------------------------------- ------------------------------
EXHIBIT A PURCHASE OF STOCK BY GTSI - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------ GTSI Options Date Exercise Purchase Cost Payment Amount Vested Issued Cost Price Differential - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------ 45,000 3/25/1997 $5.25 $6.25 $1.00 $45,000.00 - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------ 9,000 3/25/1999 $3.75 $6.25 $2.50 $22,500.00 - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------ 30,000 8/3/1999 $4.00 $6.25 $2.25 $67,500.00 - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------ 6,667 11/2/1999 $2.88 $6.25 $3.37 $22,467.79 - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------ 1,500 7/10/200 $3.31 $6.25 $2.94 $4,410.00 - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------ TOTAL TOTAL 92,167 $161,877.79 - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------ - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------ Options Date Exercise GTSI Cost Payment Amount Vesting Issued Cost Purchase Differential Upon Price Execution - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------ 6,667 11/2/1999 $2.88 $6.25 $3.37 $22,469.79 - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------ 1,500 7/10/2000 $3.31 $6.25 $2.94 $4,410.00 - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------ TOTAL TOTAL 8,167 $26,879.79 - ----------------- -------------- ----------------- ----------------- ---------------- ------------------------
----------------- ----------------------- Total Options Total Payment Purchased Amount by GTSI ----------------- ----------------------- 100,334 $188,757.58 ----------------- ----------------------- 10 EXHIBIT B EXCEPTIONS (PURSUANT TO 13) --------------------------- None 11 EX-10.20 4 gex10_20-27428.txt OFFER LETTER EXHIBIT 10.20 OFFER LETTER OF TERRI ALLEN Revised 28 June 2001 Ms. Terri Allen 9932 Koupela Drive Raleigh, N.C. 27614 Dear Terri: GTSI Corp. ("GTSI") is pleased to offer you the position of Senior Vice President, Sales. In this position, you will report to John Spotila, Chief Operating Officer and General Counsel. We would like your employment to commence as soon as possible, preferably by the Projected Start Date referred to below. Your total annual target compensation will be $315,000. This will consist of a base salary of $215,000 ($8,958.33 semi-monthly) plus participation in the Sales Incentive Compensation Plan. At 100% goal attainment, your annual target bonus under this plan will be $100,000. GTSI will guarantee 100% of your pro-rated target bonus for the first three months of employment (i.e.: 3 equal installments of 8,333.33 per month). GTSI will discuss your incentive plan with you in more detail, during your first three months of active employment. As a further incentive for you, GTSI will pay for the moving expenses you incur during your relocation process from North Carolina to Virginia in an amount not to exceed $65,000. These expenses include household goods moving costs, temporary housing, as well as Realtor fees associated with the sale of your current residence for up to 12 months from your first day of employment. Please reference the attached policy for additional details. To qualify, expense amounts must be approved by GTSI prior to your obtaining services. Please understand that you will be required to repay all such expenses paid on your behalf should your employment with GTSI end voluntarily or for cause before the end of one year of employment. 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. We will provide you with detailed information concerning your complete benefits package upon employment. You will be eligible for three weeks of vacation for the year 2001 and for each calendar year thereafter. 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 - --------------------------- 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) 1 extended for five months to be coterminous with the salary. This severance plan expires 12 months from your date of hire. 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, we 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 30,000 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 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 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, we 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. Your employment at GTSI will be an "at will" relationship; that is, either party may end it at any time. Neither this offer of employment, nor your acceptance, nor our maintenance of personnel policies, procedures, and benefits creates a minimum term of employment. Please also be advised that it is GTSI's policy that employees should discuss salary issues only with their manager. For the first 120 days of employment, you will serve an initial introductory period. GTSI regards Customer Relationship Management (CRM) as a fundamental part of its strategy. CRM, as implemented through our contact database, is a unifying factor that manages all forms of communication with our customers, increasing the value of GTSI to our customers and the value of our customers to GTSI. To make this effective, we need the support and commitment of every GTSI employee. We will need your full cooperation in this regard. 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 of which you have furnished copies or written summaries to me, prior to your execution of this letter. - -------------------------------------------------------------------------------- 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. 2 This letter contains our entire understanding with respect to your employment at GTSI. It 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 or any actual or perceived agent. Terri, 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 the enclosed copy of this letter, and returning it to me as soon as possible along with your completed application of employment. Sincerely, Acknowledged/Accepted /s/ Bridget Atkinson - ------------------------------ Bridget Atkinson /s/ Terri Allen Date July 29, 2001 Vice President --------------------- Human Resources Terri Allen Projected Start Date: 11 July 2001 3 EX-23.1 5 gex23_1-27428.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 14, 2002 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, 333-44922, and 33-59478). ARTHUR ANDERSEN LLP Vienna, Virginia March 25, 2002 -67- EX-99 6 gex99-27428.txt CONFIRMATION LETTER EXHIBIT 99 CONFIRMATION LETTER GTSI Corp. 3901 Stonecroft Boulevard Chantilly, VA 20151 March 25, 2002 United States Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 RE: ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001; CONFIRMATION OF RECEIPT OF ASSURANCES FROM ARTHUR ANDERSEN LLP Ladies and Gentlemen: GTSI Corp. ("GTSI") engages Arthur Andersen LLP ("Andersen") as its independent public accountants. Andersen completed its audit work on our financial statements for the year ended December 31, 2001 on February 14, 2002, and Andersen's opinion with respect to our financial statements bear that date. However, we did not file our Annual Report on Form 10-K for the year ended December 31, 2001 until after March 14, 2002. We are aware of the contents of Release Nos. 33-8070 and 34-45590 and the Addition of Temporary Note 3T to Article 3 of Regulation S-X (the "Temporary Note"). Because the audit of our financial statements was completed prior to March 14, 2002, we are not certain that the Temporary Note applies to GTSI. However, in an abundance of caution, we have requested and received from Andersen a letter to the effect that Andersen has represented to GTSI that its audit was subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with the professional standards and that there was appropriate continuity of Andersen personnel working on audits, and availability of national and international office consultation. Based on the foregoing, we respectfully request that the Commission accept GTSI's financial statements as audited by Andersen in GTSI's Annual Report on Form 10-K for the year ended December 31, 2001. Respectfully submitted, /s/ Robert D. Russell ----------------------- Robert D. Russell Chief Financial Officer -68- -----END PRIVACY-ENHANCED MESSAGE-----