ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
GTSI’s primary business is conducted from its corporate headquarters complex and distribution center located in Northern Virginia. We do not own any real property. In December 2007, GTSI executed a new 10-year lease for a new corporate headquarters in Herndon, Virginia and moved into the approximately 104,000 square-foot facility in November 2008. In June 2008, GTSI relocated its datacenter to a separate location owned and operated by a third party. The 42-month agreement, which includes options for additional years, calls for the hosting and providing power services for a company installed datacenter. GTSI’s primary distribution and integration operations are located in a facility of approximately 142,000 square feet in Chantilly under a lease expiring in December 2011.
Our corporate headquarters is a multi-tenant facility located in Herndon, Virginia, approximately five miles from our distribution and integration center directly on the Route 28 corridor, across from Dulles International Airport. The facility has an efficient space plan that incorporates a number of resources that enhances our business development such as a Client Solutions Center, upgraded testing labs and meeting spaces to enable our employees to take advantage of a number of amenities that are provided to the tenants of the facility. GTSI has a number of lease options for current and future space commitments under its 10-year term lease.
We believe the facilities we are retaining are in good condition and suitable to meet our current needs for the conduct of our business. For additional information regarding our obligations under leases, see Note 15 of the consolidated financial statements in Part II, Item 8 of this Form 10-K.
On October 1, 2010, GTSI received notice from the SBA that GTSI was temporarily suspended from any future Federal Government contracting. The suspension notice cited that it was based on alleged evidence of the commission of fraud or a criminal offense in connection with GTSI obtaining, attempting to obtain and performing certain subcontracts with small businesses in 2007 and a lack of business integrity or business honesty that seriously or directly affected the present responsibility of GTSI as a government contractor. On October 19, 2010, GTSI entered into an administrative agreement with the SBA (the “SBA Agreement”) pursuant to which the SBA lifted the temporary federal contract suspension it had imposed on GTSI. As a result, GTSI is, subject to the SBA Agreement, engaged in its business with most of its existing clients and pursuing new Federal Government contracts.
Pursuant to the SBA Agreement, GTSI agreed that it will not obtain or attempt to obtain any new Federal Government contracts, subcontracts or any business, which in any capacity, whether directly or indirectly is intended to benefit small businesses, including task orders and options on existing contracts. This includes benefits in circumstances involving small businesses serving as prime contractors, joint ventures with small businesses and participating in the SBA’s mentor-protégé program. As also required by the SBA Agreement, GTSI has retained Debarment Solutions Institute, LLC, a SBA-approved monitor, to report regularly to the SBA on GTSI’s compliance with the SBA Agreement and applicable Federal Government contracting laws and regulations. The SBA Agreement will terminate on the earlier of (a) October 19, 2013, (b) the 90th day after the SBA’s Office of Inspector General’s notification of the completion of its continuing investigation of GTSI, or (c) the notification date of any proposed debarment of GTSI by the SBA.
In connection with the SBA Agreement, GTSI accepted the voluntary resignations of Scott Friedlander as Chief Executive Officer, President and a Director of GTSI, and Charles DeLeon as a Senior Vice President and General Counsel of GTSI, both effective as of October 26, 2010. In connection with their voluntary resignations the Company entered into separation agreements with Messrs. Friedlander and DeLeon. GTSI also suspended three other employees, who subsequently resigned. GTSI has conducted a review of its business ethics program that covers all employees and created a position and designated an employee as GTSI’s ethics officer who is responsible for managing GTSI’s business ethics program. At least once each year, GTSI will conduct an internal audit of its business practices, procedures, policies and internal controls for compliance with the SBA Agreement, GTSI’s code of business ethics and the special requirements regarding government contracting and report the results of such audit to the SBA and Debarment Solutions Institute, LLC.
The U.S. Attorney’s Office for the Eastern District of Virginia is reviewing the same subject matter that led to the SBA temporary suspension of GTSI from Federal Government contracting and the resulting SBA Agreement. GTSI has provided information in response to that inquiry.
GTSI will continue to cooperate with the continuing investigations of GTSI’s conduct as a subcontractor for certain small businesses. The continuing investigations of GTSI by the Federal Government may result in administrative, civil or criminal penalties, including a recommendation that may adversely affect or terminate GTSI’s ability to serve as a government contractor.
EyakTek Arbitration and Certain Related Matters
By letter dated May 24, 2010 the SBA advised EyakTek that its request for a voluntary early graduation from the SBA’s Business Development Program under Section 8(a) of the Small Business Act (“Section 8(a) BD Program”) was approved, effective May 10, 2010. EyakTek’s Operating Agreement provides that EyakTek shall dissolve and commence winding up and liquidating upon its graduation from the Section 8(a) BD Program, unless EyakTek’s members by an affirmative vote of at least 65% of the membership interests decide to continue EyakTek’s business operations. While GTSI has not voted its 37% EyakTek membership interests to continue EyakTek’s business operations, such operations have continued since EyakTek’s graduation from the Section 8(a) BD Program.
In September 2010, GTSI filed a complaint in the Chancery Court of Delaware against EyakTek; two of EyakTek’s three owner/members-The Eyak Corporation (“Eyak Corp.”), which owns 51% of EyakTek, and Global Technology LLC, which owns 12% of EyakTek, (collectively, the “Member Defendants”); and several of EyakTek’s directors and officers (the “Individual Defendants”). GTSI is the third member of EyakTek, as noted above GTSI owns 37% of EyakTek. GTSI’s complaint alleged that EyakTek and the Member Defendants had breached EyakTek’s Operating Agreement by taking certain actions without GTSI’s approval, which is required under the Operating Agreement, including actions leading to the making of an unsolicited offer to acquire GTSI and the continuation of the business operations of EyakTek after its graduation from the Section 8(a) BD Program. The complaint further alleged that the Individual Defendants had breached their fiduciary duties and the implied covenant of good faith and fair dealing by allowing EyakTek to take these actions. The complaint requested declaratory and injunctive relief, plus attorneys’ fees, against all of the defendants. On November 3, 2010, GTSI filed an amended complaint in the Chancery Court, which clarified the nature of relief sought and added an additional claim for breach of EyakTek’s Operating Agreement based upon EyakTek’s refusal to recognize GTSI’s designated director to EyakTek’s board of directors, among other matters.
In September 2010, EyakTek, the Member Defendants and Individual Defendants filed an arbitration demand with the American Arbitration Association asserting that GTSI’s claims in the Delaware Chancery Court are subject to arbitration under EyakTek’s Operating Agreement. The arbitration demand also asserted that GTSI’s filing of the Delaware complaint violated EyakTek’s Operating Agreement and constituted a breach of fiduciary duty and the implied covenant of good faith and fair dealing that GTSI allegedly owes to EyakTek as an EyakTek member. The arbitration demand seeks declaratory relief, damages, and attorneys’ fees against GTSI.
GTSI filed a motion in the Delaware Chancery Court to dismiss or stay the above-referenced arbitration. EyakTek, the Member Defendants and Individual Defendants filed a motion to dismiss or stay GTSI’s lawsuit. The Delaware Chancery Court heard both sets of motions in November 2010 and subsequently, based primarily on its interpretation of the arbitration provision of EyakTek’s Operating Agreement, determined that the arbitrator and not the court must decide whether the matter is to proceed in court or in arbitration. Thus, the court granted the defendants’ request to stay GTSI’s lawsuit. GTSI’s appeal of such decision was not successful.
Thereafter, GTSI submitted before the above-referenced arbitrator claims against and request for relief from EyakTek, the Member Defendants and Individual Defendants similar to GTSI’s above-referenced claims and request for relief denied by the Delaware Chancery Court. In addition, GTSI requested the arbitrator to enforce the above-referenced provisions of EyakTek’s Operating Agreement requiring the dissolution of EyakTek because of its graduation from Section 8(a) BD Program. While the outcome of these continuing disputes with EyakTek, the Member Defendants and Individual Defendants is currently unknown, such outcome may include a buyout of GTSI’s ownership in EyakTek, the dissolution of EyakTek, the continuation of EyakTek under its current Operating Agreement or under a modified Operating Agreement or some other alternative agreed upon by the various parties involved or ruled by the arbitrator.
By letter dated November 1, 2010, Eyak Corp., through the same counsel that represents EyakTek, advised GTSI that Eyak Corp. was the owner of 100 shares of GTSI’s common stock, and as a GTSI stockholder Eyak Corp. was demanding that GTSI investigate and take actions on matters set forth in the letter, including matters that were the subject of GTSI’s claims before the Delaware Chancery Court. Eyak Corp. alleged that GTSI’s failure to approve the continuation of EyakTek’s business operations constitutes a breach of fiduciary duties by GTSI’s directors and officers and demands that they cure this breach by approving the continuation of EyakTek’s business operations. Eyak Corp. also demanded that, if the alleged breach is not cured, GTSI investigate its prior disclosure related to GTSI’s disputes and litigation with EyakTek, make appropriate disclosures, including to the SBA and GTSI’s lenders, and investigate GTSI’s financial statements and account balances in respect of GTSI’s 37% interest in EyakTek. Further, Eyak Corp. demanded that GTSI bring action against GTSI’s employees, officers and directors responsible for the foregoing alleged actions to recover damages for GTSI. GTSI’s board of directors and a special committee of the Board are investigating this matter and will take such action as they deem necessary or appropriate and in the best interest of GTSI and its stockholders, in accordance with Delaware law.
Law Firm Investigations
According to a number of public announcements, several law firms are investigating, on behalf of purchasers of GTSI common stock, potential violations of the federal securities laws by GTSI with a focus on whether statements regarding GTSI’s business, prospects and operations were materially false and misleading when they were made. These press releases also stated the investigations were based on the SBA accusations that GTSI obtained government contracts not available to GTSI due to its size. The press releases also encouraged any person who invested in GTSI common stock between January 1, 2007 and October 1, 2010 to contact the law firms.
Other Matters
In addition to the matters discussed above, we have, in the normal course of business, certain claims, including legal proceedings, against us and against other parties. We believe the resolution of these other claims that we have in the normal course of our business will not have a material adverse effect on our results of operations or financial position. However, the results of any legal proceedings cannot be predicted with certainty. Further, from time-to-time, agencies of the Federal Government, including the SBA and the U.S. Attorney’s Office as discussed above, investigate whether our operations are being conducted in accordance with applicable regulatory requirements. Federal Government investigations of us, whether relating to government contracts or conducted for other reasons, may result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or may lead to suspension or debarment from future Federal Government contracting. Federal Government investigations often take years to complete.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The annual meeting of GTSI’s stockholders is scheduled to be held at 10:00 a.m. on April 28, 2011, at the Company’s headquarters located at 2553 Dulles View Drive, Suite 100, Herndon, VA.
Price Range of Common Stock
GTSI’s common stock is traded on the NASDAQ Global Market under the symbol GTSI. As of March 8, 2011, there were 287 holders of record of the Company’s common stock. The following stock prices are the high and low sales prices of GTSI’s common stock during the calendar quarters indicated.
GTSI’s transfer agent is American Stock Transfer & Trust Company, 59 Maiden Lane Plaza Level, New York, NY 10038; telephone 1-800-937-5449.
Dividends
The Company has never paid any cash dividends and does not anticipate paying cash dividends on its common stock in the foreseeable future. Also, as discussed in Note 8 to GTSI’s consolidated financial statements, included in Part II, Item 8 of this Form 10-K, the Amended Credit Agreement currently prohibits GTSI from paying any cash dividends.
Issuer Purchases of Equity Securities
On June 8, 2009, GTSI’s Board of Directors (“the Board”) authorized a program for periodic purchases of GTSI common stock through May 27, 2011 for an aggregate purchase price not to exceed $5 million, replacing GTSI’s stock repurchase program announced in December 2008. In connection with the SBA Agreement, GTSI Corp. entered into the Amended Credit Agreement with its lenders, dated October 19, 2010, which prohibits GTSI from purchasing any of its common stock. The Company did not purchase any of its common stock during the three months ended December 31, 2010, except for 1,985 shares acquired through net share settlements to cover tax withholdings in connection with restricted stock issuances.
Equity Compensation Plans
The following table summarizes information regarding GTSI’s equity compensation plans as of December 31, 2010.
PERFORMANCE GRAPH
The following graph is furnished pursuant to SEC Exchange Act regulations. It compares the annual percentage change in the cumulative total return on Common Stock with the cumulative total return of the NASDAQ Composite Index and a Peer Index of companies with the same four-digit standard industrial classification (SIC) code as the Company (SIC Code 5045 - Computers and Peripheral Equipment and Software)1 for the period commencing January 1, 2006 and ending December 31, 2010. The stock price performance shown on the graph below is not necessarily indicative of future price performance.
COMPARES 5-YEAR CUMULATIVE TOTAL RETURN
AMONG GTSI CORP., NASDAQ MARKET INDEX AND
SIC CODE INDEX
The 34 companies listed in SIC Code 5045 are: ADPT CORP.; AVNET, INC.; BEIJING CENTURY HEALTH MEDICAL, INC.; CIRTRAN CORPORATION; CISTERA NETWORKS, INC.; CONTINENTAL INFORMATION SYSTEMS CORPORATION; DEGAMA SOFTWARE SOLUTIONS, INC.; DIGITAL RIVER, INC.; DUALSTAR TECHNOLOGIES CORPORATION; EUROPEAN MICRO HOLDINGS, INC.; GTSI CORP.; HENRY JACK & ASSOCIATES, INC; HITACHI, LTD. ADR; HXT HOLDINGS, INC.; IB3 NETWORKS, INC.; IFS INTERNATIONAL HOLDINGS, INC.; INGRAM MICRO, INC.; INX, INC.; KONINKLIJKE PHILIPS ELECTRONICS, N.V. ADR; NAVARRE CORPORATION; NETTEL HOLDINGS, INC.; OFFICE DEPOT, INC.; PARLAY ENTERTAINMENT, INC.; PEERLESS SYSTEMS CORPORATION; PROGRESSIVE GAMING INTERNATIONAL CORPORATION; SECURE NETWORKS, INC.; SED INTERNATIONAL HOLDINGS, INC.; SOLERA HOLDINGS, INC; STAPLES, INC.; TECH DATA CORPORATION; TELECONNECT, INC.; TRANSNET CORPORATION; UNITED STATIONERS, INC.; AND WAYSIDE TECHNOLOGY GROUP, INC.
Since GTSI’s proxy statement last year, ADAPTEC, INC.; AMERICAN SOFTWARE, INC.; AVISTAR COMMUNICATIONS CORPORATION; BELL MICROPRODUCTS, INC.; CHINA TECHNOLOGY GLOBAL CORPORATION; CIRCUIT CITY STORES, INC.; MERISEL, INC.; PROXYMED, INC.; SCANSOURCE; SHARP HOLDING CORPORATION; SUPER LUCK, INC.; TRANS-LUX CORPORATION were deleted from SIC Code 5045 and the following 9 companies were added to SIC Code 5045:
ADPT CORP.; BEIJING CENTURY HEALTH MEDICAL, INC.; CISTERA NETWORKS, INC.; DIGITAL RIVER, INC.; EUROPEAN MICRO HOLDINGS, INC.; HXT HOLDINGS, INC.; IFS INTERNATIONAL HOLDINGS, INC.; SOLERA HOLDINGS, INC; TELECONNECT, INC.
The following selected financial data is qualified in its entirety by reference to, and should be read in conjunction with, the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K. The statement of operations data set forth below for the three years ended December 31, 2010, 2009 and 2008 and the balance sheet data as of December 31, 2010 and 2009 has been derived from GTSI’s audited consolidated financial statements that are included in Part II, Item 8 of this Form 10-K. The statement of operations data for the year ended December 31, 2007 and 2006 and the balance sheet data as of December 31, 2008, 2007 and 2006 is derived from audited consolidated financial statements of GTSI that are not included herein.
In reviewing the statement of operations data for the five years ended December 31, 2010, 2009, 2008, 2007 and 2006 and the balance sheet data as of December 31, 2010, 2009, 2008, 2007 and 2006 the following material items should be considered. Loss from operations, net loss and loss per share for the year ended December 31, 2010, our net income and earnings per share for the year ended December 31, 2008, and our loss from operations, net loss and loss per share for the year ended December 31, 2006 were materially affected by certain items, which affects the comparability of the information presented with other years’ results. Loss from operations for the year ended December 31, 2010 included charges of $4.6 million to cost of sales and $3.0 million of Selling, General and Administrative (“SG&A”) expenses related to the SBA Agreement as discussed in Note 15 to GTSI’s consolidated financial statements. Income tax benefit for the year ended December 31, 2008 included the reversal of the tax valuation allowance of $4.6 million. Cost of sales for the year ended December 31, 2006 included the positive effects of the de-recognition of aged accrued payables of $5.8 million; a change in estimate of vendor rebates of $1.1 million; and a change in estimate of vendor payable amounts of $4.0 million. As a result of these items, loss from operations and net loss for the year ended December 31, 2006 was $10.9 million lower. All notes referenced are in Item 8 of this Form 10-K. Our historical results are not necessarily indicative of our results for any future period.
Statement of Operations Data:
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, our audited consolidated financial statements and notes included in Part II, Item 8 of this Form 10-K. 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. We use the terms “GTSI,” “Company,” “we,” “our,” and “us” to refer to GTSI Corp. and its subsidiaries.
Overview
GTSI has more than 27 years of experience in selling IT products and solutions primarily to U.S. Federal, state and local governments and to prime contractors who are working directly on government contracts. We believe our key differentiators to be our strong brand among government customers, extensive contract portfolio, close relationships with wide variety of vendors, and a technology lifecycle management approach.
The IT solutions we offer to our customers have a strong product component, along with a services component on many solutions. We connect IT’s leading vendors, products and services inside the core technology areas most critical to government success by partnering with global IT leaders such as Cisco, Microsoft, Oracle, Hewlett Packard, Panasonic, Net App, Dell, Citrix and Hitachi. GTSI has strong strategic relationships with hardware and software industry leading OEMs and includes these products in the solutions we provide to our customers.
GTSI continues to develop and deliver information technology solutions that include products from OEM partners in the areas of Client End-Points, Networking, Data Center and Security. GTSI will continue to enable said solutions through consulting, integration, delivery and support services.
To help our customers acquire, manage and refresh this technology in a strategic and application-appropriate manner, GTSI has created a mix of professional and financial services capable of managing and funding the entire technology lifecycle. Additionally, GTSI offers leasing arrangements to allow government agencies to acquire access to technology on an evenly distributed operating expense basis, rather than on the much more budget-sensitive and discontinuous capital expense basis. We believe this model represents a distinctive advantage to our customers.
Summarized below are some of the possible material trends, demands, commitments, events and uncertainties currently facing the Company:
•
On October 1, 2010, GTSI received a notice from the Small Business Administration (“SBA”) that the SBA was temporarily suspending GTSI from any future Federal Government contracting. On October 19, 2010, GTSI entered into an administrative agreement with the SBA lifting the temporary suspension (the “SBA Agreement”). In addition, GTSI entered into an Amended Credit Agreement, dated October 19, 2010, with its lenders. See our Note 15 “Commitments and Contingencies” in Item 8 and “Legal Proceedings” included in Item 3, for a discussion of these matters. While we are continuing to work to minimize the impact on our future business, the temporary suspension and SBA Agreement reduced sales and gross margin during the fourth quarter of 2010. During the three months ended December 31, 2010, the Company recorded $4.6 million of lease write-offs as a result of the SBA Agreement and incurred additional SG&A expenses of approximately $1.4 million, $0.7 million and $0.9 million related to severance, legal, and monitoring and other expenses, respectively, in connection with the SBA Agreement. If the Company is unable to generate additional sales, mitigate impacted opportunities and reduce operating costs to offset for lost sales activity and added administrative costs related to the restrictions under the SBA Agreement it may have a material adverse effect on the Company’s business, results of operations and financial condition in future periods. The Company expects to incur additional SG&A expenses during the year ended December 31, 2011 related to legal, professional and monitoring and other expenses in connection with the SBA Agreement.
•
Resolution of our continuing disputes with EyakTek and its other members may have a material adverse effect on our financial performance, as discussed in Item 3
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GTSI had a $135 million Credit Facility indexed at the Prime Rate plus margin as of December 31, 2008. The Company terminated the Credit Facility on May 27, 2009 and entered into the $135 million Credit Agreement, which includes inventory financing. The Credit Agreement provides a “vendor and distributor program” under which we receive financing for inventory purchases from several of our largest CPC approved vendors with extended payment terms. The Credit Agreement carries an interest rate indexed at 1-Month LIBOR plus 300 basis points for revolving loan advances and 1-Month LIBOR plus 350 basis points for floor plan loans.
On October 19, 2010, GTSI entered into the Amended Credit Agreement to amend the Credit Agreement by reducing the total facility limit from an aggregate principal amount of $135 million to $100 million and the aggregate revolving loan facility limit from $60 million to $45 million.
This Amended Credit Agreement exposes us to market risk from changes in interest rates. For purposes of specific risk analysis, we use sensitivity analysis to determine the effects that market risk exposures may have.
Our results of operations may be affected by changes in interest rates due to the impact those changes may have on borrowings under our Amended Credit Agreement. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, which would require more cash to service our indebtedness. As of December 31, 2010, the Company had no outstanding loan balance (other than non-interest bearing floor plan loans) and an available credit of $49.9 million. As of December 31, 2009, the Company had no outstanding loan balance (other than non-interest bearing floor plan loans) and an available credit of $82.9 million.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS & SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To Board of Directors and Stockholders
of GTSI Corp.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders’ equity, and of cash flows present fairly, in all material respects, the financial position of GTSI Corp. and its subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and on the financial statement schedule based on our audits. We did not audit the financial statements of Eyak Technology, LLC, an investment accounted for under the equity method, for which GTSI Corp. reflected in other assets of $10.6 million and $8.0 million as of December 31, 2010 and 2009, respectively, and reflected income from affiliate of $7.9 million, $8.3 million, and $4.9 million reflected for the years ended December 31, 2010, 2009 and 2008, respectively. The financial statements of Eyak Technology, LLC were audited by other auditors whose report thereon has been furnished to us, and our opinion on the financial statements expressed herein, insofar as it relates to the amounts included for Eyak Technology, LLC, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 11, 2011
Report of Independent Registered Public Accounting Firm
Board of Directors
Eyak Technology, LLC
Dulles, Virginia
We have audited the accompanying Consolidated Balance Sheets of Eyak Technology, LLC and Subsidiary as of December 31, 2010 and 2009, and the related Consolidated Statements of Income, Members’ Equity, and Cash Flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eyak Technology, LLC and Subsidiary as of December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
/s/ Aronson LLC
Rockville, Maryland
March 10, 2011
GTSI CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
GTSI CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
GTSI CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2010, 2009 and 2008
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
GTSI CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
GTSI CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2010, 2009 and 2008
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Business
GTSI Corp. (collectively with its subsidiaries, “GTSI” or the “Company”) is an IT hardware and solutions provider, focusing on U.S. Federal, state, and local government customers and to prime contractors which are working directly on government contracts. GTSI addresses government technology challenges by providing IT products and solutions, a powerful collection of contracts, dedicated teams of certified professionals, flexible financing options, and ISO 9001:2008 registered global integration and distribution.
To help customers acquire, manage and refresh their technology in a strategic and application-appropriate manner, GTSI has created a mix of hardware, professional and financial services capable of managing and funding the entire technology lifecycle. The Company offers leasing arrangements to allow government agencies to acquire access to technology on an evenly distributed operating expense basis, rather than on the more budget-sensitive and discontinuous capital expense basis. Additionally, GTSI markets and sells products, primarily computer hardware and software, and solutions through its website, www.GTSI.com, providing a convenient, customized shopping experience to meet the unique and changing needs of its customers.
B. Risks and Uncertainties
There are many factors that affect the Company’s business and results of operations and many of such factors are beyond our control, including reliance on a small number of transactions for a significant portion of our sales and gross margins, increased competition, adverse changes in U.S. Federal Government spending, and infrastructure failures that may adversely affect our ability to process orders, track inventory and ship products in a timely manner.
The Company’s compliance with the administrative agreement entered into with the U.S. Small Business Administration (the “SBA Agreement”) and the outcome of the continuing related Federal Government investigations of GTSI, which may result in administrative, civil and criminal penalties, may have a material adverse effect on the Company’s business, financial condition and operating performance. Also, the Company’s failure to generate additional sales or reduce operating costs to offset for lost sales due to the restrictions in the SBA Agreement and the administrative costs related to complying with the SBA Agreement may have a material adverse effect on our financial performance.
In May 2009 the Company terminated the Credit Facility and entered into a new $135 million credit agreement with Castle Pines Capital LLC (“CPC”) and other lenders (the “Credit Agreement”). The Credit Agreement provides a “vendor and distributor program” under which we receive financing for inventory purchases from several of our largest CPC approved vendors with extended payment terms. In connection with the SBA Agreement, GTSI entered into an Amended Credit Agreement, dated October 19, 2010, with CPC and other lenders to amend and restate the Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement carries an interest rate indexed at 1-Month LIBOR plus 300 basis points for revolving loan advances and 1-Month LIBOR plus 350 basis points for floor plan loans. The Company relies on the Amended Credit Agreement as the primary vehicle to finance operations. The Amended Credit Agreement imposes financial and informational covenants on the Company. The Company was in compliance with all financial and informational covenants as set forth in the Amended Credit Agreement as of December 31, 2010. See Note 18 “Subsequent Events” for discussion of the extension from May 27, 2011 to May 27, 2012 of the maturity date of the Amended Credit Agreement in respect of CPC’s 74.08% of the total loan commitment thereunder.
While the Company believes that we will remain in compliance with all of the financial and information covenants under the Amended Credit Agreement, there can be no assurance that we will do so. A breach of any of the covenants or restrictions in the Amended Credit Agreement may result in an event of default under the Amended Credit Agreement. Such a default may result in the lenders discontinuing lending or declaring all outstanding borrowings, including inventory financing, to be due and payable. If any of these events occur, we would need to find additional or alternative financing, if available, to refinance any such accelerated obligations. There can be no assurance that such financing would be available.
C. Principles of Consolidation
The consolidated financial statements include the accounts of GTSI and its wholly owned subsidiaries, GTSI Financial Services, Inc., GTSI Professional Services, Inc. and Technology Logistics, Inc. All intercompany accounts and transactions have been eliminated. Investments in entities which the Company does not control but has the ability to exercise significant influence over are accounted for using the equity method of accounting.
D. Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year end, and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. Management’s estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, current conditions and available information. Significant items subject to such estimates and assumptions include valuation allowances for receivables and deferred tax assets, accrual of warranties, proportional performance estimates related to open professional service contracts, recoverability of capitalized internal use software, market value of inventory, accruals of liabilities and the fair value of stock options. Cost of sales in the accompanying Consolidated Statements of Operations is based on the direct cost method.
E. New Accounting Pronouncements
In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010, modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. The guidance relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting and modifies the manner in which the transaction consideration is allocated across the individual deliverables. Also, the guidance expands the disclosure requirements for revenue arrangements with multiple deliverables. This guidance removes tangible products from the scope of the software revenue guidance if the products contain both software and non-software components that function together to deliver a product’s essential functionality and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue guidance. The guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after June 15, 2010, and may be applied retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the adoption date.
Effective January 1, 2011 the Company adopted on a prospective basis for all new or materially modified arrangements entered into on or after January 1, 2011, the new accounting guidance for multiple-deliverable revenue arrangements and the new guidance related to the scope of existing software revenue recognition guidance. The guidance does not generally change the units of accounting for the Company’s revenue transactions. Most of the Company’s products and services qualify as separate units of accounting. The new guidance changes the level of evidence of standalone selling price required to separate deliverables in a multiple deliverable revenue arrangement by allowing a company to make its best estimate of the selling price (“ESP”) of deliverables when more objective evidence of selling price is not available and eliminates the use of the residual method. The guidance applies to multiple deliverable revenue arrangements that are not accounted for under other accounting pronouncements and retains the use of vendor specific objective evidence of selling price (“VSOE”) if available and third-party evidence of selling price (“TPE”), when VSOE is unavailable. The Company is still evaluating the impact from this adoption and does not expect that it will have a material impact on the Consolidated Financial Statements.
F. Revenue Recognition
GTSI recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured in accordance with FASB ASC 605-10, Revenue Recognition, Overall (“ASC 605-10”).
The Company recognizes software revenue pursuant to the requirements of FASB ASC 985-25, Software Revenue Recognition (“ASC 985-25”). In accordance with ASC 985-25, the Company recognizes software related revenue from re-selling third party software licenses that do not require significant production, modification or customization, when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured.
The Company enters into revenue arrangements that may consist of multiple deliverables of its products and services based on the needs of its clients. These arrangements may include any combination of hardware, software, services and/or financing.
The new guidance changes the level of evidence of standalone selling price required to separate deliverables in a multiple deliverable revenue arrangement by allowing a company to make its best estimate of the selling price (“ESP”) of deliverables when more objective evidence of selling price is not available and eliminates the use of the residual method. The guidance applies to multiple deliverable revenue arrangements that are not accounted for under other accounting pronouncements and retains the use of vendor specific objective evidence of selling price (“VSOE”) if available and third-party evidence of selling price (“TPE”), when VSOE is unavailable.
When a customer order contains multiple items such as hardware, software and services which are delivered at varying times, the Company determines whether the delivered items can be considered separate units of accounting as prescribed under FASB ASC 605-25, Revenue Recognition, Multiple-Element Arrangements (“ASC 605-25”). ASC 605-25 states that delivered items should be considered separate units of accounting if delivered items have value to the customer on a standalone basis and if delivery of undelivered items is probable and substantially in GTSI’s control.
Generally, the Company is able to establish fair value for all elements of the arrangement. In these instances, revenue is recognized on each element separately. However, if the delivered items do not have stand alone value to the customer without additional services provided, the Company recognizes revenue on the contract as a single unit of accounting, based on either the completed-contract or proportional-performance methods as described below. The Company allocated revenue from multiple-element arrangements to the multiple elements based on the relative fair value of each element, which was generally based on the relative sales price of each element when sold separately.
In most cases, revenue from hardware and software product sales is recognized when title passes to the customer. Based upon the Company’s standard shipping terms, FOB destination, title passes upon delivery of the products to the customer. However, occasionally GTSI’s customers will request bill-and-hold transactions in situations where the customer does not have space available to receive products or is not able to immediately take possession of products for other reasons, in which case GTSI will store the purchased equipment in its distribution center. Under ASC 605-10, the Company only recognizes revenue for bill-and-hold transactions when the goods are complete and ready for shipment, title and risk of loss have passed to the customer, management receives a written request from the customer for bill-and-hold treatment, and the ordered goods are segregated in GTSI’s warehouse from other inventory and cannot be used to fulfill other customer orders.
Revenue is recognized on service contracts using either the completed-performance or proportional-performance method depending on the terms of the service agreement. When there are acceptance provisions based on customer-specified subjective criteria, the completed-performance method is used. For contracts where the services performed in the last series of acts is very significant, in relation to the entire contract, performance is not deemed to have occurred until the final act is completed. Once customer acceptance has been received, or the last significant act is performed, revenue is recognized. The Company uses the proportional-performance method when a service contract specifies a number of acts to be performed and the Company has the ability to determine the pattern in which service is provided to the customer.
In many contracts, billing terms are agreed upon based on performance milestones such as the execution of a contract, the customer’s acceptance of the equipment and/or vendor for products, the partial or complete delivery of products and/or the completion of specified services. Payments received before delivery has occurred or services have been rendered are recorded as deferred revenue until the revenue recognition criteria are met. Deferred revenue from extended warranty contracts is recognized over the terms of the extended warranty.
The Company sells products to certain customers under sales-type lease arrangements for terms typically ranging from two to four years. The Company accounts for its sales-type leases according to the provisions of FASB ASC 840, Leases (“ASC 840”), and, accordingly, recognizes current and long-term lease receivables, net of unearned income, on the accompanying balance sheets. The present value of all payments is recorded as sales and the related cost of the equipment is charged to cost of sales. The associated interest is recorded over the term of the lease using the effective interest method.
In many cases, GTSI transfers these receivables to various unrelated financing companies and accounts for the transfers in accordance with FASB ASC 860, Transfers and Servicing (“ASC 860”). The transfer of receivables in which GTSI surrenders control is accounted for as a sale. To surrender control, the assets must be isolated from the Company, the transferee has the right to pledge or exchange the receivables and GTSI must not have an agreement that entitles and obligates the Company to repurchase the receivables or the ability to unilaterally cause the holder to return specific assets. If the transfer of receivables does not meet the criteria for a sale under ASC 860, the transfer is accounted for as a secured borrowing with a pledge of collateral. As a result, the Company has recorded certain transferred receivables and secured borrowings, within accounts receivable and long-term financing receivables, and as financed lease debt on the balance sheet.
The Company may also enter into sales arrangements with customers where the Company performs as an agent or broker without assuming the risks and rewards of ownership of the goods and services. The Company recognizes revenue from these transactions on a net basis in accordance with FASB ASC 605-45, Revenue Recognition, Principal Agent Considerations (“ASC 605-45”). The Company sells services performed by third parties, such as maintenance contracts, and recognizes revenue on a net basis at the time of sale.
GTSI offers rights of return to its customers on the products it sells. In accordance with FASB ASC 605-15, Revenue Recognition, Product (“ASC 605-15”), the Company records a sales return allowance based on historical trends in product return rates. The allowance for future sales returns as of December 31, 2010 and December 31, 2009 was $0.6 million and $0.7 million, respectively, and was recorded as a reduction of accounts receivable, net. The estimated cost of sales of $0.6 million and $0.6 million related to these sales were also deferred and recorded on the consolidated balance sheet as of December 31, 2010 and December 31, 2009, respectively, as deferred costs.
In accordance with FASB ASC 605-50, Revenue Recognition, Customer Payments and Incentives (“ASC 605-50”), the Company records cash received from a vendor as a reduction of inventory and a subsequent reduction in cost of sales, unless the cash is a reimbursement of a specific, identifiable, incremental cost related to selling the vendor’s product or the vendor receives, or will receive, an identifiable benefit in exchange for the cash.
We record vendor rebates received under its vendor incentive programs pursuant to a binding arrangement as a reduction of cost of sales based on a systematic and rational allocation that results in progress by the Company toward earning the rebate provided the amounts are probable and reasonably estimable. If the rebate is not probable and reasonably estimable, it is recognized as the milestones are achieved. In accordance with FASB ASC 605-45, Revenue Recognition, Principal Agent Considerations (“ASC 605-45”), the Company records freight billed to customers as sales and the related shipping costs as cost of sales.
In accordance with ASC 605-45, the Company collects and remits sales and property taxes on products and services that it purchases and sells under its contracts with customers, and reports such amounts under the net method in its consolidated statements of operations.
We capitalize and amortize costs that are directly related to the acquisition of a long-term contract and that would have not been incurred but for the acquisition of that contract (incremental direct acquisition costs). As long-term contracts are awarded the related up-front incentive costs, which are specific incremental costs associated with the acquisition of long-term contracts, are recorded as prepaid/deferred assets and amortized over the term of the contract or five years, whichever is shorter as a component of selling, general and administrative expenses.
G. Cash
Cash consists of all cash balances held in bank accounts at the end of the year. The Company places its temporary cash investments with high credit quality financial institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation (FDIC) insurance limit. Management monitors balances in excess of insured limits and believes they do not represent a significant credit risk to the Company.
H. Concentration of Credit Risk
Accounts receivable principally represents amounts collectible from the U.S. Federal, state and local governments and prime contractors that are working directly on government contracts. The Company periodically performs credit evaluations of its non-governmental customers and generally does not require collateral. As of December 31, 2010 and 2009, trade accounts receivable from the U.S. Federal Government were $64.3 million or 61.6% and $103.9 million or 73.4%, respectively. The Department of Defense accounted for 29.8% and 36.9% of total trade accounts receivable as of December 31, 2010 and 2009, respectively. One Federal agency and one prime contractor accounted for 12.2% and 10.7%, respectively, of total trade accounts receivable as of December 31, 2010. No other single U.S. Federal Government department, agency or prime contractor accounted for 10% or more of accounts receivable. Credit losses have been insignificant.
I. Allowance for Doubtful Accounts
The Company’s accounts receivable balances are net of an estimated allowance for doubtful accounts. The allowance for doubtful accounts is based on a specific identification of probable losses and an analysis of historical trade receivable write-offs. These estimates may differ from actual collection experience and are subject to adjustment. Therefore, the valuation reserve is re-evaluated quarterly and adjusted as information about the ultimate collectability of accounts receivable becomes available.
J. Software Development Costs
The Company capitalizes the cost of internally developed software that has a useful life in excess of one year in accordance with FASB ASC 350-40, Intangibles-Goodwill and Other Internal-Use Software (“ASC 350-40”). These costs consist of the fees paid to consultants and the salaries of employees working on such software development to customize it to the Company’s needs as well as any third party hardware/software purchases specific to development. Costs incurred in connection with the development of upgrades or enhancements that result in additional functionality are also capitalized and amortized over the useful life of the software once the enhancements are implemented. Software maintenance and training costs are expensed in the period in which they are incurred.
K. Impairment of Long-Lived Assets
Long-lived assets, consisting primarily of furniture, equipment and capitalized internal use software costs, are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable in accordance with FASB ASC 360, Property, Plant, and Equipment, (“ASC 360”). Recoverability of long-lived assets is assessed by a comparison of the carrying amount to the estimated future net cash flows expected to result from the use of the assets and their eventual disposition. If estimated undiscounted future net cash flows are less than the carrying amount, the asset is considered impaired and a loss would be recognized based on the amount by which the carrying value exceeds the fair value of the asset.
L. Accounts Payable
The Company purchases significant amounts of inventory each year and records an estimate of the payable based on the purchases as of the balance sheet date. As invoices are received, the Company records adjustments for actual prices paid.
M. Stock-based Compensation
On January 1, 2006, the Company adopted the fair value recognition provisions of FASB ASC 718, Compensation-Stock Compensation, (“ASC 718”), using the modified-prospective transition method. Under this method, compensation cost recognized in the years ended December 31, 2010, 2009 and 2008 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated.
Stock-based compensation expense for the years ended December 31, 2010, 2009, 2008 was $1.7 million, $2.4 million and $2.9 million, respectively. ASC 718 requires the cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those share based awards (“tax windfalls”) to be classified as financing cash flows. For the years ended December 31, 2010, 2009 and 2008, the tax impact from stock based compensation was a tax benefit of $0.7 million, $0.8 million and $1.1 million, respectively.
N. Income Taxes
The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected 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. ASC 740 requires that a valuation allowance be established when it is more likely than not that some portion or all of a deferred tax asset will not be realized. For the years ended December 31, 2010 and 2009, a tax provision of $1.1 million and $4.2 million, respectively, was recorded.
O. Advertising
The costs of advertising are expensed as incurred.
P. Fair Value of Financial Instruments
At December 31, 2010 and 2009, the recorded values of financial instruments such as trade receivables, accounts payable and Credit Facility borrowings approximated their fair values based on the short-term maturities of these instruments. As of December 31, 2010 and 2009, the Company believes the carrying amount of its current and long-term lease receivables and financed lease debt approximate their fair value.
Q. Equity Investments
Investments in joint ventures and entities over which the Company exercises significant influence but not control are accounted for using the equity method as prescribed by FASB ASC 323-30, Investments - Equity Method and Joint Ventures, Partnerships, Joint Ventures, and Limited Liability Entities, (“ASC 323-30”). Under this method of accounting, which generally applies to investments that represent a 20% to 50% ownership of the equity securities of the entities, the Company’s share of the net earnings or losses of the affiliated entities is included in other income and expenses.
R. Comprehensive Income
For the years ended December 31, 2010, 2009 and 2008, respectively, the Company had no components to adjust Net Income to reportable Comprehensive Income.
2. Accounts Receivable
Accounts receivable consists of the following as of December 31 (in thousands):
3. Long-term receivables and other assets
The Company’s long-term receivables and other assets were as follows as of December 31 (in thousands):
4. Lease and Finance Receivables
The Company leases computer hardware to customers generally under sales-type leases, which are classified as lease receivables in the accompanying audited Consolidated Balance Sheets, in accordance with FASB ASC 840 Leases. In connection with those leases, the Company may sell related services, software and maintenance to its customers, which are classified as finance receivables in the accompanying audited Consolidated Balance Sheets. The terms of the receivables from the sale of these related services are often similar to the terms of the leases of computer hardware; that is, receivables are interest bearing and are often due over a period of time that corresponds with the terms of the leased computer hardware.
The Company recognized revenue of $68.2 million, $99.5 million and $85.1 million for the years ended December 31, 2010, 2009 and 2008, respectively, from sales-type leases and related transactions. As of December 31, 2010, the Company had current and long-term outstanding lease and finance receivables of $29.1 million, compared with $63.3 million as of December 31, 2009.
As a result of the SBA Agreement, certain multiyear financing agreements were modified or terminated, which resulted in a $4.6 million write-off of net financing receivables. In addition, some other multiyear financing agreements were restructured to become due within the next 12 months, resulting in a $22.0 million decrease in accounts receivable and long-term receivables along with a corresponding $22.0 million decrease in accrued liabilities and other liabilities.
Future minimum payments for lease and finance receivables were as follows as of December 31, 2010 (in thousands):
The Company’s investments in lease receivables were as follows as of December 31 (in thousands):
The Company’s investment in finance receivables were as follows as of (in thousands):
5. Transferred Receivables and Financed Lease Debt
The Company transferred gross financing receivables of $58.1 million and $69.2 million for the years ended December 31, 2010 and 2009, respectively, to third parties that meet the sale criteria under FASB ASC 860, Transfers and Servicing. In exchange, for the years ended December 31, 2010 and 2009, the Company received cash of $55.1 million and $64.5 million and recorded a profit on the sales of $5.5 million and $6.5 million, respectively. The receivables are transferred non-recourse to third parties who accept all credit, interest, and termination risk from the underlying issuer. Continuing involvement with the transferred assets is limited only to billing and remitting payments on behalf of some third parties at the specific direction of the third parties.
6. Inventory
Inventory (composed of finished goods) is valued at the lower of cost or market. Cost is determined using the average cost method. The Company writes down its inventory for obsolete or excess inventory based on assumptions about future demand and market conditions. For the years ended December 31, 2010, 2009 and 2008, there were no significant charges recorded for obsolete or excess inventory.
7. Depreciable Assets
Depreciable assets are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over estimated useful lives. Furniture and equipment useful lives range from three to ten years. Purchased and developed computer software for internal use, including the GTSI Enterprise Resource Management System (“GEMS”), are amortized over expected lives ranging from three to seven years. The useful life for leasehold improvements is the lesser of the term of the lease or the life of the improvement, which range from three to ten years. Costs for maintenance and repairs are charged to expense when incurred. Depreciable assets consist of the following as of December 31 (in thousands):
Depreciation expense, including amortization of capitalized software development costs, was $3.8 million, $3.9 million and $3.4 million for the years ended 2010, 2009 and 2008, respectively. Amortization of software costs was $2.9 million in 2010, $2.8 million in 2009 and $2.6 million in 2008. During 2010 and 2009, the Company capitalized $0.3 million and $0.9 million, respectively, of development costs related to GEMS. In addition, during both 2010 and 2009, the Company capitalized less than $0.1 million of purchased software for internal use. The total net book value of capitalized software development costs was $4.8 million and $7.6 million as of December 31, 2010 and 2009, respectively.
For years ended December 31, 2010 and 2008, the Company had an impairment loss, related to internally developed software, of $0.2 million and $0.1 million, respectively, under FASB ASC 360, Property, Plant & Equipment. There were no indicators of impairment under FASB ASC 360 during 2009.
There were no significant retirements or disposals of fully depreciated assets and related accumulated depreciation during 2010. During 2009, the Company retired or disposed or a total of $15.1 million of depreciable assets and $15.1 million of related accumulated depreciation.
8. Credit Facility, Credit Agreement and Amended Credit Agreement
In 2006, the Company entered into a $135 million credit agreement with a group of lenders (the “Credit Facility”). This Credit Facility was terminated on May 27, 2009 and the related unamortized deferred financing costs of $1.5 million were written-off.
On May 27, 2009, we entered into a $135 million credit agreement with Castle Pines Capital LLC (“CPC”) and other lenders (the “Credit Agreement”). The Credit Agreement provides a “vendor and distributor program” under which we receive financing for inventory purchases from several of our largest CPC approved vendors with extended payment terms.
On October 1, 2010, GTSI received a notice from the SBA that GTSI was temporarily suspended from any future Federal Government contracting. On October 19, 2010, GTSI entered into the SBA Agreement, which among other things, terminated GTSI’s temporary suspension from Federal Government contracting.
In connection with the SBA Agreement, GTSI entered into the Amended Credit Agreement, dated as of October 19, 2010, with its lenders to amend the Credit Agreement by reducing the total facility limit from an aggregate principal amount of $135 million to $100 million and the aggregate revolving loan facility limit from $60 million to $45 million. The Amended Credit Agreement carries an interest rate indexed at 1-Month LIBOR plus 300 basis points for revolving loan advances and 1-Month LIBOR plus 350 basis points for floor plan loans. Borrowing under the Amended Credit Agreement at any time is limited to the lesser of (a) $100 million or (b) a collateral-based borrowing base (eligible accounts receivable and inventory balances) less outstanding obligations relating to any borrowings, floor plan loans and stand-by letters of credits. Further, the Amended Credit Agreement prohibits GTSI from purchasing any of its common stock.
As of December 31, 2010, borrowing capacity and availability under the Amended Credit Agreement was as follows (in thousands):
As of December 31, 2010, the Company had no outstanding loan balance (other than non-interest bearing floor plan loans) under the Amended Credit Agreement and as reflected above, available credit thereunder of $49.9 million.
The Amended Credit Agreement contains customary covenants limiting our ability to, among other things (a) incur debt; (b) make guarantees or grant or suffer liens; (c) repurchase our common stock, (d) make certain restricted payments (including cash dividends), purchase other businesses or investments; (e) enter into transactions with affiliates; (f) dissolve, change names, merge or enter into certain other material agreement regarding changes to the corporate entities; (g) acquire real estate; and (h) enter into sales and leaseback transactions.
The financial covenants of the Amended Credit Agreement require us, among other restrictions, to:
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Maintain Tangible Net Worth not less than or equal to $45 million as of the end of each fiscal month
The Amended Credit Agreement provides, as did the Credit Agreement, that the existence of a material proceeding against the Company or the Company’s failure to be in compliance with all material laws constitutes an event of default under the agreement. Furthermore, the Amended Credit Agreement contains information covenants requiring the Company to provide the lenders certain information. The Company was in compliance with all financial and informational covenants as set forth in the Amended Credit Agreement as of December 31, 2010. If the Company fails to comply with any material provision or covenant of our Amended Credit Agreement, it would be required to seek a waiver or amendment of covenants.
The Company currently relies on its Amended Credit Agreement as its primary vehicle to finance its operations. See Note 18 “Subsequent Events” for discussion of the extension from May 27, 2011 to May 27, 2012 of the maturity date of the Amended Credit Agreement in respect of CPC’s 74.08% of the total loan commitment thereunder.
The Company defers loan financing costs and recognizes these costs throughout the term of the loans. The Company deferred $0.1 million of loan financing costs related to the Credit Agreement during the second quarter of 2009. Deferred financing costs as of December 31, 2010 and 2009 were less than $0.1 million and $0.1 million, respectively.
9. Accrued Liabilities
Accrued liabilities consist of the following as of December 31 (in thousands):
10. Stockholders’ Equity
Purchase of Capital Stock
On June 8, 2009, the Board authorized a program for periodic purchases of common stock through May 27, 2011 for an aggregate purchase price not to exceed $5 million, replacing the stock repurchase program announced in December 2008.
In 2010, under its repurchase program, the Company purchased 154,377 shares of its common stock through the nine months ended September 30, 2010 and throughout the year acquired 20,816 shares of its common stock related to net share settlements to cover tax withholdings. Under the Amended Credit Agreement the Company is prohibited from purchasing its common stock. In 2009, under its repurchase program, the Company purchased 122,329 shares of its common stock throughout the year and in April 2009, the Company purchased 316,861 shares from one seller in a private transaction. In addition, the Company acquired 23,905 shares of its common stock related to net share settlements to cover tax withholdings. The Company did not purchase any of its common stock in 2008, except for 24,041 shares acquired through net share settlements to cover tax withholdings.
Stock-Based Compensation
Stock Incentive Plans
The Company has one stockholder approved combination incentive and non-statutory stock incentive plan, which is named the Amended and Restated 2007 Stock Incentive Plan (“2007 Plan”). The 2007 Plan provides for the granting of options to employees and non-employee directors to purchase up to 4,500,000 shares of the Company’s common stock. The 2007 Plan also permits the grant of restricted stock and restricted stock units to its employees and non-employee directors as well as stock appreciation rights (“SARs”).
Under the 2007 Plan, options have a term of up to ten years, generally vest over four years and option prices are required to be at not less than 100% of the fair market value of the Company’s common stock at the date of grant and, except in the case of non-employee directors, must be approved by the Board of Directors or its Compensation Committee. The vesting period for restricted stock and restricted stock units is determined by the Compensation Committee on an individual award basis. GTSI recognizes stock-based compensation expense for these graded vesting awards on a straight-line basis over the requisite service period for the entire award, which is equal to the vesting period specified in the option agreement.
Valuation Assumptions
The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option valuation model that uses the assumptions noted in the following table. Expected volatilities are based on the historical volatility of GTSI’s stock over the historical period of time equal to the expected term of the options. The Company uses historical data to estimate option exercises, employee terminations and award forfeitures within the valuation model. The expected term of options granted has been determined based on historical exercise behavior and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the U.S. Treasury rates at the time of grant that approximates the expected term of the option. The expected dividend assumption is zero as the Company is currently restricted under its Amended Credit Agreement from issuing dividends on its common stock and it does not expect to declare a dividend in the foreseeable future. The fair value of the Company’s stock based option awards to employees was based on the following weighted-average assumptions for the years ended December 31:
Stock Options
A summary of option activity under the Company’s stock incentive plans as of December 31, 2010, 2009 and 2008, and related changes during the years then ended is presented below (in thousands):
The weighted-average grant-date fair value of options granted during 2010, 2009 and 2008 was $5.22, $6.40 and $5.65, respectively. The total intrinsic value of options exercised during 2010, 2009 and 2008 was $0.1 million, $0.1 million and $0.1 million, respectively. For the years ended December 31, 2010, 2009 and 2008, stock compensation expense related to stock options was $0.4 million, $0.7 million and $0.6 million, respectively.
For the years ended December 31, 2010, 2009 and 2008, the tax impact from stock based compensation was a tax benefit of $0.7 million, $0.8 million and $1.1 million, respectively.
Restricted Shares
In 2010, the Company issued restricted stock grants of 26,664 shares of the Company’s common stock to the non-employee Board members, which will vest in April 2011, and no shares of restricted stock to employees. During 2009, the Company issued restricted stock grants of 26,664 shares of the Company’s common stock to the non-employee Board members, which vested in April 2010, as well as 36,539 shares of restricted stock to employees, scheduled to vest in equal installments over a period of five years from the grant date. During 2008, the Company issued restricted stock grants of 26,664 shares of the Company’s common stock to the non-employee Board members, which vested in April 2009, as well as 17,821 shares of restricted stock to employees that will vest in equal installments over a period of five years from the grant date. Compensation is recognized on a straight-line basis over the vesting period of the grants. During 2010, 2009 and 2008, $0.6 million, $0.8 million and $1.1 million, respectively, was recorded as stock compensation expense for restricted stock.
Holders of non-vested restricted stock have similar dividend and voting rights as common stockholders. The fair value of non-vested restricted stock is determined based on the closing trading price of the Company’s shares on the grant date. A summary of the status of the Company’s non-vested shares as of December 31, 2010, 2009 and 2008, and related changes during the years then ended is presented below (in thousands):
Stock Appreciation Rights (“SARs”)
In 2010, there were no SARs granted as part of the 2007 Plan. During 2009 and 2008, there were 76,179 and 42,023 SARs granted, respectively, as part of the 2007 long term incentive plan. All SARs are to be settled in GTSI stock. During 2010, 2009 and 2008, $0.7 million, $0.9 million and $1.2 million, respectively was recorded as stock compensation expense for SARs. A summary of SARs activity under the Company’s stock incentive plans as of December 31, 2010, 2009 and 2008, and related changes during the years then ended is presented below (in thousands):
Unrecognized Compensation
As of December 31, 2010, there was $2.0 million of total unrecognized compensation cost related to non-vested stock-based awards, which consisted of unrecognized compensation of $0.6 million related to stock options, $0.6 million related to restricted stock awards and $0.8 million related to SARs. The cost as of December 31, 2010 for unrecognized compensation related to stock options, restricted stock awards, and SARs is expected to be recognized over a weighted average period of 2.62 years, 1.64 years and 2.26 years, respectively. During 2010, approximately 167,919 stock option and SAR awards and 83,485 restricted stock awards vested.
As of December 31, 2009, there was $4.8 million of total unrecognized compensation cost related to non-vested stock-based awards, which consisted of unrecognized compensation of $1.2 million related to stock options, $1.5 million related to restricted stock awards and $2.1 million related to SARs. The cost as of December 31, 2009 for unrecognized compensation related to stock options, restricted stock awards, and SARs is expected to be recognized over a weighted average period of 2.49 years, 2.26 years and 2.61 years, respectively. During 2009, approximately 361,795 stock option and SAR awards and 101,035 restricted stock awards vested.
Employee Stock Purchase Plan
Under GTSI’s Employee Stock Purchase Plan (“ESPP”), eligible employees may elect to set aside, through payroll deduction, up to 15% of their compensation to purchase Company common stock at 85% of the fair market value of shares of common stock on the last day of the offering period. 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 95% 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. Prior to July 1, 2008, the ESPP purchase price was 95% of the fair market value of a share of common stock on the last day of the offering period. No other material changes were made to the plan. The Company uses its treasury shares to fulfill the obligation of both the employee withholding and the discount.
The table below summarizes the number of shares purchased by employees under the ESPP during offering periods indicated:
The weighted average fair market value of shares under the ESPP was $4.40 in 2010, $4.37 in 2009 and $5.69 in 2008. GTSI has reserved 1,600,000 shares of common stock for the ESPP, of which 490,536 were available for future issuance as of December 31, 2010.
Stockholder Rights Plan
On September 13, 2010, the Company’s Board of Directors adopted a stockholder rights plan (the “Rights Plan”). The Rights Plan is set forth in the Rights Agreement dated as of September 14, 2010 (the “Rights Agreement”) between the Company and American Stock Transfer & Trust Company, LLC (the “Rights Agent”). In connection with the Rights Plan, the Company declared a dividend of one preferred share purchase right (individually, a “Right” and collectively, the “Rights”) for each share of outstanding common stock of the Company at the close of business on September 24, 2010. If the Rights become exercisable, each Right will entitle the registered holder thereof, until September 12, 2011 (or the earlier redemption, exchange or termination of the Rights), to purchase from the Company one one-thousandth (1/1000th) of a share of Series A Junior Participating Preferred Stock, par value $0.25 per share (the “Preferred Stock”), of the Company, at a price of $20.00 per one one-thousandth (1/1000th) of a share of Preferred Stock, subject to certain anti-dilution adjustments.
The Rights are not immediately exercisable. The Rights will initially trade only with the Company’s common stock to which they are attached, and generally become exercisable only if a person or group becomes an Acquiring Person (as defined in the Rights Agreement) by accumulating beneficial ownership (as defined in the Rights Agreement) of 20% or more of the Company’s outstanding common stock. If a person becomes an Acquiring Person, the holders of each Right (other than an Acquiring Person) are entitled, after the tenth business day, to purchase shares of the Company’s preferred stock at the exercise price of the Right, which is initially $20.00 per Right. The Rights Agreement provides that a person or group currently owning 20% or more of the Company’s outstanding common stock will not be deemed to be an Acquiring Person if the person or group does not subsequently accumulate an additional 1% of the Company’s outstanding common stock through open market purchases, expansion of the group or other means. The Rights, which only become exercisable after a person becomes an Acquiring Person, have no objective value at this time. If the Rights become exercisable, any objective determinable value of the Rights would be accounted for with a charge to retained earnings and a credit to paid-in capital.
At any time prior to a person becoming an Acquiring Person, the Company’s Board of Directors may cause the Company to redeem the Rights in whole, but not in part, at a price of $0.01 per Right. The Rights will expire on September 12, 2011 (unless earlier redeemed, exchanged or terminated).
11. Related Party Transactions
In 2002, GTSI made a $0.4 million investment in Eyak Technology, LLC (“EyakTek”), and assumed a 37% ownership of EyakTek. GTSI is also entitled to have a designee on EyakTek’s Board of Directors under EyakTek’s operating agreement. See Note 15 “Commitments and Contingencies” for discussion of the Company’s legal proceedings regarding EyakTek and certain related matters. GTSI’s investment in EyakTek is accounted for under the equity method and adjusted for earnings or losses as reported in the financial statements of EyakTek and dividends received from EyakTek. At December 31, 2010 and 2009, the investment balance for EyakTek was $10.6 million and $8.0 million, respectively, and equity in earnings was $7.9 million and $8.3 million, respectively. The Company recognized sales to EyakTek of $47.6 million, $21.9 million, and $23.2 million during 2010, 2009 and 2008 and receivables have been recorded by the Company totaling $10.6 million and $14.7 million as of December 31, 2010 and 2009, respectively. GTSI also receives a fee from EyakTek based on sales from products sold at cost by GTSI to EyakTek and fees recognized by the Company during 2010, 2009 and 2008 are $0.2 million, $0.3 million and $1.4 million, respectively, which are included in sales in the accompanying consolidated statements of operations. The amounts due are included in accounts receivable totaling $0.1 million and $0.1 million for the years ended December 31, 2010 and 2009, respectively.
The following table summarizes EyakTek’s financial information as of and for the year ended December 31 (in thousands):
12. (Loss) Earnings Per Share
Basic (loss) earnings per share are calculated by dividing net income by the weighted average shares outstanding during the period, which includes shares of restricted stock that are fully vested. Diluted (loss) earnings per share are computed similarly to basic (loss) earnings per share, except that the weighted average shares outstanding are increased to include equivalents, when their effect is dilutive. In periods of net loss, all potentially dilutive shares are considered anti-dilutive and are excluded from the calculation.
The following table sets forth the computation of basic and diluted (loss) earnings per share for the years ended December 31 (in thousands except per share amounts):
13. Income Taxes
The (provision) benefit for income taxes consists of the following for the years ended December 31 (in thousands):
Deferred income taxes include the net tax effects of net operating loss (“NOL”) carryforwards and tax credits and the net tax effects of temporary differences between the carrying amounts of assets and liabilities and the amounts recorded for income tax purposes. The components of the deferred tax assets and liabilities are as follows as of December 31 (in thousands):
The following is a reconciliation of the statutory U.S. income tax rate to the Company’s effective tax rate for the years ended December 31:
Tax Uncertainties
Effective January 1, 2007, the Company adopted the provisions of FASB ASC 740, Income Taxes, (“ASC 740”), which applies to all tax positions related to income taxes subject to ASC 740. ASC 740 requires a new evaluation process for all tax positions taken. ASC 740 clarifies accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. If the probability for sustaining a tax position is greater than 50%, then the tax position is warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate settlement.
GTSI is subject to U.S. Federal income tax as well as income tax of multiple states and local jurisdictions. The consolidated U.S. Federal income tax return is closed for all tax years up to and including 2005 and the statute of limitations is closed through 2003. Currently, no state income tax returns are under examination.
The Company’s tax reserves relate to state nexus issues and the state impact of IRS audit adjustments for the 2003 through 2005 tax years. With each year the Company’s tax exposure rolls forward with incremental increases expected based on continued accrual of interest. The Company’s tax liability for unrecognized tax benefits are as follows as of December 31 (in thousands):
GTSI’s practice is to recognize interest and penalties related to uncertain tax positions in income tax expense. The Company had less than $0.1 million accrued for interest and less than $0.1 million accrued for penalties as of December 31, 2010. The Company has less than $0.1 million accrued for interest and less than $0.1 million accrued for penalties as of December 31, 2009. During the year, accrued interest and accrued penalties both decreased by less than $0.1 million due primarily to the settlement and payment of assessed liabilities. Interest will continue to accrue on certain issues in 2011 and beyond.
It is not anticipated that any increase or decrease during the next 12 months in the amount of unrecognized tax benefits will be material. Further, it is anticipated that the effective tax rate impact of any unrecognized tax benefits will be immaterial.
14. 401(k) Plan
GTSI maintains the Employees’ 401(k) Investment Plan (the “401(k) Plan”), a savings and investment plan intended to be qualified under Section 401 of the Internal Revenue Code (“IRC”). All Company employees who are at least 21 years of age are eligible to participate. The 401(k) Plan is voluntary and allows participating employees to make pretax contributions, subject to limitations under IRC, of a percentage (not to exceed 30%) of their total compensation. New hires are automatically enrolled in the 401(k) Plan at a 3% deferral rate unless the new hire opts out or selects to increase or decrease their deferral percentage. Employee contributions are fully vested at all times. GTSI contributions vest at 20% over five years. GTSI matches employee contributions 50% of the first five percent of eligible pay. In 2010, 2009 and 2008, the Company contributed approximately $1.0 million, $1.2 million and $1.1 million to the Plan, respectively.
15. Commitments and Contingencies
Product Warranties
GTSI offers extended warranties on certain products which are generally covered for three or five years beyond the warranty provided by the manufacturer. Products under extended warranty require repair or replacement of defective parts at no cost to the customer. The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its extended warranty contracts. The following table summarizes the activity related to product warranty liabilities for the years ended December 31 (in thousands):
Maintenance Warranties
Revenue and cost of sales from extended warranty contracts is recorded as deferred revenue and deferred costs, respectively, and subsequently recognized over the term of the contract. The following table summarizes the activity related to the deferred warranty revenue for the years ended December 31 (in thousands):
Lease Commitments
The Company conducts its operations from leased real properties, which include offices and a warehouse. These obligations expire at various dates between 2011 and 2019. In December 2007, the Company executed a lease for a new corporate headquarters. The Company relocated to its new location in November 2008, which has a number of lease options for current and future space commitments under its 10-year term. This lease expires in 2019. Most of the leases contain renewal options at inception, some of which have been exercised, as well as escalation clauses, which are recognized on a straight-line basis over the lease term. No leases contain purchase options or restrictions of the Company’s activities concerning dividends, additional debt, or further leasing. Rent expense for 2010, 2009 and 2008 was approximately $4.7 million, $4.9 million and $3.2 million, respectively.
Future minimum lease payments under operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2010 are as follows (in thousands):
Letters of Credit
As of December 31, 2010 and 2009, the Company provided a letter of credit in the amount of $2.4 million for the office space lease signed in December 2007.
As of December 31, 2010 and 2009, the Company had an outstanding letter of credit in the amount of $2.7 million to guarantee the performance by the Company of its obligations under customer contracts.
Employment Agreements
At December 31, 2010, GTSI has change in control agreements with 10 executives and key employees and severance agreements with six executives. These arrangements provide for payments of as much as 15 months of total target compensation and continuation of benefits upon the occurrence of specified events. As of December 31, 2010, no accruals have been recorded for these agreements.
Legal Proceedings
Contingencies
On October 1, 2010, GTSI received notice from the SBA that GTSI was temporarily suspended from any future Federal Government contracting. The suspension notice cited that it was based on alleged evidence of the commission of fraud or a criminal offense in connection with GTSI obtaining, attempting to obtain and performing certain subcontracts with small businesses in 2007 and a lack of business integrity or business honesty that seriously or directly affected the present responsibility of GTSI as a government contractor. On October 19, 2010, GTSI entered into an administrative agreement with the SBA (the “SBA Agreement”) pursuant to which the SBA lifted the temporary federal contract suspension it had imposed on GTSI. As a result, GTSI is, subject to the SBA Agreement, engaged in its business with most of its existing clients and pursuing new Federal Government contracts.
Pursuant to the SBA Agreement, GTSI agreed that it will not obtain or attempt to obtain any new Federal Government contracts, subcontracts or any business, which in any capacity, whether directly or indirectly is intended to benefit small businesses, including task orders and options on existing contracts. This includes benefits in circumstances involving small businesses serving as prime contractors, joint ventures with small businesses and participating in the SBA’s mentor-protégé program. As also required by the SBA Agreement, GTSI has retained Debarment Solutions Institute, LLC, a SBA-approved monitor, to report regularly to the SBA on GTSI’s compliance with the SBA Agreement and applicable Federal Government contracting laws and regulations. The SBA Agreement will terminate on the earlier of (a) October 19, 2013, (b) the 90th day after the SBA’s Office of Inspector General’s notification of the completion of its continuing investigation of GTSI, or (c) the notification date of any proposed debarment of GTSI by the SBA.
In connection with the SBA Agreement, GTSI accepted the voluntary resignations of its Chief Executive Officer, and a Senior Vice President and General Counsel of GTSI, both effective as of October 26, 2010. In connection with their voluntary resignations the Company entered into separation agreements with the resigning officers. GTSI also suspended three other employees, who subsequently resigned. GTSI has conducted a review of its business ethics program that covers all employees and created a position and designated an employee as GTSI’s ethics officer, who is responsible for managing GTSI’s business ethics program. At least once each year, GTSI will conduct an internal audit of its business practices, procedures, policies and internal controls for compliance with the SBA Agreement, GTSI’s code of business ethics and the special requirements regarding government contracting and report the results of such audit to the SBA and Debarment Solutions Institute, LLC.
The U.S. Attorney’s Office for the Eastern District of Virginia is reviewing the same subject matter that led to the SBA temporary suspension of GTSI from Federal Government contracting and the resulting SBA Agreement. GTSI has provided information in response to that inquiry.
GTSI will continue to cooperate with the continuing investigations of GTSI’s conduct as a subcontractor for certain small businesses. The continuing investigations of GTSI by the Federal Government may result in administrative, civil or criminal penalties, including a recommendation that may adversely affect or terminate GTSI’s ability to serve as a government contractor.
According to a number of public announcements, several law firms are investigating, on behalf of purchasers of the GTSI common stock, potential violations of the federal securities laws by GTSI with a focus on whether statements regarding GTSI’s business, prospects and operations were materially false and misleading when they were made. These press releases also stated the investigations were based on the SBA accusations that GTSI obtained government contracts not available to GTSI due to its size. The press releases also encouraged any person who invested in GTSI common stock between January 1, 2007 and October 1, 2010 to contact the law firms.
Legal Proceedings
By letter dated May 24, 2010 the SBA advised EyakTek that its request for a voluntary early graduation from the SBA’s Business Development Program under Section 8(a) of the Small Business Act (“Section 8(a) BD Program”) was approved, effective May 10, 2010. EyakTek’s Operating Agreement provides that EyakTek shall dissolve and commence winding up and liquidating upon its graduation from the Section 8(a) BD Program, unless EyakTek’s members by an affirmative vote of at least 65% of the membership interests decide to continue EyakTek’s business operations. While GTSI has not voted its 37% EyakTek membership interests to continue EyakTek’s business operations, such operations have continued since EyakTek’s graduation from the Section 8(a) BD Program.
In September 2010, GTSI filed a complaint in the Chancery Court of Delaware against EyakTek; two of EyakTek’s three owner/members-The Eyak Corporation (“Eyak Corp.”), which owns 51% of EyakTek, and Global Technology LLC, which owns 12% of EyakTek, (collectively, the “Member Defendants”); and several of EyakTek’s directors and officers (the “Individual Defendants”). GTSI is the third member of EyakTek, as noted above GTSI owns 37% of EyakTek. GTSI’s complaint alleged that EyakTek and the Member Defendants had breached EyakTek’s Operating Agreement by taking certain actions without GTSI’s approval, which is required under the Operating Agreement, including actions leading to the making of an unsolicited offer to acquire GTSI and the continuation of the business operations of EyakTek after its graduation from the Section 8(a) BD Program. The complaint further alleged that the Individual Defendants had breached their fiduciary duties and the implied covenant of good faith and fair dealing by allowing EyakTek to take these actions. The complaint requested declaratory and injunctive relief, plus attorneys’ fees, against all of the defendants. On November 3, 2010, GTSI filed an amended complaint in the Chancery Court, which clarified the nature of relief sought and added an additional claim for breach of EyakTek’s Operating Agreement based upon EyakTek’s refusal to recognize GTSI’s designated director to EyakTek’s board of directors, among other matters.
In September 2010, EyakTek, the Member Defendants and Individual Defendants filed an arbitration demand with the American Arbitration Association asserting that GTSI’s claims in the Delaware Chancery Court are subject to arbitration under EyakTek’s Operating Agreement. The arbitration demand also asserted that GTSI’s filing of the Delaware complaint violated EyakTek’s Operating Agreement and constituted a breach of fiduciary duty and the implied covenant of good faith and fair dealing that GTSI allegedly owes to EyakTek as an EyakTek member. The arbitration demand seeks declaratory relief, damages, and attorneys’ fees against GTSI.
GTSI filed a motion in the Delaware Chancery Court to dismiss or stay the above-referenced arbitration. EyakTek, the Member Defendants and Individual Defendants filed a motion to dismiss or stay GTSI’s lawsuit. The Delaware Chancery Court heard both sets of motions in November 2010 and subsequently, based primarily on its interpretation of the arbitration provision of EyakTek’s Operating Agreement, determined that the arbitrator and not the court must decide whether the matter is to proceed in court or in arbitration. Thus, the court granted the defendants’ request to stay GTSI’s lawsuit. GTSI’s appeal of such decision was not successful.
Thereafter, GTSI submitted before the above-referenced arbitrator claims against and request for relief from EyakTek, the Member Defendants and Individual Defendants similar to GTSI’s above-referenced claims and request for relief denied by the Delaware Chancery Court. In addition, GTSI requested the arbitrator to enforce the above-referenced provisions of EyakTek’s Operating Agreement requiring the dissolution of EyakTek because of its graduation from Section 8(a) BD Program. While the outcome of these continuing disputes with EyakTek, the Member Defendants and Individual Defendants is currently unknown, such outcome may include a buyout of GTSI’s ownership in EyakTek, the dissolution of EyakTek, the continuation of EyakTek under its current Operating Agreement or under a modified Operating Agreement or some other alternative agreed upon by the various parties involved or ruled by the arbitrator.
By letter dated November 1, 2010, Eyak Corp., through the same counsel that represents EyakTek, advised GTSI that Eyak Corp. was the owner of 100 shares of GTSI’s common stock, and as a GTSI stockholder Eyak Corp. was demanding that GTSI investigate and take actions on matters set forth in the letter, including matters that were the subject of GTSI’s claims before the Delaware Chancery Court. Eyak Corp. alleged that GTSI’s failure to approve the continuation of EyakTek’s business operations constitutes a breach of fiduciary duties by GTSI’s directors and officers and demands that they cure this breach by approving the continuation of EyakTek’s business operations. Eyak Corp. also demanded that, if the alleged breach is not cured, GTSI investigate its prior disclosure related to GTSI’s disputes and litigation with EyakTek, make appropriate disclosures, including to the SBA and GTSI’s lenders, and investigate GTSI’s financial statements and account balances in respect of GTSI’s 37% interest in EyakTek. Further, Eyak Corp. demanded that GTSI bring action against GTSI’s employees, officers and directors responsible for the foregoing alleged actions to recover damages for GTSI. GTSI’s board of directors and a special committee of the Board are investigating this matter and will take such action as they deem necessary or appropriate and in the best interest of GTSI and its stockholders, in accordance with Delaware law.
In addition to the matters discussed above, we have, in the normal course of business, certain claims, including legal proceedings, against us and against other parties. We believe the resolution of these other claims that we have in the normal course of our business will not have a material adverse effect on our results of operations or financial position. However, the results of any legal proceedings cannot be predicted with certainty. Further, from time-to-time, agencies of the Federal Government, including the SBA and the U.S. Attorney’s Office as discussed above, investigate whether our operations are being conducted in accordance with applicable regulatory requirements. Federal Government investigations of us, whether relating to government contracts or conducted for other reasons, may result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed upon us, or may lead to suspension or debarment from future Federal Government contracting. Federal Government investigations often take years to complete.
16. Segment Reporting
GTSI engages in business activities as one operating segment that resells hardware and software and provides services primarily to the U. S. Federal Government. The Company’s chief operating decision maker evaluates performance and determines resource allocation based on GTSI’s consolidated sales and operating results.
The following table summarizes the Company’s sales by type for the years ended December 31 (in thousands):
Major Customers
All of GTSI’s sales are earned from U.S. entities. Sales to multiple agencies and departments of the U.S. Federal Government, either directly or through prime contractors, accounted for approximately 96%, 95% and 93% of the Company’s consolidated sales during 2010, 2009, and 2008, respectively.
17. Selected Quarterly Financial Data (unaudited)
The following tables illustrate selected quarterly financial data for 2010 and 2009. GTSI has historically experienced significant seasonal fluctuations in its operations as a result of the U.S. Federal Government buying and funding patterns. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends (in thousands).
(a)
Pre-tax income for the quarter ended December 31, 2010 was negatively impacted by a $4.6 million write-off of net financing receivables and $3.0 million in additional SG&A expenses related to severance, legal and monitoring and other expenses in connection with the SBA Agreement.
18. Subsequent Events
Credit Agreement Extension
On February 24, 2011, GTSI entered into an agreement with CPC and Wells Fargo Capital Finance, LLC., extending from May 27, 2011 to May 27, 2012 the maturity date of CPC’s 74.08% pro-rata share of the total loan commitment under the Amended Credit Agreement. GTSI and CPC are currently in discussions with other lenders to participate in the Amended Credit Agreement in respect of a 25.92% pro-rata share of the total loan commitment thereunder until May 27, 2012. If no other lenders agree to participate in the Amended Credit Agreement, the total facility limit would be reduced from an aggregate principal amount of $100 million to $74.08 million and the aggregate revolving loan facility limit would be reduced from $45 million to $33.34 million.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of December 31, 2010. Our disclosure controls and procedures are designed to (i) ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to GTSI’s management including our CEO and our CFO, as appropriate to allow timely decisions regarding required disclosures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2010.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management is required to assess the effectiveness of our internal control over financial reporting as of the end of the fiscal year and report, based on that assessment, whether our internal control over financial reporting is effective.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Management, under the supervision and with the participation of our CEO and CFO, conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2010, based upon the criteria set forth in Internal Control-Integrated Framework established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2010.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of management, an evaluation was performed to determine whether there were any changes in our internal control procedures over financial reporting that occurred during the quarter ended December 31, 2010. Based on this evaluation, management determined there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference to the Registrant’s definitive Proxy Statement for the Annual Meeting of Registrant’s Stockholders scheduled to be held on April 28, 2010 (the “Proxy Statement”). The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after December 31, 2010.
The information required by this Item is incorporated by reference to the Proxy Statement.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the “Equity Compensation Plan Information” disclosed in Item 5 above, the information regarding the security ownership of certain beneficial owners and management required by this Item is incorporated by reference to the Proxy Statement.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to the Proxy Statement.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to the Proxy Statement.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENTS AND SCHEDULES:
(a) (1) Financial Statements
The consolidated financial statements of GTSI Corp. filed are as follows:
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Operations for each of the three years in the period ended December 31,
Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended December 31, 2010
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
Notes to Consolidated Financial Statements
(a) (2)Financial Statement Schedules
The financial statement schedules of GTSI Corp. and subsidiaries filed are as follows:
Schedule II-Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2010
All other schedules are omitted because they are not applicable, or the required information is shown in the consolidated financial statements or the notes thereto.
(c) Eyak Technology, LLC
The Consolidated Balance Sheets of Eyak Technology, LLC as of December 31, 2010 and 2009 and the related Consolidated Statements of Income, Members’ Equity and Cash Flows for the three years ended December 31, 2010 are being filed. These financial statements are filed in accordance with Rule 3-09 of Regulation S-X.
Exhibits
The exhibits set forth in the Exhibit Index are filed as part of this Form 10-K.
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 11, 2011 by the following persons on behalf of the registrant and in the capacities indicated.
GTSI CORP.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
SCHEDULE II
(1)
The sales returns allowance is reported as a reduction of accounts receivable on the consolidated balance sheets.
All other schedules are omitted because the required information is not present or is not present in amount sufficient to require submission of the schedule, or because the information is included in the consolidated financial statements or notes thereto.
EXHIBIT INDEX