**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10–K/A**

**AMENDMENT No. 2**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For thefiscal year ended December 31, 2004**

 

**CommissionFile Number:     0–19394**

 

**GTSI CORP.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **54–1248422**                   |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **3901 Stonecroft Boulevard, Chantilly, VA**                    | ** ** | **20151-1010**                        |
| (Address of principal executive offices)                        |       | (Zip Code)                            |

 

**703–502–2000**

(Registrant’s telephone number, including area code)

 

Securitiesregistered pursuant to section 12(b) of the Act:  **None**

 

Securitiesregistered pursuant to section 12(g) of the Act:   **Common Stock, par value $0.005 per share**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.           YES  ý         NO  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act).  YES  ý         NO  o

 

Theaggregate market value of the voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, asof June 30, 2004 was $98,698,256.

 

Thenumber of shares outstanding of the registrant’s common stock on March 1,2005 was 8,988,143.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Items10, 11, 12, 13 and 14 of Part III of this Form 10-K are incorporatedby reference to GTSI’s proxy statement filed with the Securities and ExchangeCommission on March 28, 2005 in connection with the Annual Meeting ofStockholders held on April 21, 2005.

 

 

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**EXPLANATORY NOTE**

 

ThisAmendment No. 2 to our Annual Report on Form 10-K for the year ended December 31,2004 is being filed for the purpose of responding to comments received by usfrom the Staff of the Securities and Exchange Commission. This Form 10-K/Afor 2004 includes these revisions and amends:

•                  Part II, Item 6, Selected FinancialData. Added a cross reference to the discussion of aged accrued payables andthe effect on comparability between years presented and

•                  Part II, Item 7, MD&A. Expanded theOverview section and Gross margin subheading of the 2004 Compared with2003 section to discuss the affect of the derecognition and reversal ofaged accrued payables.

 

ThisAmendment does not change any of the financial information previously reported inthe Company’s consolidated financial statements or any of the notes to such consolidatedfinancial statements.

 

ThisAmendment speaks as of the original filing date of our Annual Report on Form 10-Kand has not been updated to reflect events occurring subsequent to the originalfiling date of March 16, 2005. Accordingly, this amendment should be readin conjunction with the Company’s filings with the SEC subsequent to the filingof our Annual Report on Form 10-K.

 

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**PART II**

 

**ITEM 6.****    ****SELECTED FINANCIAL DATA**

 

Thefollowing selected consolidated financial data as of and for the years ended December 31,2004, 2003, 2002, 2001 and 2000 have been derived from the consolidated auditedfinancial statements. This selected financial data should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations and our financial statements and related notesincluded in this Annual Report on Form 10-K. Our income from operations,net income and earnings per share in 2004 were materially affected by thereduction in Cost of sales described below, which affects the comparability ofthe information presented with prior years results.

 

**Statement of Operations Data:**

 
| ** **                                                                        | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands, except per share  data)**                                        | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Sales                                                                             |       | $                                         | 1,076,148  |   | $ | 954,118 |   | $ | 934,730 |   | $ | 783,496 |   | $ | 677,754 |   |
| Cost  of sales                                                                    |       | 954,143                                   | *     | 857,334 |   | 857,105 |   | 718,370 |   | 617,621 |   |
| Gross  margin                                                                     |       | 122,005                                   |       | 96,784 |   | 77,625 |   | 65,126 |   | 60,133 |   |
| Operating  expenses:                                                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative                                              |       | 107,833                                   |       | 85,473 |   | 62,956 |   | 57,002 |   | 49,382 |   |
| Depreciation  and amortization                                                    |       | 3,022                                     |       | 2,874 |   | 3,543 |   | 4,407 |   | 3,934 |   |
| Impairment  charge                                                                |       | —                                    |       | 5,972 |   | — |   | — |   | — |   |
| Total  operating expenses                                                         |       | 110,855                                   |       | 94,319 |   | 66,499 |   | 61,409 |   | 53,316 |   |
| Income  from operations                                                           |       | 11,150                                    |       | 2,465 |   | 11,126 |   | 3,717 |   | 6,817 |   |
| Interest  and other income, net                                                   |       | 5,569                                     |       | 2,832 |   | 4,520 |   | 3,707 |   | 2,259 |   |
| Income  before taxes                                                              |       | 16,719                                    |       | 5,297 |   | 15,646 |   | 7,424 |   | 9,076 |   |
| Income  tax provision (benefit)                                                   |       | 6,455                                     |       | 2,118 |   | 6,113 |   | 2,938 |   | (2,008 | ) |
| Net  income before cumulative effect of SAB No. 101 adoption                 |       | 10,264                                    |       | 3,179 |   | 9,533 |   | 4,486 |   | 11,084 |   |
| Cumulative  effect of SAB 101 adoption                                            |       | —                                    |       | — |   | — |   | — |   | 467 |   |
| Net  income                                                                       |       | $                                         | 10,264     |   | $ | 3,179 |   | $ | 9,533 |   | $ | 4,486 |   | $ | 10,617 |   |
| Earnings  per common share                                                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic:                                                                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic  earnings per share before cumulative effect of SAB No. 101 adoption   |       | $                                         | 1.18       |   | $ | 0.38 |   | $ | 1.15 |   | $ | 0.55 |   | $ | 1.23 |   |
| Cumulative  effect per share of SAB No. 101 adoption                         |       | —                                    |       | — |   | — |   | — |   | (0.05 | ) |
| Basic  earnings per share                                                         |       | $                                         | 1.18       |   | $ | 0.38 |   | $ | 1.15 |   | $ | 0.55 |   | $ | 1.18 |   |
| Diluted:                                                                          |       |                                      |       |   |   |   |   |   |   |   |   |
| Diluted  earnings per share before cumulative effect of SAB No. 101 adoption |       | $                                         | 1.09       |   | $ | 0.35 |   | $ | 1.04 |   | $ | 0.50 |   | $ | 1.20 |   |
| Cumulative  effect per share of SAB No. 101 adoption                         |       | —                                    |       | — |   | — |   | — |   | (0.05 | ) |
| Diluted  earnings per share                                                       |       | $                                         | 1.09       |   | $ | 0.35 |   | $ | 1.04 |   | $ | 0.50 |   | $ | 1.15 |   |
| Weighted  average common shares outstanding                                       |       |                                      |       |   |   |   |   |   |   |   |   |
| Basic                                                                             |       | 8,664                                     |       | 8,349 |   | 8,302 |   | 8,144 |   | 9,021 |   |
| Diluted                                                                           |       | 9,388                                     |       | 9,116 |   | 9,156 |   | 9,049 |   | 9,225 |   |

 

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*Cost of sales in 2004 include the positive effects of the derecognition of agedaccrued payables of $10.1 million and the reversal of accounts payable of $2.5million as discussed in Note 7 to the consolidated financial statements in Part II,Item 8 of this Form 10-K.

 

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**Balance Sheet Data:**

 
| ** **                 | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| **(in thousands)**         | ** ** | **2004**              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Working  capital           |       | $                     | 79,027     |   | $ | 64,348 |   | $ | 62,836 |   | $ | 34,968 |   | $ | 43,659 |   |
| Total  assets              |       | $                     | 296,386    |   | $ | 268,761 |   | $ | 224,918 |   | $ | 252,452 |   | $ | 227,065 |   |
| Notes  payable to banks    |       | $                     | 1,179      |   | $ | 12,813 |   | $ | 7,539 |   | $ | 20,186 |   | $ | 11,925 |   |
| Long-term  liabilities     |       | $                     | 3,473      |   | $ | 1,522 |   | $ | 1,640 |   | $ | 2,403 |   | $ | 2,145 |   |
| Total  liabilities         |       | $                     | 204,249    |   | $ | 190,816 |   | $ | 149,427 |   | $ | 189,387 |   | $ | 168,586 |   |
| Stockholders’  equity |       | $                     | 92,137     |   | $ | 77,945 |   | $ | 75,491 |   | $ | 63,065 |   | $ | 58,480 |   |

 

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**ITEM 7.****                            ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thefollowing discussion and analysis is provided to increase the understanding of,and should be read in conjunction with, our audited consolidated financialstatements and notes included in Part II, Item 8 of this Annual Report on Form 10-K.Historical results and percentage relationships among any amounts in theconsolidated financial statements are not necessarily indicative of trends inoperating results for any future period. We use the terms “GTSI,” “we,” “our,”and “us” to refer to GTSI Corp. and its subsidiaries.

 

**Overview**

 

GTSIis a recognized IT solutions leader, providing products and services primarilyto federal government customers worldwide. One of our key differentiators is the extensive number of contractvehicles we have in our portfolio.  Forover two decades GTSI has served the public sector by partnering with global ITleaders such as Panasonic, HP, Cisco, Sun Microsystems and Microsoft.  We seek to deliver maximum value through ourbroad range of products, customer service and ISO 9001:2000 certifieddistribution center.  Through ourTechnology Practices, we deliver “best of breed” products and solutions to helpour customers realize strong value for their IT investments.

 

Weexperienced some significant successes in 2004, including our annual revenueexceeding the $1 billion mark. We faced a number of challenges and we madesignificant progress in building an organization that can consistently deliverstrong financial results.  Our sales grew12.8% during 2004, outpacing the underlying growth in government IT spending.We expect that GTSI will continue to outpace market growth in 2005.

 

Asdiscussed in more detail throughout our MD&A:

•                  Our sales increased $122.0 million from 2003to 2004, exceeding $1 billion for the first time in GTSI history.

•                  The buying and funding patterns of thegovernment continue to have a significant positive effect on our sales and netincome in the third and fourth quarters.

•                  Our gross margin increased as a percentage ofsales.

•                  Our balance sheet remains solid, with nolong-term debt.

•                  Cash provided by operating activities morethan tripled to $16.8 million for the year ended December 31, 2004.

 

Ourbusiness experiences significant fluctuations in our quarterly sales, operatingincome and net income as a result of the buying patterns of the federalgovernment, our primary customer. In addition to the increase in operating andnet income during the third quarter of 2004 caused by this cyclical buyingpattern, our results were positively affected by the derecognition of $10.1million in aged accrued payables. We recorded this release from obligations asan offset to Cost of sales which increased our Gross margin by $10.1 million.As a result, our Income from operations during 2004 was also $10.1 millionhigher, corresponding to a $6.2 million increase in net income, or an increaseof $0.66 per share. Our net income of $10.3 million for the year ended December 31,2004 would have been reduced to $4.1 million had we not derecognized the agedaccrued payables. Due to the one time nature of this transaction, our resultsfor 2004 should not be used as a basis to determine annual trends in projectingfuture financial results.  Our 2004results were also positively affected by the reversal of accounts payable of$2.5 million. Our 2004 net income as adjusted for the one-time derecognition ofaged payables of $4.1 million, would have been further reduced to $2.6 millionhad we not reversed accounts payable. For additional details see the discussionunder 2004 Compared with 2003 section of the MD&A, Gross Marginsubheading and refer to Note 7 of the consolidated financial statementsincluded in Part II, Item 8 of this Form 10-K.

 

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Wehave initiated a strategic three-year growth plan designed to capitalize on thegovernment’s heightened demand for IT services and we plan to double ourrevenue to $2 billion, improve our productivity and increase our grossmargins.  To double our sales we willcontinue to leverage the strong growth of personnel in our sales and marketingorganization. In addition, we are selectively, but aggressively, hiringtalented employees and expect our headcount to reach approximately 950employees by the end of 2005. We expect to expand our sales from leasearrangements for IT products and solutions in 2005.  We have essentially completed the build-outof our ERP system. After full testing and retesting, extensive training anddocumentation of new work processes for SOX compliance, we plan to implementthe final phase of our ERP capabilities throughout GTSI in the second quarterof 2005.

 

Inaddition to the implementation of the final phase of our ERP system, severalother initiatives are underway to position GTSI to reach our strategic plangoal of increased productivity including proactive supply-chain management;customer, deal, and vendor profitability assessments; and order managementimprovements. Management is also evaluating various CRM solutions, includingthe future use of our existing CRM platform. If we select a new CRM Solution,we may incur an impairment charge for the write-off of our existing CRMsoftware.

 

Webelieve we can make significant improvements to net income. First, additionalsales are expected to improve net income. Second, improved margin percentagesare expected to increase bottom line growth. And third, we believe ourproductivity improvements will lower SG&A expense as a percentage of salesand improve net income margin.

 

**CriticalAccounting Estimates**

 

The discussion andanalysis of our financial condition and results of operations is based on ourconsolidated financial statements. The preparation of these financialstatements requires management to make estimates and judgments that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the consolidated financial statements and thereported amounts of revenue and expenses during the reporting period.  Critical accounting estimates are defined asthose that are reflective of significant judgments and uncertainties, andpotentially result in materially different results under different assumptionsand conditions. We have included below our policies that are both important to ourfinancial condition and operating results, and require management’s mostsubjective and complex judgments in determining the underlying estimates andassumptions. Actual results may differ from these estimates under differentassumptions or conditions. Accounting estimates that management believes aremost critical to our financial condition and operating results pertain tomerchandise inventories, long-lived assets, warranties, contingencies andrevenue recognition. We have discussed the application of these criticalaccounting estimates with the Audit Committee of our Board of Directors.

 

*MerchandiseInventories*

Our inventory is statedat the lower of average cost or market value. We record a provision for excessand obsolete inventory based on assumptions about future demand and marketconditions. Our estimates of future product demand may prove to be inaccurate,in which case we may have understated or overstated the provision required forexcess or obsolete inventory.  In thefuture, if there were a higher incidence of inventory obsolescence because ofrapidly changing technology and customer requirements, we would be required toincrease our inventory allowance and our gross margin could be adverselyaffected.

 

During 2004 as a resultof our physical inventory counts and other internal controls, we discovered twoinstances of inventory losses. Losses of $0.7 million and $0.6 million wererecorded, that were subsequently offset by an insurance settlement of $0.6million. A second insurance claim is still pending. The outcome of theinsurance claim, as well as the results of our ongoing investigations, couldmaterially

 

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alter the amount ofmanagement’s estimate.

 

*Long-LivedAssets*

Long-lived assets, consistingprimarily of capitalized software, furniture and equipment, are required to be tested forrecoverability whenever events or changes in circumstances indicate that theircarrying amount may not be recoverable. If the carrying value exceedsthe undiscounted cash flows expected toresult from the use and eventual disposition of the asset, an impairment chargeis recognized. During 2003, we determined that it was not in our bestinterest to continue with a highly customized ERP system due to the high levelof development risk and the higher total cost of ownership associated withmaintaining a customized solution. We changed our strategy to a standard ERPsystem (“GEMS”) to lower the risk and reduce the overall project expenses. Dueto this change in strategy we estimated $6.0 million of the customized ERPsolution would have no future value and recorded an impairment charge in 2003.If any future events indicate the carrying amount of GEMS may exceed its fairvalue, we will test for recoverability which would necessitate the use ofsignificant assumptions regarding the fair value and undiscounted net cashflows expected. During 2004, we capitalized $5.5 million related to the ERPproject.

 

*Warranties*

We offer warranties onsales of certain products specific to the terms of the customeragreements.  Our standard warrantiesrequire us to repair or replace defective products reported to us during suchwarranty period at no cost to the customer. We record an estimate for warranty related costs at the time of salebased on our actual historical return rates and repair costs at the time ofsale.  We cannot guarantee that we willcontinue to experience the same warranty return rates or repair costs that wehave in the past.  Factors that impactour accrued warranty liability include the number of installed units underwarranty contracts, the rate of unit failures, the cost of spare parts, andhistorical and anticipated cost per warranty claim under the warranty contract.As these factors are affected by actual experience and future expectations, wereevaluate the adequacy of our accrued warranty liability and adjust amounts asnecessary.

 

*Contingencies*

We are subject to thepossibility of various loss contingencies arising in the ordinary course ofbusiness. We accrue an estimated loss contingency when it is probable that aliability has been incurred and the amount of loss can be reasonably estimated.We regularly evaluate current information available to us to determine whethersuch accruals should be adjusted and whether new accruals are required. Reviewof certain aged payables during 2004 resulted in reversals of $10.1 million and$2.5 million during the second half of 2004. A new accrual for potential payroll tax liability was estimatedat $0.8 million in 2004 for employees working in our office in Germany.

 

*Revenue Recognition*

The majority of our sales relates to physical productsand is generally recognized when title to the products sold passes to thecustomer. Based on our standard shipping terms, title generally passes upon thecustomer’s receipt of the products. This requires us to analyze sales near theend of reporting periods to estimate the amount of products in transit to thecustomer that cannot be recognized as revenue. At the time of sale, we record an estimate for product returns based onhistorical experience. If actual product returns are greater than estimated bymanagement, additional expense may be incurred.

 

Certain of our service and solution agreements containmultiple elements that sometimes require significant contract interpretation todetermine the appropriate accounting, including whether the deliverables shouldbe treated as separate units of accounting for revenue recognition purposes,and if so, how the price should be allocated among the deliverable elements andwhen to recognize revenue for each element.

 

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**Historical Results of Operations**

 

Thefollowing table illustrates the percentage of sales represented by items in ourconsolidated statements of operations for the years ended December 31:

 
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales                                |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost  of sales*                      |       | 88.7     | **    | 89.9     |       | 91.7     |       |
| Gross  margin                        |       | 11.3     |       | 10.1     |       | 8.3      |       |
| Operating  expenses:                 |       |     |       |     |       |     |       |
| Selling,  general and administrative |       | 10.0     |       | 8.9      |       | 6.7      |       |
| Depreciation  and amortization       |       | 0.3      |       | 0.3      |       | 0.4      |       |
| Impairment  charge                   |       | —   |       | 0.6      |       | —   |       |
| Total  operating expenses            |       | 10.3     |       | 9.8      |       | 7.1      |       |
| Income  from operations              |       | 1.0      |       | 0.3      |       | 1.2      |       |
| Interest  and other income, net      |       | 0.6      |       | 0.3      |       | 0.5      |       |
| Income  before taxes                 |       | 1.6      |       | 0.6      |       | 1.7      |       |
| Income  tax provision                |       | 0.6      |       | 0.3      |       | 0.7      |       |
| Net  income                          |       | 1.0      | %          | 0.3      | %          | 1.0      | %          |

 

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*As a result of adopting Emerging Issues Task Force Issue No. 02-16, “Accountingfor Consideration Received from a Vendor by a Customer (Including a Reseller ofthe Vendor’s Product)”, we changed our reporting of certain vendorconsiderations.  Beginning January 1,2003, GTSI recorded vendor consideration as a reduction to Cost of Salesinstead of as a reduction to Selling, General & Administrative expenses.

**Cost of sales in 2004 include the positive effects of the derecognition of agedaccrued payables of $10.1 million and the reversal of accounts payable of $2.5million as discussed in Note 7 to the consolidated financial statements in Part II,Item 8 of this Form 10-K.

 

Thefollowing table sets forth the annual percentage changes in the dollar amountsof selected items within our consolidated statements of operations.

 
| ** **                           | ** ** | **Percentage Change** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2003 to 2004**      | ** ** | **2002 to 2003** | ** ** |
| Sales                                |       | 12.8                  | %          | 2.1 | % |
| Cost  of sales                       |       | 11.3                  | %          | 0.0 | % |
| Gross  margin                        |       | 26.1                  | %          | 24.7 | % |
| Operating  expenses:                 |       |                  |       |   |   |
| Selling,  general and administrative |       | 26.2                  | %          | 35.8 | % |
| Depreciation  and amortization       |       | 5.1                   | %          | (18.9 | )% |
| Impairment  charge                   |       | (100.0                | )%         | 100.0 | % |
| Total  operating expenses            |       | 17.5                  | %          | 41.8 | % |
| Income  from operations              |       | 352.3                 | %          | (77.8 | )% |
| Interest  and other income, net      |       | 96.6                  | %          | (37.3 | )% |
| Income  before taxes                 |       | 215.6                 | %          | (66.1 | )% |
| Income  tax provision                |       | 204.8                 | %          | (65.4 | )% |
| Net  income                          |       | 222.9                 | %          | (66.7 | )% |

 

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Thefollowing tables indicate, for the years ended December 31 (dollars inmillions), the approximate sales by contract vehicle, vendor, and productcategory along with related percentages of total sales.

 
| ** **                        | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |     |       |   |   |   |   |   |   |
| **Contract Vehicles**             |       |     |       |     |       |     |       |   |   |   |   |   |   |   |   |   |
| GSA  Schedules                    |       | $        | 299.3      |     | 27.8       | %        | $          | 268.0 |   | 28.1 | % | $ | 276.0 |   | 29.5 | % |
| IDIQ  Contracts                   |       | 428.0    |       | 39.8     |       | 430.4    |       | 45.1 |   | 388.7 |   | 41.6 |   |
| Open  Market                      |       | 238.0    |       | 22.1     |       | 159.7    |       | 16.7 |   | 107.0 |   | 11.5 |   |
| Subcontracts  and Other Contracts |       | 110.8    |       | 10.3     |       | 96.0     |       | 10.1 |   | 163.0 |   | 17.4 |   |
| Total                             |       | $        | 1,076.1    |     | 100.0      | %        | $          | 954.1 |   | 100.0 | % | $ | 934.7 |   | 100.0 | % |

 
| ** **           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
| **Top Five Vendors** |       |     |       |     |       |     |       |   |   |   |   |   |   |   |   |   |
| Panasonic            |       | $        | 188.0      |     | 17.5       | %        | $          | 162.2 |   | 17.0 | % | $ | 123.5 |   | 13.2 | % |
| HP                   |       | 153.4    |       | 14.3     |       | 139.3    |       | 14.6 |   | 167.7 |   | 17.9 |   |
| Cisco                |       | 135.7    |       | 12.6     |       | 112.9    |       | 11.8 |   | 114.9 |   | 12.3 |   |
| Sun  Microsystems    |       | 131.8    |       | 12.2     |       | 130.1    |       | 13.6 |   | 110.6 |   | 11.8 |   |
| Microsoft            |       | 53.7     |       | 5.0      |       | 66.5     |       | 7.0 |   | 95.6 |   | 10.2 |   |
| Others               |       | 413.5    |       | 38.4     |       | 343.1    |       | 36.0 |   | 322.4 |   | 34.6 |   |
| Total                |       | $        | 1,076.1    |     | 100.0      | %        | $          | 954.1 |   | 100.0 | % | $ | 934.7 |   | 100.0 | % |

 
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |     |       |   |   |   |   |   |   |
| **Products**                         |       |     |       |     |       |     |       |   |   |   |   |   |   |   |   |   |
| Hardware                             |       | $        | 834.1      |     | 77.5       | %        | $          | 692.5 |   | 72.6 | % | $ | 673.7 |   | 72.1 | % |
| Software                             |       | 155.7    |       | 14.5     |       | 154.5    |       | 16.2 |   | 196.4 |   | 21.0 |   |
| Resold  third-party service products |       | 66.6     |       | 6.2      |       | 91.2     |       | 9.5 |   | 50.8 |   | 5.4 |   |
| Services                             |       | 19.7     |       | 1.8      |       | 15.9     |       | 1.7 |   | 13.8 |   | 1.5 |   |
| Total                                |       | $        | 1,076.1    |     | 100.0      | %        | $          | 954.1 |   | 100.0 | % | $ | 934.7 |   | 100.0 | % |

 

**2004Compared with 2003**

 

*Sales*

Salesconsist of revenue from products delivered and services sold or rendered, netof allowances for customer returns and credits. Sales increased $122.0 million,or 12.8%, from $954.1 million in 2003 to $1.08 billion in 2004.  The majority of this increase, by contractvehicle, is due to the $78.3 million increase in Open Market procurementsresulting from the efforts of our expanded sales force. Sales in GSA Schedule andSubcontracts and Other Contracts categories increased 11.7% and 15.4%,respectively, from 2003 to 2004. IDIQ contract sales were relatively flat yearover year.

 

Ananalysis of sales by product reveals our overall sales increase was due to the$141.6 million rise in hardware to $834.1 million in 2004 generated byincreased sales of networking products, storage products and large serversales. This increase was partially offset by a $24.6 million decline in salesof resold third-party service products. Sales of services increased 23.9% from2003 to 2004 to $19.7 million. We intend to grow our service revenue at asimilar rate in 2005.

 

Althoughwe offer our customers access to products from hundreds of vendors, 61.6% ofour sales in 2004 were products from our top five vendor partners. As detailedin the preceding table, Panasonic remains our top vendor with product salesincreasing $25.8 million from 2003 to 2004. Sales of Cisco and HP products alsoincreased $22.8 million and $14.1 million, respectively, from the previousyear. The increase in sales was also related to the $16.0 million decrease inbacklog as of December 31, 2004 compared to 2003.

 

8

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GTSI will be required torecertify our “small business” size status on our GSA Schedule Contract nolater than 2007. At such time, we may not qualify as a small business. Tomitigate any potential adverse affect on our sales from the loss of our smallbusiness status, GTSI has developed strategic relationships with smallbusinesses that benefit from the small business benefits described in theBusiness section in Part I of this Form 10-K. GTSI acts as botha supplier and prime contractor to these small businesses. In addition, wefurther mitigate this risk by participating in the Mentor-Protégé Programoffered under the SBAs 8(a) program, which is a business developmentinitiative that helps socially and economically disadvantaged Americans gainaccess to economic opportunity. Through this program, we provide various formsof mentoring, expertise in key business areas and assistance to our protégé,Eyak Technology, LLC.

 

*GrossMargin*

Grossmargin increased $25.2 million, or 26.1%, from $96.8 million in 2003 to $122.0million in 2004. Gross margin as a percentage of sales increased from 10.1% for2003 to 11.3% in 2004. This increase was predominantly due to the reduction inCost of sales resulting from the $10.1 million non-cash extinguishment of agedvendor liabilities.  Without the impactof this extinguishment, Gross margin would have been 10.4% as a percentage ofsales. The increase in Gross margin was also related to the reversal of $2.5million of accounts payable. Without these two items, gross margin would haveincreased $12.6 million, or 13.0%, from $96.8 million in 2003 to $109.4 millionin 2004. Management is committed to continuing margin expansion. We have put inplace new processes which we expect to continue to result in margin expansionincluding our centralized pricing initiatives. Our increased Gross marginresulted in positive impacts on our Income from operations and Net income forthe year ended December 31, 2004. Therefore, our financial results for2004 should not be used as a basis to determine annual trends in projectingfuture financial results.

 

*Selling,General & Administrative Expenses*

Selling,General & Administrative (“SG&A”) expenses for 2004 increased$22.5 million, or 25.5% from 2003.  Thisincrease was primarily related to approximately $6.9 million in compensationand benefits expense associated with our long-term investments in new employeesto increase headcount company-wide and $6.1 million of additional commissionsand commission accelerators paid on our increased sales. Management feels thatby making these investments in personnel, we are now better positioned to takeadvantage of:

•                  new opportunities in the State and Localmarketplace utilizing the US Communities Contract;

•                  additional federal government opportunities;

•                  sales to Prime Contractors through ourIntegrator Solutions Group; and

•                  increased lease sales to the government.

 

Inaddition, we incurred expenses of $2.0 million in consulting fees for ourSarbanes-Oxley (“SOX”) compliance and approximately $1.7 million for continuedimplementation of our ERP system.  Legaland accounting fees increased $1.6 million due to litigation costs and theinternal control audit, performed by our independent registered public accountingfirm as required by SOX. Total Selling, General & Administrativeexpense increased 1.1% as a percentage of sales from 2003 to 2004. Managementhas developed a new sales commission plan for 2005 to align commissions withthe goals of our strategic growth plan.

 

*Interestand Other Income, Net*

Interestand Other Income, Net increased $2.7 million, or 96.6%, from 2003 to 2004. Thisincrease is mainly due to approximately $3.2 million increase in interestincome from the sales of our leases receivable. This increased income waspartially offset by the continuing decline in prompt payment discounts receivedfrom vendors. Due to the economy, fewer vendors are offering this incentive.Interest and other expense remained flat year over year.

 

9

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*IncomeTaxes*

Werecorded a tax provision of $6.5 million for 2004, of which $3.9 million is dueto the reversal of aged accrued liabilities, based on our expected annualeffective tax rate of approximately 38.6%.  For 2003 we recorded a tax provision of $2.1 million at an effectiverate of 40.0%. The decrease in our effective tax rate from 2003 to 2004 is dueto reduced state income taxes and a reduction in permanent non-deductible itemsas a percentage of earnings before taxes. The main difference between oureffective tax rate in 2004 and the statutory rate are state income taxes.

 

**2003Compared with 2002**

 

*Sales*

Netsales in 2003 increased $19.4 million to $954.1 million, or 2.1% over2002.  Sales under IDIQ and Open Market contractsincreased $41.7 million and $52.7 million, respectively. IDIQ sales increaseddue primarily to increased sales on one of our mature contracts combined withfull year sales on a contract that began at the end of 2002. Sales in theSubcontracts and Other Contracts category decreased 41.1% to $96.0 million dueprimarily to decreased volume on subcontracts with prime contractors,specifically on the FBI’s Trilogy contract. Our sales of Panasonic productsincreased $38.7 million, or 31.3%, from 2002 to 2003 replacing HP as our topvendor. Sun Microsystem’s product sales also marked a significant increase of$19.5 million year over year. Sales of Microsoft declined $29.1 million, or30.4% from 2002. This decline also contributed to our overall decrease insoftware sales. When reviewed by product type, this decrease was offsetpredominantly by the $40.4 million increase in sales from resold third-partyservice products related to theincreased volume of productized service and maintenance contracts. Hardwaresales also increased a moderate $18.8 million from 2002 to 2003.

 

*GrossMargin*

Gross Margin increased $19.2million, or 24.7%, to $96.8 million from $77.6 million in 2002. Gross margin asa percentage of sales also increased to 10.1% for 2003 from 8.3% for 2002. Thisincrease is due primarily to the January 1, 2003 adoption of EmergingIssues Task Force (“EITF”) Issue No. 02-16, “Accounting for ConsiderationReceived from a Vendor by a Customer (Including a Reseller of the Vendor’sProduct)”, which resulted in recording certain vendor funds as a reduction inCost of Sales instead of Selling, General & Administrative expenses.For comparative purposes, if we applied EITF No. 02-16 to the year ended December 31,2002, our gross margin would have increased from $90.0 million to $96.8million. The gross margin percentage would have increased from 9.6% for 2002 to10.1% for 2003. The primary reason for the increase in margins on thiscomparative basis is due to an increase in the volume of the vendor incentive fundsreceived in 2003 compared to 2002.

 

Duringthe second quarter of 2003, our sales organization was successful in securingan order for software inventory that had been reserved for during 2002.  As a result, we reversed a $1.4 millionreserve. This benefit partially contributed to the increase in the gross marginpercentage for the year.

 

*Selling,General & Administrative Expenses*

SG&Aexpenses for the year ended December 31, 2003 increased $21.8 million to$88.3 million from $66.5 million for 2002. A large portion of this increase wasa result of the adoption of EITF No. 02-16. For comparative purposes,Selling, General & Administrative expenses for the year ended December 31,2002 would have been $78.8 million if EITF No. 02-16 was applied to 2002.In addition to the impact of this new accounting pronouncement, Selling,General & Administrative expenses increased due to higher personnelcosts due to increased headcount primarily in the Sales and Technology Teamorganizations. When an organization adds resources to its sales teams, there isa ramp-up period before these new sales personnel are fully optimized.

 

During 2002, we determined that it was remote thatcertain accrued obligations would need to be paid.  Accordingly, the associated obligation of $1.4million was reversed. SG&A expenses as a percentage of

 

10

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sales increased to 8.9% for 2003 from 6.7% in 2002.Applying the impact from EITF No. 02-16 to the year ended December 31,2002 for comparison purposes, SG&A expenses would have been 8.1% in 2002.

 

*Impairment charge*

Inthe fourth quarter of 2003 we recorded an impairment charge of $6.0 millionrelated to the impairment of capitalized software because we determined that itwas not in our best interest to continue to pursue a highly customized ERPsolution due to the high level of development risk and the higher total cost ofownership associated with maintaining a customized solution. We changed ourstrategy and decided to implement a standard ERP system that is expected tolower the risk, compress the delivery time, provide significant value sooner,and reduce overall project expenses. Due to this change in strategy, $6.0million of the capitalized assets related to the customized solution was determinedto have no future economic value. The enterprise software and hardware for astandard ERP system purchased to date will be fully utilized in the roll-out ofthe new ERP.

 

*Interest and Other Income, Net*

Interest and Other Income,Net is the amount of interest income, prompt payment discounts, and otherincome reduced by interest and other expenses. Interest and other income, net,decreased $1.7 million, from $4.5 million to $2.8 million, or 37.8%, in 2003compared to 2002.  Interest and otherincome decreased by $2.1 million and interest and other expense decreased $0.4million over 2002. The decline in interest income is primarily due to a $1.3million decrease in prompt payment discounts partially combined with a $0.4million decrease in interest income from leases receivable. Other incomedecreased $0.3 million due primarily to a $0.5 million gain on the sale ofequipment leases in the first quarter of 2002 that did not occur in 2003.Interest and other expense decreased $0.4 million from 2002 to 2003 dueprimarily to improved cash management practices allowing us to rely less on theCredit Facility throughout the year.

 

### ***Income Taxes***

### **Our effective tax rate in 2002 was 39.1% resulting in a tax provision of$6.1 million.  The difference between theeffective rate and the statutory rate is primarily state taxes and permanentnon-deductible items.**

### ** **

### **SeasonalFluctuations**

### ** **

Wehave historically experienced and expect to continue to experience significantseasonal fluctuations in our operations as a result of government buying andfunding patterns. The unpredictability of the factors affecting suchseasonality makes our annual and quarterly financial results difficult topredict and subject to significant fluctuation. While sales to the U.S.Government are usually weaker in the first and second quarter and stronger inthe third and fourth quarter, our Selling, General & Administrativeexpenses are more level throughout the year. As such, first and second quarterearnings are typically well below those of the third and fourth quarters. Ourstock price could be adversely affected if any such financial results fail tomeet the financial community’s expectations.

 

11

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Thefollowing tables show our results of operations, sales by contract, and salesby vendor on a quarterly basis.  Thisinformation has been included to provide additional insight into the seasonalnature of our business.

 
| ** **                                           | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|----------|------------|
| **(in millions except per share  data)**             | ** ** | **Q1**   | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| Sales                                                |       | $        | 178.6      |   | $ | 239.0 |   | $ | 330.6 |   | $ | 327.9 |   | $ | 1,076.1 |   |
| Cost  of sales                                       |       | 160.5    |       | 217.5 |   | 283.9 |   | 292.2 |   | 954.1 | * |
| Gross  margin                                        |       | 18.1     |       | 21.5 |   | 46.7 |   | 35.7 |   | 122.0 |   |
| Selling,  general & administrative expenses |       | 21.7     |       | 24.6 |   | 30.4 |   | 34.2 |   | 110.9 |   |
| (Loss)  income from operations                       |       | (3.6     | )          | (3.1 | ) | 16.3 |   | 1.5 |   | 11.1 |   |
| Interest  and other income, net                      |       | 1.3      |       | 0.5 |   | 1.0 |   | 2.8 |   | 5.6 |   |
| (Loss)  income before taxes                          |       | (2.3     | )          | (2.6 | ) | 17.3 |   | 4.3 |   | 16.7 |   |
| Income  tax (benefit) provision                      |       | (0.9     | )          | (1.0 | ) | 6.8 |   | 1.5 |   | 6.4 |   |
| Net  (loss) income                                   |       | $        | (1.4       | ) | $ | (1.6 | ) | $ | 10.5 |   | $ | 2.8 |   | $ | 10.3 |   |
|                                                 |       |     |       |   |   |   |   |   |   |   |   |
| Basic  (loss) earnings per share                     |       | $        | (0.16      | ) | $ | (0.18 | ) | $ | 1.21 |   | $ | 0.31 |   | $ | 1.18 |   |
| Diluted  (loss) earnings per share                   |       | $        | (0.16      | ) | $ | (0.18 | ) | $ | 1.13 |   | $ | 0.29 |   | $ | 1.09 |   |

 

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*Cost of sales in 2004 include the positive effects of the derecognition of agedaccrued payables of $10.1 million and the reversal of accounts payable of $2.5million as discussed in Note 7 to the consolidated financial statements in Part II,Item 8 of this Form 10-K.

 
|                              |   | **2004  Quarter Ended** |   |
|-----------------------------------|--------|-------------------------|--------|
| **(dollars in millions)**         |   | **March 31,**      |   | **June 30,** |   | **September 30,** |   | **December 31,** |   |
| Contract  Vehicles                |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| GSA  Schedules                    |   | $                       | 42.2   |   | 23.6 | % | $ | 54.8 |   | 22.9 | % | $ | 105.7 |   | 32.0 | % | $ | 96.6 |   | 29.5 | % |
| IDIQ  Contracts                   |   | 72.9                    |   | 40.8 |   | 93.1 |   | 39.0 |   | 127.6 |   | 38.6 |   | 134.4 |   | 41.0 |   |
| Open  Market                      |   | 36.0                    |   | 20.2 |   | 59.8 |   | 25.0 |   | 72.9 |   | 22.0 |   | 69.3 |   | 21.1 |   |
| Subcontracts  and Other Contracts |   | 27.5                    |   | 15.4 |   | 31.3 |   | 13.1 |   | 24.4 |   | 7.4 |   | 27.6 |   | 8.4 |   |
| Total                             |   | $                       | 178.6  |   | 100.0 | % | $ | 239.0 |   | 100.0 | % | $ | 330.6 |   | 100.0 | % | $ | 327.9 |   | 100.0 | % |
|                              |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Top  Five Vendors                 |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Panasonic                         |   | $                       | 34.4   |   | 19.3 | % | $ | 36.2 |   | 15.1 | % | $ | 65.6 |   | 19.8 | % | $ | 51.8 |   | 15.8 | % |
| HP                                |   | 18.2                    |   | 10.2 |   | 31.5 |   | 13.2 |   | 47.7 |   | 14.4 |   | 56.0 |   | 17.1 |   |
| Cisco                             |   | 23.1                    |   | 12.9 |   | 20.8 |   | 8.7 |   | 50.1 |   | 15.1 |   | 41.7 |   | 12.7 |   |
| Sun                               |   | 20.4                    |   | 11.4 |   | 37.4 |   | 15.6 |   | 40.3 |   | 12.2 |   | 33.7 |   | 10.3 |   |
| Microsoft                         |   | 7.7                     |   | 4.3 |   | 8.3 |   | 3.5 |   | 28.8 |   | 8.7 |   | 8.9 |   | 2.7 |   |
| Others                            |   | 74.8                    |   | 41.9 |   | 104.8 |   | 43.9 |   | 98.1 |   | 29.8 |   | 135.8 |   | 41.4 |   |
| Total                             |   | $                       | 178.6  |   | 100.0 | % | $ | 239.0 |   | 100.0 | % | $ | 330.6 |   | 100.0 | % | $ | 327.9 |   | 100.0 | % |

 

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| ** **                                           | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|----------|------------|
| **(in millions except per share  data)**             | ** ** | **Q1**   | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Total** | ** ** |
| Sales                                                |       | $        | 178.9      |   | $ | 189.7 |   | $ | 273.1 |   | $ | 312.4 |   | $ | 954.1 |   |
| Cost  of sales                                       |       | 162.8    |       | 167.0 |   | 245.6 |   | 281.9 |   | 857.3 |   |
| Gross  margin                                        |       | 16.1     |       | 22.7 |   | 27.5 |   | 30.5 |   | 96.8 |   |
| Selling,  general & administrative expenses |       | 19.7     |       | 21.6 |   | 22.6 |   | 24.4 |   | 88.3 |   |
| Impairment  charge                                   |       | —   |       | — |   | — |   | 6.0 |   | 6.0 |   |
| Total  operating expenses                            |       | 19.7     |       | 21.6 |   | 22.6 |   | 30.4 |   | 94.3 |   |
| (Loss)  income from operations                       |       | (3.6     | )          | 1.1 |   | 4.9 |   | 0.1 |   | 2.5 |   |
| Interest  and other income, net                      |       | (0.7     | )          | (0.8 | ) | (0.8 | ) | (0.5 | ) | (2.8 | ) |
| (Loss)  income before taxes                          |       | (2.9     | )          | 1.9 |   | 5.7 |   | 0.6 |   | 5.3 |   |
| Income  tax (benefit) provision                      |       | (1.1     | )          | 0.8 |   | 2.2 |   | 0.2 |   | 2.1 |   |
| Net  (loss) income                                   |       | $        | (1.8       | ) | $ | 1.1 |   | $ | 3.5 |   | $ | 0.4 |   | $ | 3.2 |   |
|                                                 |       |     |       |   |   |   |   |   |   |   |   |
| Basic  earnings per share                            |       | $        | (0.21      | ) | $ | 0.14 |   | $ | 0.42 |   | $ | 0.04 |   | $ | 0.38 |   |
| Diluted  earnings per share                          |       | $        | (0.21      | ) | $ | 0.13 |   | $ | 0.39 |   | $ | 0.04 |   | $ | 0.35 |   |

 
|                              |       | **2003 Quarter Ended** |       |
|-----------------------------------|------------|------------------------|------------|
| **(dollars in millions)**         | ** ** | **March 31,**     | ** ** | **June 30,** | ** ** | **September 30,** |   | **December 31,** |   |
| Contract  Vehicles                |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| GSA  Schedules                    |       | $                      | 51.9       |   | 29.0 | % | $ | 53.9 |   | 28.4 | % | $ | 77.6 |   | 28.4 | % | $ | 84.6 |   | 27.1 | % |
| IDIQ  Contracts                   |       | 78.9                   |       | 44.1 |   | 83.3 |   | 43.9 |   | 119.8 |   | 43.9 |   | 148.4 |   | 47.5 |   |
| Open  Market                      |       | 27.0                   |       | 15.1 |   | 28.5 |   | 15.0 |   | 50.5 |   | 18.5 |   | 53.7 |   | 17.2 |   |
| Subcontracts  and Other Contracts |       | 21.1                   |       | 11.8 |   | 24.0 |   | 12.7 |   | 25.2 |   | 9.2 |   | 25.7 |   | 8.2 |   |
| Total                             |       | $                      | 178.9      |   | 100.0 | % | $ | 189.7 |   | 100.0 | % | $ | 273.1 |   | 100.0 | % | $ | 312.4 |   | 100.0 | % |
|                              |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Top  Five Vendors                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Panasonic                         |       | $                      | 34.8       |   | 19.5 | % | $ | 33.6 |   | 17.7 | % | $ | 48.4 |   | 17.7 | % | $ | 45.4 |   | 14.5 | % |
| HP                                |       | 30.3                   |       | 16.9 |   | 28.6 |   | 15.1 |   | 38.9 |   | 14.2 |   | 41.5 |   | 13.3 |   |
| Sun                               |       | 19.7                   |       | 11.0 |   | 34.8 |   | 18.3 |   | 38.9 |   | 14.2 |   | 36.7 |   | 11.7 |   |
| Cisco                             |       | 20.5                   |       | 11.5 |   | 18.1 |   | 9.5 |   | 32.2 |   | 11.8 |   | 42.1 |   | 13.5 |   |
| Microsoft                         |       | 14.9                   |       | 8.3 |   | 17.1 |   | 9.0 |   | 19.3 |   | 7.1 |   | 15.2 |   | 4.9 |   |
| Others                            |       | 58.7                   |       | 32.8 |   | 57.5 |   | 30.4 |   | 95.4 |   | 35.0 |   | 131.5 |   | 42.1 |   |
| Total                             |       | $                      | 178.9      |   | 100.0 | % | $ | 189.7 |   | 100.0 | % | $ | 273.1 |   | 100.0 | % | $ | 312.4 |   | 100.0 | % |

 

**Liquidityand Capital Resources**

 

*Cashflows for the year ended December 31,*

 
| **(in millions)**                                | ** ** | **2004** | ** ** | **2003** | ** ** | **Change** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Cash  provided by operating activities           |       | $        | 16.8       |     | $          | 4.6        |       | $ | 12.2 |   |
| Cash  used in investing activities               |       | $        | (7.5       | )        | $          | (7.9       | )          | $ | (0.4 | ) |
| Cash  (used in) provided by financing activities |       | $        | (9.1       | )        | $          | 3.4        |       | $ | 12.5 |   |

 

Cashprovided by operating activities for the year ended December 31, 2004 was$16.8 million, an increase of $12.2 million from cash provided for the yearended December 31, 2003.  Thisincrease was primarily due to improved collections of trade accountsreceivable. Total accounts receivable provided $10.7 million more to operationsin 2004 compared to 2003. In the latter half of 2004, we implemented newprocesses related to cash management that we feel had, and will continue tohave, a positive impact on cash from operations.

 

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Cashused in investing activities was relatively constant from 2003 to 2004 andconsisted principally of investments in our ERP system.

 

Cashused in financing activities of $9.1 million during 2004 was due primarily tothe net payments on our line-of-credit of $11.6 million.  This amount was partially offset by $2.6million in proceeds from stock options and employee stock purchase planactivity.  During 2003, we received cashproceeds of $5.3 million from net borrowings and used $4.0 million in the firsthalf of 2003 to purchase GTSI’s common stock from third partyshareholders.  During the year ended December 31,2004, we did not purchase any GTSI common stock.

 

*BankCredit Facility*

Wehave a $125 million credit facility with a group of banks (the “Credit Facility”).  The Credit Facility includes a revolving lineof credit (the “Revolver”) and a provision for inventory financing of vendorproducts (the “Wholesale Financing Facility”). The Credit Facility, unlessterminated earlier, will continue after the maturity date of February 28,2006 from year to year, unless any party gives the other party written noticeof termination not less than 90 days prior to the start of a new renewalperiod.  We are currently negotiatingwith our lead lender to increase the size of the Credit Facility and add otherpartners.  We expect to conclude thesenegotiations during the first half of 2005. Borrowing under the Revolver is limited to 85% of eligible accountsreceivable. The Revolver is secured by substantially all of our assets.Borrowing under the Wholesale Financing Facility is limited to 100% of thevalue of our inventory. The Wholesale Financing Facility is secured by theunderlying inventory. The Credit Facility carries an interest rate indexed toLondon Interbank Offered Rate (“LIBOR”) plus 1.75 percentage points. The CreditFacility also contains certain covenants as well as provisions specifyingcompliance with certain quarterly and annual financial ratios. In 2004, GTSIand its lenders signed three amendments to the Revolver to add a new lender andadd GTSI’s wholly owned subsidiaries, Technology Logistics, Inc. and GTSIFinancial Services, as borrowers.

 

AtDecember 31, 2004 and 2003, GTSI’s interest rate under the Credit Facilitywas 4.17% and 2.88%, respectively. We were in compliance with all financialcovenants set forth in the Credit Facility and had available credit of $59.0million at December 31, 2004 and $90.4 million at December 31, 2003.

 

*CapitalResources and Requirements*

Ourongoing capital requirements depend on a variety of factors, including theextent to which we are able to fund the cash needs of our business fromoperations.  During the first quarter of2004, we were able to pay completely our notes payable to banks.  We anticipate that we will continue to rely primarilyon operating cash flow, vendor credit and our Wholesale Financing Facility tofinance our operating cash needs. We believe that such funds should besufficient to satisfy our near term anticipated cash requirements foroperations.  Nonetheless, we may seekadditional sources of capital, including obtaining permanent financing over alonger term at fixed rates, to finance our working capital requirements orother strategic initiatives.  GTSIbelieves that such capital sources will be available to us on acceptable terms,if needed.  During 2004 and 2003 we madecapital expenditures of $5.5 million and $6.0 million, respectively, forcapitalized consulting costs associated with the implementation of our ERPsystem and the purchase of software for internal use, respectively.

 

**ContractualObligations (in millions)**

 
| ** **                     | ** ** | **Total** | ** ** | **Less Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** |
|--------------------------------|------------|-----------|------------|-----------------------|------------|----------------|------------|----------------|------------|
| Operating  Lease Obligations   |       | $         | 8.0        |                  | $          | 2.9            |       | $              | 3.8        |   | $ | 1.3 |   |
| Notes  Payable to Banks        |       | 1.2       |       | 1.2                   |       | —         |       | —         |       |
| Total  Contractual Obligations |       | $         | 9.2        |                  | $          | 4.1            |       | $              | 3.8        |   | $ | 1.3 |   |

 

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AtDecember 31, 2004 GTSI was obligated under an operating lease to provideour landlord with a letter of credit in the amount of $0.8 million as asecurity deposit for all tenant improvements associated with the lease. InFebruary, 2005 an amendment to the lease was executed which reduced the letterof credit to $0.2 million.  GTSI was alsoobligated to provide a letter of credit in the amount of $1.75 million toguarantee the performance by GTSI of all obligations under a customer contract.This letter of credit will expire on August 31, 2005.

 

**NewAccounting Pronouncements**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 123 (Revised2004) “Share-Based Payment” (“FAS 123R”), which is a revision of FASB StatementNo. 123, “Accounting for Stock-Based Compensation.”  FAS 123R supersedes Accounting PrincipalBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB25”) and its related implementation guidance. Generally, the approach toaccounting in FAS 123R requires all share-based payments to employees,including grants of employee stock options, to be recognized in the financialstatements based on the grant-date fair value of the award.  As permitted by FAS No. 123, GTSIcurrently accounts for share-based payments to employees using the intrinsicvalue provisions of APB 25 and, as such, generally recognizes no compensationcosts for employee stock options. Accordingly, the adoption of FAS 123R’s fairvalue method will have a significant impact on our results of operations,although it will have no impact on our overall financial position.  The impact of FAS 123R cannot be predicted atthis time because it will depend on levels of share-based payments granted inthe future. However, had we adopted FAS 123R in prior periods, the impact ofthat standard would have approximated the impact of FAS No. 123 asdescribed in the disclosure of pro forma net income and earnings per share inNote 1G to our consolidated financial statements in Part II, Item 8 ofthis Form 10-K. FAS 123R also requires the benefits of tax deductions inexcess of recognized compensation cost to be reported as a financing cash flow,rather than as an operating cash flow as required under current literature.This requirement will reduce net operating cash flows and increase netfinancing cash flow in periods after adoption. FAS 123R is effective as of thebeginning of the first interim or annual reporting period that begins after June 15,2005 and we will adopt the standard beginning July 1, 2005.  The Statement offers several alternatives forimplementation.  At this time, managementplans to use the modified prospective transition method. We are also evaluatingthe impact of FAS 123R on our employee stock purchase plan and may decrease ourcurrent 15% upfront purchase discount to employees.

 

InNovember 2004, the FASB issued SFAS No. 151 “Inventory Costs, anamendment of APB No. 43, Chapter 4,” (“FAS 151”) which clarifies the typesof costs that should be expensed rather than capitalized as inventory. Theamendments made by FAS 151 also clarify the circumstances under which fixedoverhead costs associated with operating facilities used in inventoryprocessing should be capitalized.  FAS151 is effective for inventory costs incurred during fiscal years beginningafter June 15, 2005. Earlier application is permitted for inventory costsincurred during fiscal years beginning after November 24, 2004. We arepresently analyzing the potential impact of this statement but do not expectthe adoption of FAS 151 will have a significant impact on our financialposition or results of operations.

 

**Outlook**

 

Asof December 31, 2004, our sales surpassed $1 billion for the firsttime.  We have initiated a strategicthree-year growth plan designed to capitalize on the government’s heighteneddemand for IT services and we plan to double our revenue to $2 billion, improveour productivity and increase our gross margins.  To double our sales we will continue to leveragethe strong growth of personnel in our sales and marketing organization. Inaddition, we are selectively, but aggressively, hiring talented employees andexpect our headcount to reach approximately 950 employees by the end of 2005.We expect to expand our sales from

 

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leasearrangements for IT products and solutions in 2005.  We have essentially completed the build-outof our ERP system. After full testing and retesting, extensive training anddocumentation of new work processes for SOX compliance, we plan to implementthe final phase of our ERP capabilities throughout GTSI in the second quarterof 2005.

 

Inaddition to the implementation of the final phase of our ERP system, severalother initiatives are underway to position GTSI to reach our strategic plangoal of increased productivity including proactive supply-chain management;customer, deal, and vendor profitability assessments; and order managementimprovements. Management is also evaluating various CRM solutions, includingthe future use of our existing CRM platform. If we select a new CRM Solution,we may incur an impairment charge for the write-off of our existing CRMsoftware.

 

Webelieve we can make significant improvements to net income. First, additionalsales are expected to improve net income. Second, improved margin percentagesare expected to increase bottom line growth. And third, we believe ourproductivity improvements will lower SG&A expense as a percentage of salesand improve net income margin.

 

**ITEM 15.****              ****EXHIBITS, FINANCIAL STATEMENTSAND SCHEDULES, AND REPORTS ON FORM 8-K:**

 

**Exhibits**

 

Theexhibits set forth in the Exhibit Index are filed as part of this AnnualReport on Form 10-K/A.

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon July 22, 2005 on its behalf by the undersigned thereunto dulyauthorized.

 
|   | **GTSI  CORP.**                                    |
|--------|----------------------------------------------------|
|   |                                               |
|   | By:                                                | /s/  M. DENDY YOUNG |   |
|   | M.  Dendy Young                                    |
|   | Chairman  and Chief Executive Officer              |
|   |                                               |
|   |                                               |
|   | /s/  THOMAS A. MUTRYN                              |   |
|   | Thomas  A. Mutryn                                  |
|   | Senior  Vice President and Chief Financial Officer |
|   | (Principal  Financial and Accounting Officer)      |
|        |                                                    |  |  |

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                          |
|---------------------|------------|----------------------------------------------------------------------------------------------------------|
| 31.1                |       | Section 302  Certification of Chief Executive Officer (filed herewith)                              |
| 31.2                |       | Section 302  Certification of Chief Financial Officer (filed herewith)                              |
| 32                  |       | Section 906  Certification of Chief Executive Officer and Chief Financial Officer (filed  herewith) |

 

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