GTSI To Restate Financials

The government integrator will also restate its Form 10-Q for the first quarter of 2006 for the overstatement of accounts payable, resulting in an increase in gross margin and a reduced reported loss by up to $4 million.

Specifically, GTSI recorded total gains for transfers of lease receivables of $500,000 in 2003, $3.7 million in 2004 and $5.9 million in 2005. During an analysis of internal accounting processes, the company realized that incorporating a repurchase clause in those agreements would let it recognize gains on a portion of those transfers over the life of the leases rather than at the time of transfer.

That, in turn, allows the company to benefit if the interest rate drops, for example, or if the leased asset is refreshed and resold. In first quarter 2006, errors in certain systems and processes caused the cost of goods sold to be double-counted, requiring a restatement.

"This restatement will add [earnings before interest and taxes], not subtract," said Jim Leto, GTSI's president and CEO, during an investors call today. "This is a good thing, not a bad thing."

With 137 lease contracts to assess, Leto expects restatement of 2004, 2005 and the first quarter will happen in the next three to four weeks. That delay will likely cause the company to not meet the Nasdaq listing requirements for timely filing, resulting in a staff determination notice letter that outlines the process for delisting and appealing. Leto did not comment on how the company would respond.

Beyond the analysis of accounting processes, Leto discussed company efforts to deal with 90 percent of its order activity generating less than 10 percent of total revenue. Plans include outsourcing much of the small order activity.

"[We'll] sell products at the contracted price," Leto said. "We're not in the business of discounting to the lowest level. In every case where we sell at the lowest possible discount, we lose money on a small order. We can't afford to do that, and I think our customers understand that."

Given the restatement, GTSI could not provide hard numbers for the second quarter, though Leto confirmed the company would show a more conservative loss, improving revenue from the second quarter of 2005 and from the first quarter of this year. Not accounting for impact of the restatement, the unaudited second quarter pretax loss was about $3 million, compared to the $12 million pretax loss in the second quarter of 2005.

"The key takeaway is that we are implementing a strategic plan," Leto said. "Morale is high, and good employees are coming back to GTSI. [This is the] beginning of a remarkable turnaround of a truly remarkable company."