In rebuilding effort, GTSI buys services business


The Herndon contractor said it has already paid $1.7 million in legal fees and cut staff to address SBA concerns. (NIKKI KAHN/THE WASHINGTON POST)
August 21, 2011

Herndon-based GTSI, seeking to recover from its Small Business Administration suspension last year, has bought Fredericksburg-based Information Systems Consulting Group in an effort to expand its services business.

The contractor, which resells computer hardware and software and provides related information technology services, was suspended after the SBA alleged it was part of a scheme that “resulted in contracts set aside for small businesses being awarded to ineligible contractors.” The suspension followed a Washington Post investigation that exposed relationships between GTSI and three small businesses, including Alaska native corporation EyakTek.

The suspension was lifted after GTSI and SBA agreed that the company would remove its chief executive and general counsel and turn over internal business documents.

Since then, company officials have said the company would look to acquisitions to improve its services portfolio. By buying InSysCo, GTSI said it particularly bolsters its software and database development expertise.

“This is a key milestone in the execution of the strategy” to beef up the professional services portion of the business and improve profitability, said Sterling E. Phillips Jr., GTSI’s president and chief executive, in a call with investors last week.

GTSI paid $15 million in cash for InSysCo, which Phillips said has about 115 employees and is expected to generate roughly $22 million in revenue this year. Its largest customer is the Internal Revenue Service.

Still, GTSI acknowledged it has challenges ahead. In a filing with the Securities and Exchange Commission, the company said it has already paid more than $1.7 million this year for legal and monitoring expenses related to the SBA agreement and expects additional costs. Phillips said the company’s suspension resulted in losing a “substantial number of experienced sales staff,” and, according to an SEC filing, the company trimmed its non-sales staff earlier this year, letting go about 35 employees and eliminating 15 open positions.

GTSI also continues to wrangle with EyakTek, of which it owns about 37 percent. Last year, GTSI filed a complaint against EyakTek and some of its owners and directors, alleging that it breached its operating agreement. Phillips said last week that the companies have put the legal proceedings on hold as they consider a settlement.

In the three-month period ended June 30, GTSI reported a loss of almost $1.5 million (15 cents a share), compared with a loss of $1.2 million (13 cents) in the same period a year earlier. Quarterly revenue dropped by nearly 40 percent to $81.3 million.

Still Phillips expressed optimism about the company’s future.

“It appears that we put the SBA suspension behind us in the second quarter,” he told investors. Despite other headwinds in the federal market, “the direct impact of the suspension on revenue now seems to be behind us.”

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