GTSI's CEO recalls company's near-death experience

When Jim Leto steps down Feb. 15 as GTSI's chief executive officer, he does so knowing that he brought the company back from the brink of disaster.

Just four years ago this month, when Leto took the helm, GTSI was being hounded by creditors. 

“The company was a breath away from declaring bankruptcy,” Leto told Washington Technology. “We were served notice by the banks that they weren’t going to renew our credit facility.”

At the time GTSI owed the banks millions of dollars, he said.

“My first challenge [here] was to go find somebody that would loan us money,” Leto added.

He immediately signed a forbearance agreement with his creditors by which the banks would give him less than four months to repay the loans, during which time they hold off putting the company into receivership.

As Leto recalled, he had two assets going for him as he went in search of new funding – his decade on the GTSI board and a strong reputation for success in the local community.

“I was betting that the banks would see a continuity of leadership by virtue of my participation on the board as a significant benefit in terms of taking the risk, that was No. 1. No 2 this wasn’t the first company that I’ve turned around,” he said. “I’d done this four or five times previously.”

Leto secured a syndicated revolving credit facility for GTSI that was loaded with “a whole bunch of onerous covenants,” he said. “So the first year that we had this banking facility we probably paid a million dollars in default fees for covenants that I knew we could never reach.”

Leto called it a risk that had to be taken if the company was to survive. Leto said he also took a risk by altering GTSI’s business model, moving away from being strictly a government reseller of commercial off-the-shelf (COTS) IT products by adding a services component.

The move was predicated by the government’s decision in 2000 to implement “smart buy,” bundling agencies’ IT hardware purchases and using a reverse auction method of procurement, which would dramatically reduce profit margins, Leto said.

“The only way to protect your margin is to provide true value. So we said if we’re going to survive as a company we needed to become a solutions provider, albeit a COTS solutions provider.”

Leto described GTSI’s new business plan as a hybrid; the company was not a custom software developer but would provide a variety of standard technologies to create unique solutions “but more important, through technology life-cycle management, we’ll finance the whole package for you.

"That changed the paradigm of the company,” he said. Today, services represent about 30 percent of revenue, “which is a huge shift for the company. And we expect that over time we’d like to get that number to upwards of 50 percent [which] changes the total valuation model for the company but it’s the direction that we’re planning to take the company.”

GTSI leasing business also has grown significantly in the past four years, Leto said. “We finance probably a third of the total major transactions that we do today.”

He said final figures aren’t in yet for fiscal 2009, but he added, “We’re pretty confident that we’ll exceed our 20 percent growth objective.

“When you consider that 2009 was a disaster for a lot of people in the neighborhood, we did quite well,” he said.

By his own accounting, GTSI has amassed more than $50 million in cash and is debt-free. “We have the highest earnings level in the company’s history,” he said.

Leto’s successes have not altered his original plans to step aside this month. “I told the board two years ago that in 2010 I’ll be 66 years old and I plan to retire.” He will remain on the board and act as a company consultant through the end of the year.

Leto said when he promoted Scott Friedlander to president and COO in November 2007 he told the board that it was their succession plan and that over the next two year he would groom him to step into the top job seamlessly. Friedlander will become the new CEO on Feb. 15.

For the past 15 years or so, Leto has commuted each week to the Northern Virginia area, flying either from his home near Travis City in northern Michigan or from his winter home in Sarasota, Fla. He said he and his wife, who met when they were 16, think it’s time to spend more time together.

“I have two and a half million frequent flier miles on Northwest Airlines,” he said. Some of those miles no doubt will be used for Leto’s work on advisory boards at Virginia Tech and George Mason University. He also plans to teach a course at the Darden School of Business at the University of Virginia.

“So I will not be leaving [the area permanently] anytime soon,” he said.