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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...... to ......
Registrant, State of Incorporation,
Address and Telephone Number
----------------------------
GRC INTERNATIONAL, INC.
(A DELAWARE CORPORATION)
1900 GALLOWS ROAD
VIENNA, VIRGINIA 22182
(703) 506-5000
Commission I.R.S. Employer
File No. Identification No.
- ---------- ------------------
1-7517 95-2131929
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO _____.
-----
Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock April 30, 1996
- --------------------- --------------
$.10 PAR VALUE 9,222,223 SHARES
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<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
A. FINANCIAL STATEMENTS
Consolidated Condensed Statements of Income 3
Consolidated Condensed Balance Sheets 4-5
Consolidated Condensed Statements of Cash Flows 6-7
Notes to Consolidated Condensed Financial Statements 8
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-11
C. PART II - OTHER INFORMATION 11
</TABLE>
NOTE: The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations although
the Company believes that the disclosures are adequate to make the
information presented not misleading.
It is suggested that these consolidated condensed financial statements be
read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
2
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- ------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES $28,981 $35,688 $ 89,935 $96,995
Cost of revenues 23,907 29,110 74,164 78,230
------- ------- -------- -------
GROSS MARGIN 5,074 6,578 15,771 18,765
General, administrative, marketing,
research and development expenses 5,742 5,143 15, 489 14,617
Provision for Losses 437 422 1,054 880
------- ------- -------- -------
OPERATING INCOME (LOSS) (1,105) 1,013 (772) 3,268
Interest income 93 113 255 334
Interest expense (288) (19) (470) (58)
------- ------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES (1,300) 1,107 (987) 3,544
Provision for income taxes --- --- --- ---
------- ------- -------- -------
NET INCOME (LOSS) $(1,300) $ 1,107 $ (987) $ 3,544
======= ======= ======== =======
INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $(.14) $.12 $(.11) $ .38
======= ======= ======== =======
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES 9,209 9,378 9,288 9,399
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
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GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1995
--------- --------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 92 $ 2,679
Accounts receivable 26,831 32,419
Unbilled reimbursable costs and fees 5,728 5,662
Inventories, at lower of cost or market 3,316 1,600
Other receivable 1,097 1,160
Prepaid expenses and other 2,264 918
-------- --------
Total current assets 39,328 44,438
-------- --------
PROPERTY AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization of $8,933 and $7,773 11,376 10,332
-------- --------
OTHER ASSETS:
Goodwill and other intangible assets, net 2,400 2,555
Deferred software costs, net 22,115 8,344
Deferred income taxes 2,561 2,561
Notes receivable and other 4,183 5,479
-------- --------
Total other assets 31,259 18,939
-------- --------
$ 81,963 $ 73,709
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1995
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 4,135 $ 7,774
Accrued compensation and benefits 12,221 11,960
Deferred income taxes 1,561 1,561
Accrued expenses 2,023 2,564
Other current liabilities 1,422 201
-------- --------
Total current liabilities 21,362 24,060
-------- --------
LONG-TERM DEBT 11,620 ---
-------- --------
OTHER NON-CURRENT LIABILITIES 2,565 1,381
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 9,521,000 shares
and 9,325,000 shares 952 932
Paid-in capital 75,927 76,812
Accumulated deficit (26,618) (25,631)
-------- --------
50,261 52,113
Less: Treasury stock, at cost; 300,000
shares and 142,500 shares (3,845) (3,845)
-------- --------
Total stockholders' equity 46,416 48,268
-------- --------
$ 81,963 $ 73,709
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
5
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
------------------
1996 1995
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(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ (987) $ 3,544
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,709 2,377
Provisions for losses on accounts
receivable, unbilled reimbursable costs
and fees 1,215 682
Changes in assets and liabilities:
Accounts receivable and unbilled
reimbursable costs and fees 4,307 1,674
Inventory (1,716) (416)
Other current assets (1,346) 1,067
Accounts payable, accruals and
other current liabilities (3,262) (1,153)
Other, net 21 (118)
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 941 7,657
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,294) (2,556)
Deferred software costs (including asset acquisition, see Note 3) (14,091) (4,745)
Other, net 1,354 (63)
-------- -------
NET CASH USED BY INVESTING ACTIVITIES (16,031) (7,364)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock --- (3,071)
New financing 11,620 ---
Other, net 883 331
-------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 12,503 (2,740)
-------- -------
DECREASE IN CASH & CASH EQUIVALENTS (2,587) (2,447)
-------- -------
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,679 3,660
-------- -------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 92 $ 1,213
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-----------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Cash transactions:
Interest $ 456 $ 58
Income taxes 181 371
</TABLE>
The accompanying notes are an integral part of these statements.
7
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GRC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(UNAUDITED)
(1) The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The results of
operations presented herein are not necessarily indicative of the results
to be expected for a full year. Although the Company believes that all
material adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim periods presented are
included and that the disclosures are adequate to make the information
presented not misleading, these consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1995.
(2) In December 1994, the Company announced that it had completed the
previously authorized repurchase of 300,000 shares of its common stock, at
a cost of $3,845,000, and that its Board of directors authorized the
repurchase of up to 200,000 additional shares of its common stock in the
open market or in private transactions.
The timing and number of shares of the repurchase of the additional 200,000
shares of common stock will depend greatly on market conditions and other
factors. The shares will be purchased with existing cash, short-term
borrowings, future cash flows, or a combination of these factors, and may
be retired or used for general corporate purposes. As of March 31, 1996,
the Company has not purchased any additional shares under its repurchase
program.
(3) In November 1995, the Company acquired the rights to the operating software
of Quintessential Solutions Inc. (QSI) at a cost of approximately $3.9
million. This software will be incorporated into the Company's
NetworkVUE(TM) product and as such it has been accounted for as deferred
software costs. In accordance with the purchase agreement, payments with a
net present value of $1.7 million have been deferred until future periods.
(4) The Company has a revolving credit and term loan agreement, secured by a
lien on all of the Company's assets. The revolving credit arrangement
entitles it to borrow up to a maximum of $15 million at the prime rate
(8.25% as of March 31, 1996). The revolving credit line is repayable on
January 15, 1998, but will automatically be renewed for successive, one-
year terms, unless the bank delivers written notice of non-renewal at least
fifteen months prior to the end of the initial term or any subsequent
renewal period. As of March 31, 1996, the Company had borrowed $9.0 million
of the $15 million revolving facility.
The term loan arrangement enables the Company to borrow up to $5 million
for acquisitions, working capital or other corporate purposes, also at the
prime rate. As of March 31, 1996, the Company had borrowed $2.6 million of
the $5 million term facility. The $2.6 million is due September 1, 1997.
8
<PAGE>
GRC INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 1996
(unaudited)
The revenues and operating income and interest expense of the Company are
presented for the periods indicated:
<TABLE>
<CAPTION>
Percentage
Three Months Ended Nine Months Ended Increase (Decrease)
3/31/96 3/31/95 3/31/96 3/31/95 Three Months Nine Months
-------- -------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 28,981 $ 35,688 $ 89,935 $ 96,995 (18.8)% (7.3)%
======== ======== ======== ========
Operating income (loss) $ (1,105) $ 1,013 $ (772) $ 3,268 (209.1) (123.6)
Interest income (expense), net (195) 94 (215) 276 (307.4) (205.9)
-------- -------- -------- --------
Income (loss) before income taxes (1,300) 1,107 (987) 3,544 (217.4) (127.8)
Provision for income taxes --- --- --- ---
_______ ________ ________ ________ N/A N/A
Net income (loss) $ (1,300) $ 1,107 $ (987) $ 3,544 (217.4) (127.8)
======== ======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
- ---------------------
Revenues were $29.0 million for the third quarter, compared with $35.7
million for the same quarter last year. The revenue decrease of $6.7 million or
18.8% is attributable to a $2.9 million decrease in the Companys professional
services revenues and a $3.8 million decrease in the service revenues associated
with subcontract work (work performed by other organizations and included in the
Companys revenues). The Company typically does not earn a fee on subcontract
revenues. Product sales were unchanged between the comparable periods. Revenues
were $89.9 million for the first nine months of fiscal 1996, compared with $97.0
million for the same period last year. The revenue decrease of $7.1 million or
7.3% is attributable to a $4.5 million decrease in the service revenues
associated with subcontract work and a $3.9 million decrease in the Companys
professional services revenues, which was partially offset by a $1.4 million
increase in product sales. The revenue decrease for both the quarter and the
year-to-date periods associated with subcontract revenues is the result of a
change in the accounting for a joint venture in which the Company participates.
Prior to the second quarter of fiscal 1996, the Company was required to
consolidate all of the revenues for a particular joint venture as entirely its
own revenues. Effective October 1, 1995, the Companys ownership interest in
this joint venture decreased, and as a result, the Company is only recognizing
its professional services revenues to the joint venture going forward. The
year-to-date increase in product sales is attributable generally to an
increase in all the categories of products being sold.
9
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Cost of revenues were $23.9 million for the third quarter, compared with
$29.1 million for the same quarter last year. The decrease of $5.2 million or
17.9% is attributable to a decrease of $3.4 million from the subcontract work, a
decrease of $2.1 million from the professional services business offset by an
increase of $0.3 million from product sales. Cost of revenues were $74.2 million
for the first nine months of fiscal 1996, compared with $78.2 million for the
same period last year. The decrease of $4.0 million or 5.2% is attributable to a
decrease of $3.8 million from subcontract work, and an increase of $1.4 million
from product sales and an decrease of $1.6 million from professional services
revenues.
Gross margin was $5.1 million or 17.5% of revenues for the third
quarter, compared with $6.6 million or 18.4% of revenues for the same quarter
last year. The decline in gross margin was due primarily to a shift in the mix
of federal government contracts from cost reimbursable to time and material and
fixed price contracts. This shift in contract mix has resulted in indirect costs
being absorbed by more contracts with fixed rates, thereby reducing margins.
Gross margin was $15.8 million or 17.5% of revenues for the first
nine months of fiscal 1996, compared with $18.8 million or 19.3% of revenues for
the same period last year. The decrease of $1.5 million for the quarter and $3.0
million for the first nine months is primarily attributable to a decline in
revenues and gross profit from the professional services business and increased
amortization associated with previously deferred software costs.
The Company had an operating loss of $1.1 million for the third quarter,
compared with an operating profit of $1.0 million for the same period last year.
The operating loss was $0.8 million for the first nine months of fiscal 1996,
compared with operating income of $3.3 million for the same period last year.
Included in the operating income for the first quarter of fiscal 1996, was a
beneficial $0.2 million reserve reversal, which was credited against the
general, administrative, marketing, research and development expenses. The $2.1
million decrease in operating income for the quarter and the $4.0 million
decrease for the first nine months is attributable to the decrease in gross
profits, an increase in sales and marketing expenses of approximately $0.9
million for the quarter, and $1.8 million for the first nine months, and an
increase in the loss provision.
The Company's net interest expense for both quarters and the first nine
months is the result of the borrowings used to support the commercial investment
activities.
Income taxes continue to be insignificant to the operating results, since
the Company can utilize its net operating loss carryforward to shelter its
income from tax.
A large percentage of the Company's revenues are derived from contracts
with the U.S. Department of Defense (DoD). Possible decreases or funding delays
in the DoD budget may negatively impact the Company's plans and ability to
achieve revenue growth. However, the Company believes that its contract base is
sufficiently diverse so that the cancellation of any one DoD program would not
have a material adverse effect on the Company. In addition, the Company also
believes that there are sufficient opportunities for other contract awards in
the DoD, NASA, other governmental agencies and the private sector to allow the
Company to sustain its revenue level or grow over time.
As of March 31, 1996, the value of the Company's backlog (without options)
approximates one years revenues, and the value of the total backlog (with
options) approximates two years revenues. The backlog consists of approximately
160 active contracts which vary in the period of performance from a few months
to multi-year. The work to be performed on these contracts involves the
following: information technology; studies and analysis; modeling and
simulation; and testing and evaluation.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has been able to finance its operations from a combination of
internally generated working capital and borrowing against its available credit
facilities. Management believes, with anticipated sales from its OSU(R) and
NetworkVUE(TM) products, that the Company has adequate capital resources to
finance its
10
<PAGE>
current and future operations from existing or internally generated working
capital and available credit. The Company has a revolving credit and term loan
agreement, secured by a lien on all of the Company's assets. The revolving
credit facility entitles the Company to borrow up to $15 million at the prime
rate (8.25% as of March 31, 1996). The revolving credit line is payable January
15, 1998, but is automatically renewed for successive, one-year terms, unless
the bank delivers written notice of non-renewal at least fifteen months prior to
the end of the initial term or any subsequent renewal period. As of March 31,
1996, the Company had borrowed $9.0 million of the $15 million revolving
facility.
The term loan arrangement enables the Company to borrow up to $5 million
for acquisitions, working capital or other corporate purposes, also at the prime
rate. As of March 31, 1996, the Company had borrowed $2.6 million of the $5
million term facility. The $2.6 million is due September 1, 1997.
During the first nine months of fiscal year 1996, the Company increased its
deferred software costs by a net $13.8 million, resulting in a balance at
March 31, 1996 of approximately $22.1 million. The Company capitalizes
internal software costs incurred for products to be sold only after
technological feasibility has been established. The majority of the deferred
software costs relates to the Companys efforts associated with its OSU(R)
Network Interface telecommunications product and its NetworkVUE(TM)
telecommunications software. In November 1995, the Company acquired the rights
to the operating software of Quintessential Solutions Inc. (QSI) at a cost of
approximately $3.9 million. This software will be incorporated into the Companys
NetworkVUE(TM) product and as such it has been accounted for as deferred
software costs. In accordance with the purchase agreement, payments with a net
present value of $1.7 million have been deferred until future periods.
During fiscal year 1996, the Company will continue to increase its deferred
software costs associated with its OSU(R) Network Interface telecommunications
product and its NetworkVUE(TM) telecommunications software. The Company intends
to finance the deferred software costs with internally generated working capital
and borrowings against its available credit facilities.
As of March 31, 1996, the Company had $0.1 million of cash and cash
equivalents available to support its working capital requirements.
PART II - OTHER INFORMATION
ITEMS 1, 2, 3, 4 AND 5 ARE INAPPLICABLE.
- ----------------------------------------
ITEM 6(A) EXHIBITS.
- -------------------
None.
ITEM 6(B) - REPORTS ON FORM 8-K.
- --------------------------------
None.
11
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SIGNATURES
----------
Pursuant to the requirements 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.
GRC INTERNATIONAL, INC.
By: /s/ Ronald B. Alexander
----------------------------------------
Ronald B. Alexander
Senior Vice President - Finance
Chief Financial Officer & Treasurer
May 15, 1996
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME ON PAGES 3 AND
THROUGH 5 OF GRC INTERNATIONAL'S FROM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 92
<SECURITIES> 0
<RECEIVABLES> 26,847
<ALLOWANCES> 16
<INVENTORY> 3,316
<CURRENT-ASSETS> 39,328
<PP&E> 20,309
<DEPRECIATION> 8,933
<TOTAL-ASSETS> 81,963
<CURRENT-LIABILITIES> 21,362
<BONDS> 0
0
0
<COMMON> 952
<OTHER-SE> 45,464
<TOTAL-LIABILITY-AND-EQUITY> 81,963
<SALES> 89,935
<TOTAL-REVENUES> 89,935
<CGS> 74,164
<TOTAL-COSTS> 74,164
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,054
<INTEREST-EXPENSE> 215
<INCOME-PRETAX> (987)
<INCOME-TAX> 0
<INCOME-CONTINUING> (987)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (987)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
