<PAGE>
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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 September 30, 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 issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock October 31, 1996
- --------------------- ----------------
$.10 PAR VALUE 9,337,151 SHARES
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<PAGE>
CONTENTS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-Q Quarterly Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the "Risk Factors" section of "Management's Discussion and
Analysis". Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's analysis only as of the date
hereof. The Company undertakes no obligation to publicly revise these forward-
looking statements, to reflect events or circumstances that arise after the date
hereof. Readers should carefully review the risk factors described in the
Company's Form 10-K Annual Report and other documents the Company files from
time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed by the Company subsequent to this
Form 10-Q and any Current Reports on Form 8-K filed by the Company.
<TABLE>
<CAPTION>
PAGE
----
<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 8-9
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-17
C. PART II - OTHER INFORMATION 18
</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.
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
----- -----
<S> <C> <C>
REVENUES $30,134 $32,686
Cost of revenues 25,300 27,542
------- -------
GROSS MARGIN 4,834 5,144
Research and Development 934 191
Sales and Marketing 1,725 788
General and Administrative 4,649 3,597
------- ------
Total Operating Expenses 7,308 4,576
OPERATING INCOME (LOSS) (2,474) 568
Interest (expense) income, net (136) 63
------- -------
INCOME (LOSS) BEFORE INCOME TAXES (2,610) 631
Provision for income taxes --- ---
------- -------
NET INCOME (LOSS) $(2,610) $ 631
======= =======
INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (.28) $ .07
======= =======
COMMON SHARES USED FOR EPS
CALCULATION 9,301 9,505
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
------------- --------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 291 $ 2,790
Accounts receivable 27,109 29,966
Unbilled reimbursable costs and fees 4,878 4,033
Inventories, at lower of cost or market 2,713 2,635
Other receivables 1,259 1,018
Prepaid expenses and other 1,904 1,462
------- -------
Total current assets 38,154 41,904
------- -------
PROPERTY AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization of $10,224 and $9,465 12,350 12,267
------- -------
OTHER ASSETS:
Goodwill and other intangible assets, net 2,325 2,311
Deferred software costs, net 13,173 11,216
Deposits and other 6,383 6,403
------- -------
Total other assets 21,881 19,930
------- -------
$72,385 $74,101
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
-------------- ---------
(IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,864 $ 1,823
Accounts payable 3,230 6,382
Accrued compensation and benefits 12,535 13,125
Accrued expenses 1,696 2,095
Other current liabilities 2,895 2,885
-------- --------
Total current liabilities 22,220 26,310
-------- --------
LONG-TERM DEBT 22,602 17,770
-------- --------
OTHER NON-CURRENT LIABILITIES 1,385 1,346
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 9,637,000 shares
and 9,586,000 shares 964 958
Paid-in capital 74,937 74,830
Accumulated deficit (45,878) (43,268)
-------- --------
30,023 32,520
Less: Treasury stock, at cost; 300,000 shares (3,845) (3,845)
-------- --------
Total stockholders' equity 26,178 28,675
-------- --------
$ 72,385 $ 74,101
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
1996 1995
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income (loss) $ (2,610) $ 631
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,027 770
Provisions for losses on accounts
receivable, unbilled reimbursable costs
and fees, and inventory 159 320
Changes in assets and liabilities:
Accounts receivable and unbilled
reimbursable costs and fees 1,853 (173)
Inventory (78) 3
Other current assets (442) (301)
Accounts payable, accruals and
other current liabilities (4,144) (2,486)
Other, net 12 46
-------- -------
NET CASH USED BY OPERATING ACTIVITIES (4,223) (1,190)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (950) (1,057)
Deferred software costs (2,062) (2,342)
Other, net (290) (258)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (3,302) (3,657)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings 4,874 2,350
Sale of common stock 113 ---
Other, net 39 (161)
------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 5,026 2,189
------- -------
DECREASE IN CASH & CASH EQUIVALENTS (2,499) (2,658)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,790 2,679
------- -------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 291 $ 21
======= =======
</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>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
------ -----
(IN THOUSANDS)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Cash transactions:
Interest paid $ 378 $ 14
Income taxes paid --- 19
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
GRC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
(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, 1996.
(2) 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. Under the purchase agreement, payments with a net present
value of $1.9 million were deferred until future periods. The Company has
notified QSI that the Company will not make a $600 thousand payment due
November 27, 1996, because of breaches of the purchase agreement by
QSI.
(3) 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 $22 million at the prime rate
(8.25% as of September 30, 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 September 30, 1996, the Company had borrowed $10.5
million of the $22 million revolving facility.
In June 1996, the Company completed a $7.5 million financing of
substantially all of its furniture and equipment. The loan is being
amortized over a five year period at an interest rate of 9%.
8
<PAGE>
Long term debt at September 30, 1996, consists of the following:
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
------------------ -------------
<S> <C> <C>
Revolving Credit Agreement $10,457 $ 5,425
Term Loans 5,000 5,000
Equipment Financing 7,146 7,346
Other 1,863 1,822
------- -------
Total Long Term Debt $24,466 $19,593
Less: Current Portion 1,864 1,823
------- -------
$ 22,602 $17,770
======== =======
</TABLE>
(4) Changes in Presentation - Certain amounts in the September 30, 1995
-----------------------
Consolidated Financial Statements have been reclassified to conform to the
September 30, 1996 presentation.
9
<PAGE>
GRC INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND1995
(UNAUDITED)
SUMMARY
The revenues and operating income and interest expense of the Company are
presented for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Percentage
9/30/96 9/30/95 Increase (Decrease)
------- ------- ------------------
<S> <C> <C> <C>
Revenues $ 30,134 $32,686 (7.8)%
======== =======
Operating income (2,474) $ 568 (535.6)%
Interest income (expense), net (136) 63 (315.9)%
-------- -------
Income before income taxes (2,610) 631 (513.6)%
Provision for income taxes --- ---
-------- -------
Net income $ (2,610) $ 631 (513.6)%
======== =======
</TABLE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- ----------------------------------------------------------------------
Revenues
- --------
The Company's revenues were $30.1 million for the first quarter of fiscal
1997, compared to $32.7 million for the same quarter last fiscal year. The
revenue decrease of $2.6 million or 8% is substantially attributable to the $4.5
million decrease in service revenues from the minority-interest portion of a
majority-owned joint venture which was accounted for on a consolidated basis
through the first quarter of fiscal 1996. Consolidated first quarter 1997
service revenues of $28.2 million increased 5%, compared to first quarter 1996
service revenues, excluding the joint venture referred to above, of $26.9
million. Consolidated first quarter 1997 product revenues of $1.9 million
increased 46%, compared to first quarter 1996 product revenues of $1.3 million.
For the Company's Professional Service Organization ("PSO"), excluding the
joint venture referred to above, service revenues of $27.3 million for the first
quarter of fiscal 1997 increased 3% above service revenues of $26.4 million for
the first quarter of fiscal 1996. Product revenues of $328 thousand for the
first quarter of fiscal 1997 decreased 10% from product revenues of $366
thousand for the first quarter of fiscal 1996.
For the Company's Telecommunications Division ("Telecom" ), first quarter
fiscal 1997 revenues were $1.2 million, compared to none for the first quarter
of fiscal 1996. Revenues
10
<PAGE>
from the OSU(R) business unit for the first quarter of fiscal 1997 amounted to
$308 thousand, from the NetworkVUE(TM) business unit amounted to $197 thousand,
and from the Application Software Group amounted to $670 thousand.
For the Company's Advanced Product's Division ("APD"), first quarter fiscal
1997 revenues were $1.3 million, compared to approximately $1.4 million for the
first quarter of fiscal 1996. The GRC Instruments ("GRC Instruments") materials
testing business unit of APD had first quarter 1997 revenues of $459 thousand, a
21% decline from first quarter 1996 revenues of $578 thousand. The Commercial
Information Solutions ("CIS") environmental, safety, and health management
software business unit had $232 thousand first quarter 1997 revenues, compared
to revenues of approximately $479 thousand for the prior year quarter, a decline
of 52% due to the pending completion of the next generation of CIS's software
product offering. The Advanced Security Technologies ("AST") business unit of
APD had first quarter 1997 revenues of $469 thousand, compared to none in the
previous year's quarter since the security business was not acquired until the
second fiscal quarter of 1996. Finally, the Advanced Technology Services ("ATS")
business unit of APD had first quarter 1997 revenues of $146 thousand, compared
to revenues of $371 thousand for the prior year, a decline of 61%.
Cost of Revenues and Gross Profit
- ---------------------------------
The Company's cost of revenues were $25.3 million for the first quarter of
fiscal 1997, compared to $27.5 million for the same quarter last year.
Accordingly, the Company's gross profit for the first quarter of fiscal 1997 was
$4.8 million, or 16% of revenues, a 6% decline from the gross profit of $5.1
million, or 16% of revenues, for the first quarter of fiscal 1996.
For PSO, excluding the joint venture referred to above, cost of revenues of
$22.6 million increased 1% from the $22.3 million cost of revenues for the first
quarter of the prior year. Gross profit of $5.0 million, or 18% of revenues,
increased by 11% over gross profit of $4.5 million, or 17% of revenues, for the
prior year's quarter.
For Telecom, first quarter cost of revenues were $1.7 million, compared to
none for the first quarter of fiscal 1996. Cost of revenues for the first
quarter of fiscal 1997 were $722 thousand, $454 thousand, and $489 thousand for
the OSU(R), NetworkVUE(TM), and ASG business units, respectively. Accordingly,
gross profit for Telecom for the first quarter amounted to a negative $490
thousand, comprised of a negative $414 thousand, a negative $257 thousand, and a
positive $181 thousand from the OSU, NetworkVUE and ASG business units,
respectively. Negative gross margins for the OSU and NetworkVUE business units
resulted from gross profits from unit sales being insufficient to cover the
fixed cost of revenues associated with those business units.
For APD, first quarter fiscal 1997 cost of revenues were $993 thousand,
compared to approximately $930 thousand for the first quarter of fiscal 1996.
GRC Instruments had first quarter 1997 cost of revenues of $233 thousand,
compared to prior year cost of revenues of $346 thousand. CIS had first quarter
cost of revenues of $210 thousand, compared to prior year cost of revenues of
approximately $218 thousand. AST had first quarter cost of revenues of $414
thousand and none for the prior year since the security business was not
acquired
11
<PAGE>
until the second quarter of fiscal 1996. Finally, ATS had first quarter cost of
revenues of $136 thousand, compared to cost of revenues of approximately $366
thousand for the prior year.
Accordingly, APD had a gross profit for the first quarter of fiscal 1997 of
$314 thousand, or 24% of APD revenues, comprised primarily of $226 thousand, or
49% of revenues, for GRC Instruments, $23 thousand, or 10% of revenues, for CIS,
and $55 thousand or 12% of revenues for AST. This compares with APD's gross
profit for the first quarter of fiscal 1996 of approximately $497 thousand, or
35% of revenues, comprised primarily of $232 thousand, or 40% of revenues, for
GRC Instruments and $260 thousand, or 54% of revenues, for CIS.
Operating Expenses and Operating Income
- ---------------------------------------
Operating expenses for the first quarter of fiscal 1997 amounted to $7.3
million, or 24% of revenues, compared to $4.6 million, or 14% of revenues for
the first quarter of the prior year, an increase of $2.7 million on a year-to-
year basis.
Research & Development expenses of $934 thousand for the first quarter of
fiscal 1997 increased $743 thousand over R&D expenses for the prior year quarter
of $191 thousand due to the completion of the OSU(R) Network Interface unit in
the fourth quarter of fiscal 1996 and the redeployment of development resources.
During the first quarter of fiscal 1997, the Company capitalized $2.1 million,
$1.7 million of which related to NetworkVUE(TM), $258 thousand of which related
to OSU(R), and $95 thousand of which related to ASG. Total product development
effort, including research and development expenses and capitalized software
development expenses, in the first quarter of fiscal 1997 were $3 million, a 20%
increase over the $2.5 million expended in the prior year quarter. In the first
quarter of fiscal 1997, 69% of the total product development effort was
capitalized, compared to 92% in the prior year quarter. With the first
commercial release of the NetworkVUE product in mid-October, 1996, the Company
anticipates that the level of capitalization for NetworkVUE will decline
substantially and the amortization to cost of revenues of amounts previously
capitalized with respect to NetworkVUE will begin for the second and subsequent
quarters of fiscal 1997.
Sales and Marketing expenses of $1.7 million for the first quarter of
fiscal 1997 increased $937 thousand, or 119%, over sales and marketing expenses
for the prior year quarter of $788 thousand. This increase arose primarily from
Telecom, where sales and marketing expenses increased from $266 thousand last
year to $1.1 million for the first quarter this year. This increase arose from
the commercial availability of the OSU(R) unit during the first quarter and the
anticipated commercial availability of the NetworkVUE(TM) product early in the
second quarter, which was, in fact, commercially released in mid-October 1996.
General & Administrative expenses of $4.6 million increased $1 million, or
28%, over the $3.6 million incurred in the prior year quarter. The increase in
G&A expense arose primarily in the increased infrastructure related to Telecom
where G&A expenses increased from $329 thousand in the first quarter last year
to $784 thousand in the first quarter this year, an increase of 138%, and in APD
where G&A expenses increased from $233 thousand last year to $489 thousand this
year, an increase of 110%.
Accordingly, operating expenses rose from $4.6 million in the first quarter
of fiscal 1996 to $7.3 million in the first quarter this year, and operating
profit declined from a profit of $568 thousand last year to a loss of $2.5
million this year.
12
<PAGE>
Operating Profit or Loss
- ------------------------
The Company's operating loss for the first quarter of fiscal 1997 amounted
to a consolidated operating loss of $2.5 million, consisting of a $1.7 million
operating profit from PSO, a $2.8 million operating loss from Telecom, a $1.2
million operating loss from APD, and a $128 thousand operating loss from
Corporate. This contrasts with a consolidated operating profit of $568 thousand
for the first fiscal quarter of 1996, consisting of approximately a $1.4 million
operating profit from PSO, a $604 thousand operating loss from Telecom, and
approximately a $230 thousand operating loss from APD.
Net Interest Income or Expense
- ------------------------------
Net interest expense in the first quarter of fiscal 1997 was $136 thousand,
compared to net interest income of $63 thousand in the prior year. The
increased interest expense is due to the Company's increasing reliance on debt
to fund its losses from operations and other liquidity requirements.
Net Income or Loss
- ------------------
The net loss for the first quarter of fiscal 1997 amounted to $2.6 million,
compared to a profit of $631 thousand in the first quarter of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company had $291 thousand in cash and cash equivalents at September 30,
1996, compared to $21 thousand at September 30, 1995. Net cash used in
operations amounted to $4.2 million for the first quarter of fiscal 1997,
compared to $1.2 million for the first quarter of fiscal 1996. Net cash used in
investing activities for the first quarter of fiscal 1997 amounted to $3.3
million, compared to $3.7 million for the prior year quarter. Net cash provided
by financing activities amounted to $5.0 million for the first quarter of fiscal
1997, compared to $2.2 million provided in the first quarter of fiscal 1996.
Cash flows from operations, adjusted for cash used in developing software,
was a negative $6.3 million and a negative $3.5 million in the first quarter of
fiscal 1997 and 1996, respectively.
As a result of the increase in debt during the first quarter of fiscal
1997, the Company's ratio of debt to total capitalization amounted to 48%,
compared to 41% at June 30, 1996.
During fiscal years 1994, 1995, 1996, and the first quarter of fiscal 1997,
the Company's total cash investment in operating losses, capital equipment, net
assets, including deferred software production costs, for Telecom amounted to
approximately $37 million. This was funded primarily by a combination of
internally generated cash flows from PSO and from increased bank debt.
At September 30, 1996, the Company had $24.5 million of debt, $1.9 million
of which was classified as short term, and $22.6 million of which was classified
as long term. Of these amounts, $22.6 million was bank debt and $1.9 million was
a note payable related to the 1996
13
<PAGE>
acquisition of assets from Quintessential Solutions, Inc. The Company had no
bank debt at June 30, 1995 and $17.8 million of bank debt at June 30, 1996.
The credit facilities with the Company's bank consist of a fully used $5
million term loan, a $22 million revolving line of credit, of which $10.5
million was used at September 30, 1996, and a $7.1 million debt arising from the
equipment financing arranged with the bank's equipment leasing subsidiary. The
term loan is due on September 1, 1998, and bears interest at the bank's floating
prime rate, currently 8.25% per annum. The revolving line of credit is due on
January 15, 1998, and, if the Company is not in default, is automatically
renewable for one-year renewal terms unless the bank, at its option, delivers
written notice of non-renewal to the Company at least 15 months prior to the end
of the initial term or any renewal term. The revolving line of credit bears
interest at the bank's floating prime rate, currently 8.25% per annum. The
equipment financing is for a term of 60 months.
The Amended and Restated Revolving Credit and Term Loan Agreement
containing the term loan and the revolving line of credit was amended as of
March 31, 1996, and again as of June 30, 1996, to amend various financial ratio
covenants so as to bring the Company into compliance with those covenants as of
those dates.
At September 30, 1996 the Company was in compliance with its covenants
under this Agreement. Whether the Company will be in compliance with the
financial covenants of the Loan Agreement in the future is a function of the
Company's results of operations for future quarters, and, if the Company is not
in compliance there can be no assurance that the bank will be willing to again
amend the Loan Agreement to bring the Company into compliance.
During the first quarter of fiscal 1997, the Company increased its bank
debt by $4.9 million, a cash "burn" rate of approximately $1.6 million per
month. At the end of the first quarter, $11.5 million was the remaining balance
available on the Company's revolving line of credit. Given the relatively high
levels of debt already incurred by the Company, maintaining the Company's future
liquidity and the availability of needed capital resources requires that either
the Telecom business units begin generating positive operating cash flows, or
the Company raise additional equity, or the Company enter into strategic
financial and marketing relationships with appropriate participants in the
telecommunications industry segment, or a combination of these corporate finance
strategies. As previously announced, the Company has retained Smith Barney Inc.
as its financial advisor to assist the Company in evaluating all possible
financial and strategic options. There can be no assurance, however, that any
or all of these options will be feasible, effective, or sufficient to satisfy
the Company's liquidity requirements. If the Company's results of operations
continue at the level of losses recently sustained, the Company's ability to
secure debt or equity financing may become increasingly difficult.
OUTLOOK
- -------
As forward-looking statements where actual results may differ materially
from those planned or expected, the Company believes that the following are the
current outlooks for its various Divisions:
For PSO, given its anticipated high win rates on new bids, and its enhanced
focus on marketing its information technology services both within the
government and in commercial areas, the Company believes that PSO should be able
to sustain average long-term growth
14
<PAGE>
rates greater than it has been able to achieve in recent years. PSO, for this
fiscal year, should continue to achieve positive operating results and positive
cash flows.
For Telecom's OSU(R) business unit, the Company has commissioned market
surveys to determine the nature, extent, and timing of the addressable market
served by the OSU Network Interface unit and the relative position of the OSU
product offering within that anticipated market. There can be no assurance that
these surveys will indicate that there is a substantial current or imminent
market for the Company's product offerings or that, if there is such a current
or imminent market, that the Company can compete effectively within that market.
The Company's results of operations to date from the OSU business unit have not
yet indicated that such a current or imminent market exists.
For Telecom's NetworkVUE(TM) business unit, in mid-October 1996, the
Company commercially released the first version of its NetworkVUE software
suite. A fully competitive commercial product may require subsequent product
versions having a more complete set of features and functions. There can be no
assurance that the Company now has a competitive commercial product or that it
can effectively compete in the market against established competitors. Given the
recent first commercial release of a NetworkVUE product, the Company has only
minimal operating history and, thus, cannot yet project whether or not it will
be successful with this product in this market.
For both the OSU(R) and NetworkVUE(TM) business units, given the early
stage of these business units' commercial sales efforts, these units are
expected to continue to sustain losses from operations and negative cash flows
for at least this fiscal year.
For Telecom's Application Software Group, the Company is optimistic
regarding the Group's current and future prospects to engage in highly
sophisticated and leading-edge software development for the telecommunications
industry. However, given the early stage of this business unit's operating
history, and its reliance upon one customer, ASG is expected to have essentially
small loss to break-even cash flows for this fiscal year. The Company, however,
expects a growth in revenues recognized by the Group and an operating profit for
this fiscal year.
For APD, given the maturity of the GRC Instruments materials testing
business, the recent redevelopment of the FLOW GEMINI(TM) environmental, safety,
and health management software of the CIS business unit, and growth prospects
for the AST security and ATS systems integration business units, the Company
expects a growth in revenues and gross margins for the Division, but, continued
losses and negative cash flows for this fiscal year.
Given the level of debt being carried by the Company, and its expected
increase during the next fiscal year, and the expected negative cash flows for
the next fiscal year, the Company expects net interest expense to increase for
the next fiscal year.
See "Risk Factors", below, for factors which could cause actual results to
differ materially from those outlined in this Outlook section.
15
<PAGE>
RISK FACTORS
- ------------
The Private Securities Litigation Reform Act of 1995 (the "Reform Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. Except for
the historical information contained herein, the matters discussed in this Form
10-Q Quarterly Report which relate to present or future events or trends are
intended to be forward-looking statements which involve risks and uncertainties.
Although the Company believes that the expectations reflected in such forward-
looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved. Important factors that could
cause actual results to differ materially from the Company's expectations are
disclosed in conjunction with the forward-looking statements and again below.
PSO derives substantially all of its business from service contracts
with the Department of Defense of the United States government. This business
is subject to the uncertainties of the U.S. budget, funding for the DoD,
terminations of contracts for cause or government convenience, the type of
contracts which may be awarded to the Company, and the ability of the Company to
fill the required staff positions to service those contracts. These open
positions require operations research and software engineers, computer
programmers, and other skilled scientists and engineers, employees for whom
there is a general shortage and a high degree of competitive pressure. At
September 30, 1996, the Company had openings for approximately 274 employees, of
which 219 related to positions for PSO. This contrasts with the Company's
openings at June 30, 1996 for 245 employees, of which 209 related to positions
for PSO. An inability to fill a substantial portion of these current openings
could have a materially adverse impact on PSO's revenue growth and
profitability. Although PSO's contracts number approximately 150, the loss of
one or more of these contracts may have a substantial adverse impact on PSO's
revenues and profitability, if the particular contract is large in relation to
the rest.
Telecom is a new business division for the Company, competing in a new
industry segment, not related to government contracting. The OSU(R) Network
Interface business unit sells hardware having a critical software component to
the telecommunications industry and large private corporate users. The
NetworkVUE(TM) business unit sells software and provides related services to the
telecommunications industry, large corporate users, and to intermediary software
and service providers to these end users. The Application Software Group
provides software engineering and computer programming to the telecommunications
industry. Actual results may differ materially from those planned or expected
for these business units within Telecom, depending on the adverse impact of the
following risk factors:
. In all cases, the Company must attract, hire, and retain employees
with the requisite training and experience in these industry
segments, and the Company's business units must compete
successfully with large well established companies already having
product and service offerings which are familiar to the end users
in the relevant segments.
16
<PAGE>
. The Company's OSU(R) product offering is dependent upon a
substantial growth in the need for transmission bandwidth into
customer premises causing the growth and development of fiber optic
transmission services, the SONET (synchronous optical network)
transmission protocol, and ATM switching technology (asynchronous
transfer mode) and upon a matching of the features and functions of
the Company's product offerings with the industry's requirements,
as well as the buying procedures and lead times of established
telecommunications service and equipment providers, which are not
yet accustomed to buying a product offering from the Company.
. The Company has commissioned market surveys to determine the
nature, extent, and timing of the addressable market served by the
OSU(R) Network Interface unit and the relative position of the OSU
product offering within that anticipated market. There can be no
assurance that these surveys will indicate that there is a
substantial current or imminent market for the Company's product
offerings or that, if there is such a current or imminent market,
that the Company can compete effectively within that market. The
Company's results of operations to date from the OSU business unit
have not yet indicated that such a current market exists.
. The Company's NetworkVUE(TM) product and service offering is
dependent upon the successful marketing of the first version of the
product, commercially released in mid-October 1996, the matching of
the features and functions of this product, any subsequently
released successor version of this product, and related service
offerings with the needs of the telecommunications industry, large
corporate end users, and intermediate service and product
providers, and upon the Company's ability to successfully compete
against larger already established competitors and competitive
products in this market segment.
. The Company's Application Software Group is, at present, a new
business unit having one primary customer, Lucent, and is dependent
upon attracting new clients.
. The Company in general and Telecom business units in particular
have not yet established sustained and continuing successes with
their sales and marketing strategies and, thus, do not yet have the
operating history which can serve as the basis for forecasting the
future results of plans and budgets with small variability in
expected results. Thus, the risk inherent in these businesses at
this time is high.
. Given the Company's increased reliance upon debt financing, the
financial risk arising from increased leverage is higher than it
has been in recent years and will probably grow higher during the
next fiscal year.
. If, in order to increase its liquidity, the Company were to issue
additional equity, there can be no assurance that the current
shareholders would not be diluted in their current ownership
interest in the Company.
17
<PAGE>
PART II - OTHER INFORMATION
Items 1, 2, 3 and 5 are Inapplicable.
- -------------------------------------
Item 4 - Results of Votes of Security Holders.
- ----------------------------------------------
On November 7, 1996 the Annual Meeting of Shareholders was held. The
shareholders re-elected 3 current directors as follows:
<TABLE>
<CAPTION>
Director For Withheld Broker Nonvotes
- -------- --- -------- ---------------
<S> <C> <C> <C>
H. Furlong Baldwin 7,993,484 678,550 0
E. Kirby Warren 6,849,509 1,822,525 0
Joseph R. Wright 7,994,084 677,950 0
</TABLE>
The shareholders ratified the selection of Deloitte & Touche, L.L.P. as
independent public accountants for the fiscal year ending June 30, 1997 as
follows:
<TABLE>
<CAPTION>
For Against Abstain Broker Nonvotes
--- ------- ------- ---------------
<S> <C> <C> <C>
8,373,444 272,337 26,253 0
</TABLE>
Item 6(a) Exhibits.
- -------------------
None.
Item 6(b) - Reports on Form 8-K.
- --------------------------------
On October 16, 1996, the Company reported on Form 8-K that its Board of
Directors expanded the Board to 11 directors, and elected Frank J.A. Cilluffo to
the newly created seat, effective immediately. Mr. Cilluffo is a managing
general partner of the company's largest shareholder, Cilluffo Associates, LP.
The company also reported the election of President and Chief Executive Officer
Jim Roth to the additional position of Chairman of the Board, effective at the
conclusion of the annual meeting of shareholders on November 7, 1996.
18
<PAGE>
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, Treasurer, Chief
Financial Officer & Chief Accounting Officer
November 14, 1996
19
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