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As filed with the Securities and Exchange Commission
on April 17, 1997.
Registration No. 333-22087
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
ON FORM S-2
TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GRC International, Inc.
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
95-2131929
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(I.R.S. Employee Identification Number)
1900 Gallows Road, Vienna, VA 22182 (703) 506-5000
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(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Thomas E. McCabe
Senior Vice President, General Counsel and Secretary
GRC International, Inc.
1900 Gallows Road
Vienna, VA 22182
(703) 506-5000
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. (x)
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. (x)
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. ( ) ___________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ( ) __________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. ( )
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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SUBJECT TO COMPLETION,
APRIL 17, 1997
PROSPECTUS
4,987,234 SHARES
GRC INTERNATIONAL, INC.
COMMON STOCK
This Prospectus covers the offering for resale from time to time of up
to 4,987,234 shares (the "Shares") of common stock, par value $.10 per share
(the "Common Stock"), of GRC International, Inc., a Delaware corporation (the
"Company"), by Cripple Creek Securities, LLC, a Delaware limited liability
company (the "Selling Stockholder"). The Company may, and in certain instances
shall, issue Shares from time to time to the Selling Stockholder pursuant to the
terms of the Structured Equity Line (as defined herein) and upon exercise of the
Warrants (as defined herein). See "THE COMPANY -- Debt and Equity Financing."
The Company will receive no part of the proceeds of sales made hereunder, but
the Company will receive proceeds upon the issuance of Shares to the Selling
Stockholder pursuant to the Structured Equity Line and the Warrants. All
expenses of registration incurred in connection with this public offering are
being borne by the Company. None of the Shares have been registered prior to
the filing of the Registration Statement of which this Prospectus is part.
The Common Stock is quoted on the New York Stock Exchange and the
Pacific Stock Exchange under the symbol "GRH." On April 16, 1997, the last
reported sale price of the Common Stock was $4 7/8.
The Selling Stockholder, acting as principal for its own account,
directly, through agents designated from time to time, or through brokers,
dealers, agents or underwriters also to be designated, may sell all or a portion
of the Shares that may be offered hereby in routine brokerage transactions on
the New York Stock Exchange, the Pacific Stock Exchange or otherwise at prices
and terms prevailing at the time of the sale. The Selling Stockholder also may
make private sales directly or through brokers or may make sales pursuant to
Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). The
Selling Stockholder may pay customary brokerage fees, commissions and expenses.
The aggregate proceeds to the Selling Stockholder from the sale of the Shares
that may be offered hereby by the Selling
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Stockholder will be the purchase price of such shares less commissions, if any.
The Company has agreed to indemnify the Selling Stockholder against certain
liabilities, including liabilities under the Securities Act of 1933. See "PLAN
OF DISTRIBUTION."
The Selling Stockholder and any brokers, dealers, agents or underwriters
that participate with the Selling Stockholders in the distribution of the Shares
may be deemed to be underwriters within the meaning of the Securities Act, in
which event any commissions received by such brokers, dealers, agents or
underwriters and any profit on the resale of the Shares may be deemed to be
underwriting discounts under the Securities Act. See "PLAN OF DISTRIBUTION."
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED
UNDER "RISK FACTORS" BEGINNING ON PAGE 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE SELLING STOCKHOLDER OR THEIR RESPECTIVE AGENTS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION
IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION.
The date of this Prospectus is , 1997.
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AVAILABLE INFORMATION
The Company is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street (Suite 1400), Chicago, Illinois 60661. Copies of all or part of such
materials may also be obtained at prescribed rates from the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, the Commission maintains a
Web site at http://www.sec.gov that contains reports, proxy statements and other
information. Such materials also can be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005 and the Pacific
Stock Exchange, 301 Pine Street, San Francisco, California 94104.
The Company has filed with the Commission a registration statement
(which term shall encompass any amendments thereto) on Form S-2 under the
Securities Act with respect to the securities offered hereby (the "Registration
Statement"). This Prospectus, which constitutes part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered by
this Prospectus, reference is made to the Registration Statement, including the
exhibits thereto, and the financial statements and notes thereto filed or
incorporated by reference as a part thereof, which are on file at the offices of
the Commission and may be obtained upon payment of the fee prescribed by the
Commission, or may be examined without charge at the offices of the Commission.
The Registration Statement and the exhibits thereto filed by the Company with
the Commission may be inspected and copied at the locations described above.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission
pursuant to the Exchange Act (Commission File No. 1-7517) are incorporated
herein by reference:
(a) the Company's annual report on Form 10-K for the fiscal year
ended June 30, 1996;
(b) the Company's quarterly reports on Form 10-Q for the
quarters ended September 30, 1996 and December 31, 1996; and
(c) the Company's current reports on Form 8-K filed on
October 16, 1996 and March 13, 1997.
The Company will provide, without charge to each person to whom this
Prospectus has been delivered, a copy of any or all of the documents referred to
above that have been or may be incorporated by reference herein other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference therein). Requests for such copies should be directed to GRC
International, Inc. 1900 Gallows Road, Vienna, VA 22182 Attention: Thomas E.
McCabe, Senior Vice President, General Counsel and Secretary. Telephone
requests may be directed to (703) 506-5000.
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INFORMATION WITH RESPECT TO THE COMPANY
This Prospectus is accompanied by a copy of the Company's most recent
Annual Report on Form 10-K and Quarterly Report on Form 10-Q.
THIS PROSPECTUS CONTAINS AND INCORPORATES BY REFERENCE CERTAIN FORWARD
LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND BUSINESS OF THE COMPANY, INCLUDING, WITHOUT LIMITATION,
STATEMENTS HEREIN UNDER "THE COMPANY" AND "RISK FACTORS" AND STATEMENTS IN THE
COMPANY'S ANNUAL AND QUARTERLY REPORTS UNDER "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." THESE FORWARD
LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO ASSURANCE CAN BE
GIVEN THAT ANY OF SUCH MATTERS WILL BE REALIZED. FACTORS THAT MAY CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD LOOKING
STATEMENTS INCLUDE, AMONG OTHERS, THE FACTORS DISCUSSED HEREIN UNDER "RISK
FACTORS."
THE COMPANY
The Company provides knowledge-based professional services and high-
quality technology-based product solutions to government and commercial
customers through its core professional services organization ("PSO") business.
Beginning in 1993, the Company expanded beyond PSO into telecommunications,
initially by developing the OSU(R) Network Interface. In 1995, the Company
launched a second telecommunications initiative when it began development of its
NetworkVUE(T) software. From the inception of this expansion through early
1997, the Company invested the free cash flow from PSO and incurred substantial
debt in order to fund the development and marketing of these products. During
this time, PSO generated in excess of 90% of the Company's revenue and was
consistently profitable with positive cash flows. As discussed below, the
Company has decided to sell or close most of the telecommunications business
units and certain other business units and focus primarily on PSO. The Company
also expects to pursue strategies to restructure its bank debt, which was $22.5
million at December 31, 1996.
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PROFESSIONAL SERVICES ORGANIZATION
The Company's principal business is PSO, which focuses on providing
information technology consulting services, primarily to the United States
Department of Defense ("DoD") and its instrumentalities. Areas of expertise
include: software and system engineering; business decision support systems;
analytical modeling and simulation; database design and implementation; legacy
migration engineering; network design and integration; systems integration;
post-deployment software support; operation support and management; virtual
manufacturing consulting; communication engineering; and testing and evaluation.
These services are applied to such areas as: financial and personnel
management; automated acquisition systems; transportation planning and analysis;
manufacturing analysis; logistics planning; security clearance processing;
WAN/LAN analysis; training systems; and information warfare systems relying on
radar, optics, communication networks, electronics, navigation and guidance,
control, space, and surveillance systems. PSO had revenues of $27.8 million for
the quarter ended December 31, 1996 and $117.7 million for the fiscal year ended
June 30, 1996.
OTHER BUSINESSES
Telecommunications Division. The Company's Telecommunications Division
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consists of three business units: OSU(R), NetworkVUE(T) and the Application
Software Group ("ASG"). As described below under "Recent Developments," the
Company has shut down its OSU(R) and NetworkVUE(TM) business units, which
constituted the bulk of the Telecommunications Division, but the Company remains
fully committed to ASG. OSU(R) is a section terminating regenerator that
provides demarcation between any two entities with a synchronous optical network
transmission protocol fiber network. NetworkVUE(T) is a suite of software
modules that automates the analysis, design and planning of telecommunications
networks based on optimizing cost, performance and reliability. ASG develops
custom software for the telecommunications industry. OSU(R) had revenues of
$71,000 and $1.5 million for the quarter ended December 31, 1996 and the fiscal
year ended June 30, 1996, respectively, and for the same periods, NetworkVUE(T)
had revenues of $172,000 and $460,000 and ASG had revenues of $605,000 and
$0.
Advanced Products Division. As described below under "Recent
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Developments," the Company is pursuing the sale or closure of the three business
units that constitute its Advanced Products Division ("APD"): GRC
Instruments(T), Commercial Information Solutions and Advanced Security
Technologies/Vindicator(R). GRC Instruments(T) designs, manufactures, markets
and sells electronically instrumented
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impact testing equipment for dynamic materials testing under the Dynatup(R)
label. Commercial Information Solutions develops and markets the FLOW GEMINI(T)
line of environmental, health and occupational safety software products, which
facilitate compliance with federal and state recordkeeping. Vindicator(R)
provides physical security and access control systems for critical resource
protection requirements. GRC Instruments(T) had revenues of $894,000 and $3.5
million for the quarter ended December 31, 1996 and the fiscal year ended June
30, 1996, respectively; Commercial Information Solutions had revenues of
$189,000 and $1.5 million, and Vindicator(R) had revenues of $451,000 and
$422,000 for the same periods. The Company will retain and move to PSO a small
part of its Advanced Security Technologies business, the Advanced Technology
Services Group, which had revenues of $137,000 and $1.1 million for the quarter
ended December 31, 1996 and the fiscal year ended June 30, 1996, respectively.
DEBT AND EQUITY FINANCING
Structured Equity Line. The Company and the Selling Stockholder entered
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into a Structured Equity Line Flexible Financing Agreement (the "Structured
Equity Line"), dated as of January 21, 1997 (the "Registration Rights
Agreement"), and a related Registration Rights Agreement, dated as of January
30, 1997 whereby the Company agreed to file under the Securities Act a
registration statement for the resale by the Selling Stockholder of shares of
Common Stock of which this Prospectus is a part (the "Registration Statement").
Pursuant to the terms of the Structured Equity Line, the Selling Stockholder is
required to purchase shares of Common Stock over a period of 42 months (subject
to adjustment upon the occurrence of certain events) from the date of
effectiveness under the Securities Act of the Registration Statement, for an
aggregate purchase price of up to $18 million. The Company may terminate the
Structured Equity Line on the first anniversary of the date of effectiveness of
the Registration Statement, provided that the Selling Stockholder has, as of or
on such first anniversary, purchased shares of Common Stock for an aggregate
purchase price of at least $5 million. If the Company issues less than $5
million of its Common Stock under the Structured Equity Line, it must pay the
Selling Stockholder up to $300,000. Under the terms of the Structured Equity
Line, during the first six months of effectiveness of the Registration
Statement, the Selling Stockholder may, but is not required to, purchase shares
of the Company's Common Stock for an aggregate purchase price of up to $3
million. During each three month period following that initial six month period,
the Company, subject to the satisfaction of certain conditions, can require the
Selling Stockholder to purchase shares of Common Stock for an aggregate purchase
price of at least $1.5 million and up to $3 million. At the beginning of each
three-month period, the Company shall notify the Selling Stockholder of the
aggregate purchase price of shares of Common Stock required to be purchased by
the Selling Stockholder during such three-month period. The Selling Stockholder
will select and notify the Company of the date on which the purchase of shares
of Common Stock from the Company shall close within each such three-month period
following notification by the Company, and of the purchase of additional shares
of Common Stock during such period if the aggregate purchase price of the shares
of Common Stock to be acquired pursuant to the Company's notification is less
than $3 million. The purchase price per share to be paid by the Selling
Stockholder for shares Common Stock acquired under the Structured Equity Line is
equal to 94% of the lowest reported sale price during the three trading days
immediately preceding the notice of purchase by the Selling Stockholder.
The Selling Stockholder's obligation to purchase shares of Common Stock
under the Structured Equity Line is subject to various conditions, including,
without limitation: (i) effectiveness of the Registration Statement under the
Securities Act with respect to the Shares; (ii) the price of the Common Stock
being at least $4.00 per share; (iii) reported trading volume of the Common
Stock in its principal trading market multiplied by the weighted average trading
price (by trading volume) of the Common Stock ("the value of open market
trading")
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being during a period of 20 trading days prior to the commencement of each
three-month period of at least $500,000 per day in any three month period in
which the Company requires the Selling Stockholder to purchase shares of Common
Stock for an aggregate purchase price in excess of $1.5 million; (iv) the lesser
of the amount of Common Stock sold to the Selling Stockholder in any three month
period not exceeding 8% of the average daily value of open market trading of the
Common Stock on its principal market multiplied by the number of trading days in
that period and the immediately preceding three month period; (v) listing of the
Company's Common Stock on the New York Stock Exchange ("NYSE") or American Stock
Exchange ("AMEX") or trading of the Company's Common Stock on the Nasdaq
National Market System ("Nasdaq NMS"); and (vi) the percentage of the Company's
Common Stock beneficially owned by the Selling Stockholder and its affiliates
not being more than 4.9% of the outstanding Common Stock on each closing date
for the purchase of shares of Common Stock in accordance with the terms of the
Structured Equity Line.
As consideration for entering into the Structured Equity Line, the
Selling Stockholder received a seven year warrant to purchase 125,000 shares of
the Company's Common Stock at an exercise price equal to $8.47 per share (the
"Warrant"). The Warrant is not exercisable for 18 months from the date of
issuance, but will become immediately exercisable if the Company declares a
material dividend or distribution (other than in Shares of Common Stock), sells
substantially all of its assets, or enters into a merger, consolidation or other
similar transaction, or there is a termination of the Structured Equity Line in
accordance with its terms, and in such event the exercise price will be the
lesser of (i) $8.47 or (ii) 80% of the "Transaction Value." "Transaction Value"
is defined in the Warrant to mean, in the case of a merger, acquisition, sale of
Common Stock, sale of assets or similar transaction, the fair market value of
the consideration to be received per share of Common Stock, as evidenced by the
average of the closing sale price for the Common Stock during the 10 trading
days following the announcement of such definitive agreement, and in the case of
a material special dividend or distribution, the fair market value of such
dividend or distribution.
If the Company elects to issue Common Stock under the Structured Equity
Line for an aggregate purchase price of more than $5 million or to extend the
term thereof beyond one year, the Company will issue an additional seven year
warrant for the purchase of 75,000 shares of the Company's Common Stock (the
"Additional Warrant" and, together with the Warrant, the "Warrants") at an
exercise price equal to 140% of the closing sale price of the Common Stock at
the time of the issuance of the Additional Warrant. The Additional Warrant will
be exercisable at the same time as the Warrant, or upon issuance if the Warrant
is exercised prior to the issuance of such Additional Warrant, and shall contain
provisions similar to those in the Warrant. exit
Under the Structured Equity Line and the related Registration Rights
Agreement, the Company agreed to file under the Securities Act a registration
statement, of which this Prospectus is a part, for the resale by the Selling
Stockholder of the shares of the Company's Common Stock to be issued under the
Structured Equity Line, the Warrant and the Additional Warrant.
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Convertible Debenture. The Company also has entered into a Convertible
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Securities Subscription Agreement, dated as of January 21, 1997 (the
"Subscription Agreement"), with Halifax Fund, L.P., a Cayman Islands exempted
limited partnership ("Halifax"). A member of the Selling Stockholder, The
Palladin Group, L.P., is the investment manager for Halifax. Pursuant to the
Subscription Agreement, Halifax purchased a $4 million aggregate principal
amount 5% Convertible Debenture due January 30, 2000 (the "Debenture").
Interest on the Debenture is payable quarterly in cash or, at the Company's
option, the amount due may be added to the outstanding principal due under the
Debenture. The Debenture is convertible, at Halifax's option 60 days after
January 30, 1997 at any time and from time to time, into the Company's Common
Stock at the lesser of (i) $11 per share, subject to adjustment under certain
circumstances, or (ii) 94% of the lowest reported sale price during the three
trading days immediately preceding the date of conversion. If the Company is in
default under the terms of the Debenture, Halifax may sell the Debenture to the
Company at 120% of the amount of the outstanding principal due under the
Debenture plus accrued but unpaid interest.
As consideration for entering into the Subscription Agreement, the
Company has issued to Halifax a seven year warrant, which, subject to certain
exceptions, is not exercisable until July 30, 1998, to purchase 320,000 shares
of the Company's Common Stock at a price of $8.47 per share (the "Debenture
Warrant"). If the Company (i) sells all or substantially all of its assets, (ii)
enters into a merger, consolidation, reorganization or other similar transaction
that results in the shareholders of the Company owning in the aggregate less
than 50% of the common equity and having less than 50% of the voting power of
the surviving entity, or (iii) fixes a record date for the declaration of a
material special distribution or dividend, then Halifax may sell the Debenture
to the Company at 115% of the outstanding principal due under the Debenture plus
accrued but unpaid interest, and the Debenture Warrant becomes immediately
exercisable at a price equal to the lesser of (i) $8.47 per share or (ii) 80% of
the "Transaction Value" per share ("Transaction Value" has the same meaning as
set forth above).
The Company is obligated to register the resale under the Securities Act
by Halifax of all or any part of the shares of the Company's Common Stock
issuable upon conversion of the Debenture and the Debenture Warrant and is doing
so in a registration statement, which will be filed separately from the
registration statement of which this Prospectus forms a part.
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RECENT DEVELOPMENTS
The Company's OSU(R), NetworkVUE(TM) and CIS business units have ceased
operations. The Company is attempting to sell the intellectual property of
OSU(R), NetworkVUE(TM) and CIS, but there can be no assurance that the Company
will succeed in doing so. The Company is in the process of addressing the
warranty, servicing and other contractual obligations of OSU(R), NetworkVUE(TM)
and CIS resulting from previous sales of their respective products. The Company
is also attempting to preserve the value of the intellectual property of OSU(R),
NetworkVUE(TM) and CIS pending disposition.
The Company's GRC Instruments(TM) and Advanced Security
Technologies/Vindicator(R) business units are continuing their operations
pending their sale or closure. The Company is in negotiation with potential
purchasers, but there can be no assurance that any agreements will be reached or
that any sales would be at favorable prices or without the Company incurring
additional losses.
For the quarter ended March 31, 1997, the Company anticipates reporting
the financial position, results of operations and cash flows for its OSU(R),
NetworkVUE(TM), and APD businesses on a discontinued operations basis.
On March 10, 1997, the Company announced that its board of directors has
unanimously elected Joseph R. Wright, Jr., as its new chairman. Mr. Wright had
been a member of the Company's board since 1994. Mr. Wright is also Chairman
and CEO of AVIC Group International, Inc., a public company establishing joint
ventures to develop, finance, build and maintain telecommunications networks in
the People's Republic of China. From 1981 to 1982, Mr. Wright served as deputy
secretary of the Department of Commerce, then spent the next six years as deputy
director of the White House Office of Management and Budget ("OMB"). He was a
member of the President's Cabinet as director of OMB from 1988 to 1989, prior to
becoming vice chairman and executive vice president of W.R. Grace & Co.,
positions he held from 1989 until 1994.
OTHER INFORMATION
The Company was organized in California in 1961 and has been a Delaware
corporation since 1974. The Company's principal executive offices are located
at 1900 Gallows Road, Vienna, Virginia 22182, and its telephone number is (703)
506-5000. For further information about the business and operations of the
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Company, reference is made to the Company's reports incorporated herein by
reference. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully by prospective investors in evaluating an
investment in the shares of Common Stock offered in this Prospectus.
EFFECTS OF RESTRUCTURING
The Company has refocused on its core PSO business unit; its OSU (R),
NetworkVUE(TM) and CIS business units have ceased operations, and its GRC
Instruments (TM) and Advanced Security Technologies/Vindicator (R) business
units are continuing their operations pending their sale or closure. See
"RECENT DEVELOPMENTS." There can be no assurance that the sale or closure of any
of these business units will be completed in a timely or satisfactory manner or
that the proceeds from the sales will meet the Company's financial goals. Delays
or other adverse developments in selling or closing these business units could
cause further losses to the Company and result in additional debt and reduced
liquidity. While the Company hopes to achieve greater profitability as a result
of these changes, there can be no assurance that this strategy will succeed.
Although PSO has generated more than 90% of the Company's revenues in
recent years, the financial and other effects of the anticipated sale or closure
of the Company's other business units could disrupt the Company's operations
further and, as noted, cause an increase in indebtedness and further reductions
in liquidity, thereby undermining the Company's goal of returning to
profitability and generating the cash flow necessary to service its debt.
HIGH DEBT LEVEL
As of December 31, 1996, the Company had outstanding $31.2 million of
debt, consisting of a $5 million term loan (the "Term Loan"), $17.5 million
drawn from a $22 million revolving line of credit (the "Revolving Credit"), a
$6.8 million equipment lease financing (the "Equipment Lease") and a $1.9
million note related to the 1996 acquisition of assets from Quintessential
Solutions. On January 30, 1997, the Company also issued the Debenture. See "THE
COMPANY -- Debt and Equity Financing." The Company may experience further
increases in debt levels during fiscal year 1997, when the Company hopes to
complete the sale or
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closure of its OSU(R), NetworkVUE(T) and APD business units. See "THE COMPANY --
Other Businesses."
The Company's level of indebtedness was the principal reason for the
anticipated sale or closure of its unprofitable business units. The current
level and terms of indebtedness also: (i) will require the Company to dedicate
a significant portion of its available net earnings from operations to payment
of interest and principal on the indebtedness; (ii) could limit the Company's
flexibility in reacting to business developments and changes in industry and
economic conditions generally; (iii) could limit the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
research and development, acquisitions and general corporate purposes; and (iv)
could place the Company at a competitive disadvantage inasmuch as many of its
competitors are not comparably indebted.
The Company is exploring strategies for refinancing the Term Loan, which
will come due on September 1, 1998 unless extended, and the Revolving Credit,
which is repayable on January 15, 1998 unless extended. In addition, the
Equipment Lease is repayable in monthly installments until June 2001. The
Company expects to seek to negotiate an extension to, and other new terms for,
the Term Loan and the Revolving Credit. The Company is also exploring
additional and substitute financing sources, including receivables financing and
the private sale of additional debt or equity. There can be no assurance that
the Company will be able to negotiate any extensions or additional or substitute
financing or that terms of any such financing will be favorable to the Company.
The Company also anticipates reducing its indebtedness with cash flow
from its PSO business unit. Any growth in PSO, however, could actually reduce
cash flow in the short term because of the time lag between when PSO renders
services and when PSO's principal customer, DoD, pays for those services.
Furthermore, there can be no assurance of continued growth in PSO's business,
which is subject to additional risks. See "-- Dependence on Significant
Customer," "-- Dependence on Significant Contracts," "-- Contract Profit
Exposure," "--Audits," "-- Potential Suspension and Debarment," "-- Rapid
Technological Change," "-- Competition" and "-- Dependence on Professional Staff
and Key Personnel."
The Company also expects to reduce its indebtedness by raising
additional capital through the Structured Equity Line. See "THE COMPANY -- Debt
and Equity Financing." Conditions to the sale of Common Stock under the
Structured Equity Line include (i) effectiveness of a registration statement
under the Securities Act for the resale of the shares of Common Stock to be sold
to the Selling Stockholder, (ii) the Selling Stockholder and
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its affiliates not beneficially owning more than 4.9% of the Company's Common
Stock, (iii) listing of the Company's Common Stock on the NYSE or AMEX or
trading of the Company's Common Stock on the Nasdaq NMS and (iv) the price of
the Common Stock being at least $4.00 per share, the value of open market
trading of the Common Stock being at least $500,000 per day, and the amount of
Common Stock sold to the Selling Stockholder in any three month period not
exceeding 8% of the average daily value of open market trading of the Common
Stock on its principal market multiplied by the number of trading days in that
period. Based on recent prices and trading volume for the Common Stock, there is
a substantial risk that the Company may not be able to sell as much as $3
million in Common Stock to the Selling Stockholder in each three month period,
and there is a substantial risk that in at least some quarters the Company may
not be able to sell any Common Stock at all.
At December 31, 1996, the Company was in default on the loan agreement
that governs the Term Loan and the Revolving Credit (the "Loan Agreement"), but
secured an amendment on February 7, 1997 that brought the Company back into
compliance as of December 31, 1996, and amended the financial covenants
prospectively to levels that the Company believes, under its current plans and
projections for continuing operations, will allow the Company to remain in
compliance over the next 12 months. There can be no assurance, however, that
the Company will be able to remain in compliance with the Loan Agreement, or
that, in the event of another default, additional amendments to the Loan
Agreement would be able to be made. If the Company is again in default under
the Loan Agreement and cannot secure a waiver or amendment thereto, then the
amounts outstanding under the Term Loan and the Revolving Credit (together with
the cross-default under the Equipment Lease) would become immediately due and
payable. It is unlikely that the Company would be able to make or finance such
a payment.
STOCK PRICE VOLATILITY; SHARES ELIGIBLE FOR FUTURE SALE
The price of the Company's Common Stock has been volatile. For the
twelve months ended April 16, 1997, the price of the Common Stock ranged from $3
3/4 to $44 5/8, and closed at $4 7/8. The price of the Common Stock could be
subject to additional significant fluctuations in response to, among other
things, variations in the Company's operating results, introduction of new
services or technologies by the Company or its competitors, changes in other
conditions or trends in the Company's industries, changes in security analysts'
estimates of the Company's or its competitors' or industries' future
performance, general market conditions and the matters described herein under
"RISK FACTORS." General market price declines or market volatility in the
future, or future declines
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or volatility in the prices of stock for companies in the Company's industries,
also could affect the price of the Common Stock.
The Company's agreements with the Selling Stockholder and Halifax may
also have an effect on the price of the Company's Common Stock. Under the
Company's agreements with the Selling Stockholder, the Company may issue up to
$18,000,000 of Common Stock to the Selling Stockholder at a price equal to 94%
of the lowest reported sale price during the three days immediately preceding
the notice of purchase to the Selling Stockholder. The Company also has issued
warrants to the Selling Stockholder to purchase 125,000 shares at $8.47 per
share and may issue warrants to purchase an additional 75,000 shares at 140% of
the market price at a future time. Under the Company's agreements with Halifax,
the Company is required to convert the $4,000,000 Debenture (plus any interest
not paid in cash) into Common Stock at a price equal to the lesser of (i) $11
per share or (ii) 94% of the lowest reported sale price during the three trading
days immediately preceding the date of conversion. The Company also has issued a
warrant to Halifax to purchase 320,000 shares of Common Stock at a price of
$8.47 per share. See "THE COMPANY --Debt and Equity Financing." The resale by
the Selling Stockholder and Halifax of the Common Stock that they acquire could
depress the market price of the Company's Common Stock.
Moreover, the terms of the Structured Equity Line provide that the
Company has the right to require the Selling Stockholder to purchase up to $3
million of the Common Stock in any of the three month periods during its term,
subject to certain limitations. Although the terms of the Structured Equity
Line provide that the Selling Stockholder and its affiliates are not required to
purchase Common Stock in an amount such that they would beneficially own more
than 4.9% of the Common Stock outstanding, the Selling Stockholder also has
agreed to use its best efforts to continue to purchase Common Stock
notwithstanding this limitation. Accordingly, the Selling Stockholder may be
required to purchase Common Stock from the Company in a manner that would
require it, in order to stay under the 4.9% beneficial ownership limitation and
comply with its obligations to the Company, to sell shares without regard to any
adverse effects on price and other market factors associated with the Common
Stock. See "THE COMPANY -- Debt and Equity Financing" and "SELLING
STOCKHOLDER."
DEPENDENCE ON GOVERNMENT CONTRACTS
PSO, which is expected to generate substantially all of the Company's
revenues in the foreseeable future, derives substantially all of its business
from service contracts and subcontracts with DoD and its instrumentalities.
Typically, such
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contracts have an initial term of one year combined with two, three or four one-
year renewal periods exercisable at the government's discretion. DoD and its
instrumentalities are not obligated to exercise the options to renew. At the
time of completion, a contract in its entirety may be "recompeted" against all
interested third-party providers, and awards are subject to protest by
disappointed bidders. Federal law permits DoD to terminate a contract at any
time if such termination is deemed to be in DoD's best interest. DoD's failure
to renew, or termination of any significant portion of, the Company's contracts
could have an adverse effect on the Company.
Continuation and renewal of existing contracts with the DoD, and
acquisition of additional contracts from DoD, is contingent upon, among other
things, the availability of funding for DoD. The current world political
situation and domestic political pressure to reduce the federal budget deficit
have reduced, and may continue to reduce, DoD's budget, which could have an
adverse effect on the Company's earnings.
The adoption of new or modified procurement regulations also could have
an adverse effect on the Company and its cost of competing for and performing
government contracts.
DEPENDENCE ON SIGNIFICANT CONTRACTS
Although PSO contracts at fiscal year-end 1996, 1995 and 1994 have
numbered 149, 175 and 189, respectively, the loss of one or more may have a
substantial adverse impact on PSO's revenues and profitability if the particular
contract is large in relation to the rest. There also can be no assurance that
the Company will win any follow-on contracts.
CONTRACT PROFIT EXPOSURE
The Company provides services to the government through three types of
contracts: fixed-price, time-and-materials and cost-reimbursement. The Company
assumes financial risk on fixed-price contracts (approximately 5.3% of the
Company's government contract revenues in fiscal 1996) and time-and-material
contracts (approximately 32.2% of the Company's government contract revenues in
fiscal 1996) because the Company assumes the risk of performing those contracts
at the stipulated prices or negotiated hourly rates. The failure to estimate
ultimate costs accurately or to control costs during performance of the work
could result in losses or smaller than anticipated profits. The balance of the
Company's government contract revenue in fiscal 1996 (approximately 62.5%) was
derived from cost-reimbursement contracts. To the extent that the actual costs
incurred in performing a cost-reimbursement contract are within the contract
ceiling and allowable under the terms of the contract and
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applicable regulations, the Company is entitled to reimbursement of its costs
plus a stipulated profit. However, if the Company's costs exceed the ceiling or
are not allowable under the terms of the contract or applicable regulations, any
excess would be subject to adjustment and repayment upon audit by the
government.
AUDITS
Government contract payments received by the Company for allowable
direct and indirect costs are subject to adjustment and repayment after audit if
the payments exceed allowable costs as defined in such government contracts.
Audits have been completed on all of the Company's incurred contract costs
through the end of fiscal year 1986 and on certain incurred contract costs
through the end of fiscal years 1987, 1990 and 1991.
POTENTIAL SUSPENSION AND DEBARMENT
The Company is subject to federal regulations under which its right to
receive future awards of new government contracts, or extensions of existing
government contracts, may be unilaterally suspended or barred should the Company
be convicted of a crime or be indicted based on allegations of violation of
certain specific federal statutes or other activities. Suspensions, even if
temporary, can result in the loss of valuable contract awards for which the
Company otherwise would be eligible. The initiation of suspension or debarment
hearings against the Company could have an adverse effect on the Company.
TECHNOLOGICAL CHANGE AND PROPRIETARY INFORMATION
The Company's business is dependent on its technical and organizational
knowledge, practices and procedures, and its future success is based, in part,
on its ability to keep up to date with new technological breakthroughs and
incorporate such changes in its products and services. There can be no
assurance that the Company will be successful in developing and marketing in a
timely manner new products and services that respond to technological advances
by others, or that the Company's products and services will adequately and
competitively address the needs of the changing marketplace.
The Company has or licenses a proprietary interest in certain of its
work products, software programs, methodologies and know-how. Although the
Company seeks to protect its proprietary information, there can be no assurance
that it will be successful in doing so. In addition, the government acquires
certain proprietary rights to software programs and other products that result
from the Company's services under government contracts and subcontracts. The
government may disclose such information to third parties, including the
Company's
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competitors. In case of subcontracts, the prime contractor also may have certain
rights to such programs and products. Any of these factors could reduce the
Company's ability to maximize the value of its competitive information.
COMPETITION
The markets that the Company services are highly competitive, and likely
to become more so with the expected continuing decline of government defense
expenditures. Some of the Company's competitors are large, diversified firms
with substantially greater financial resources, lower debt levels and larger
technical staffs than the Company has available to it. Government agencies also
compete with the Company because they can utilize their internal resources to
perform certain types of services that the Company might otherwise perform.
DEPENDENCE ON PROFESSIONAL STAFF
To service its PSO contracts, the Company must recruit and retain key
technical personnel, such as operations research and software engineers,
computer programmers, and other skilled scientists and engineers. Competition
for such personnel is intense, and the Company often must comply with provisions
in government contracts that require employment of persons with specified levels
of education, work experience and security clearances. At December 31, 1996,
the Company had openings for approximately 219 PSO-related positions. This
contrasts with the Company's openings at June 30, 1996 for 209 PSO-related
positions. An inability to fill a substantial portion of these current openings
could have an adverse impact on the Company's revenue growth and profitability.
NEW YORK STOCK EXCHANGE CONTINUED LISTING REQUIREMENTS
The Company's Common Stock is listed and traded primarily on the NYSE.
As of December 31, 1996, the Company did not comply with the net tangible asset
continued listing criterion set forth in Section 802.00 of the NYSE Listed
Company Manual ("NYSE Manual"). The NYSE Manual states in Section 801.00 that
when a company falls below any criterion, the NYSE will review the
appropriateness of continued listing and might not permit continued listing
unless a company is proposing to make changes that would bring it in line with
original listing standards. At the present time, the Company would not meet
certain original listing standards, including "aggregate market value of
publicly-held shares" and "demonstrated earning power." Listing of the Common
Stock on the NYSE or the AMEX or trading of the Common Stock on the Nasdaq NMS
is a condition to the Company selling shares to the Selling Stockholder under
the Structured Equity Line. See "THE COMPANY -- Debt and Equity
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Financing." The Company has had no discussions with the NYSE concerning its
listing or the status of its application to list the shares offered hereby.
There can be no assurance that the Common Stock will not be delisted on the NYSE
or, if the Common Stock is delisted, that the Company will be able to list the
Common Stock on the AMEX or have it traded on Nasdaq NMS. If the Company's
Common Stock is not listed on the NYSE or AMEX and not traded on Nasdaq NMS, the
market price and trading volume of the Common Stock could be adversely
affected.
POTENTIAL ISSUANCE OF PREFERRED STOCK
The Company's Board of Directors has the authority, without any further
vote by the Company's stockholders, to issue up to 300,000 shares of Preferred
Stock in one or more series and to determine the designations, powers,
preferences and relative, participating, optional or other rights thereof,
including without limitation, the dividend rate (and whether dividends are
cumulative), conversion rights, voting rights, rights and terms of redemption,
redemption price and liquidation preference. Although the Company has no current
plans to issue any shares of Preferred Stock, the rights of the holders of
Common Stock would be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. Issuance
of Preferred Stock could have the effect of delaying, deterring or preventing a
change in control of the Company, including the imposition of various procedural
and other requirements that could make it more difficult for holders of Common
Stock to effect certain corporate actions, including the ability to replace
incumbent directors and to accomplish transactions opposed by the incumbent
Board of Directors.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, $.10 par value per share, and 300,000 shares of undesignated
Preferred Stock, $1.00 par value per share. As of March 31, 1997, 9,342,557
shares of Common Stock were issued and outstanding. There were no shares of
Preferred Stock designated or issued.
Common Stock. The holders of the Common Stock have one vote per share
and are entitled to cumulative voting in the election of directors of the
Company. The holders of the Common Stock are entitled to receive, subject to
the preferential rights of the holders of the Preferred Stock (as hereinafter
described),
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out of the assets legally available therefor, dividends at such time and in such
amounts as the Board of Directors may determine. Subject to the preferential
rights of the holders of the Preferred Stock, upon liquidation, dissolution or
winding up of the Company, the assets legally available for distribution to
stockholders of the Company shall be distributed ratably among the holders of
the Common Stock.
Preferred Stock. The Board of Directors is empowered to issue up to
300,000 shares of preferred stock from time to time in one or more series,
fixing in each case, among other things: (i) the rate of dividends and whether
they shall be cumulative, (ii) voting rights, if any, (iii) redemption price,
(iv) the amount payable in the even of involuntary or voluntary liquidation and
(v) the terms and conditions on which shares may be converted if the shares of
that series are to be issued with the privilege of conversion.
Shareholder Rights Plan. The Company has a Shareholder Rights Plan
under which a dividend of one Common Stock Purchase Right (a "Right") is
automatically issued for each share of Common Stock. The Rights are not
exercisable or transferable apart from the Common Stock until ten business days
after a person has acquired beneficial ownership of 25% or more of the Common
Stock, or commences, or announces an intention to commence, a tender offer for
25% or more of the Common Stock. Separate certificates for the Rights will be
mailed to holders of the Common Stock as of such date, and each Right will
entitle the holder thereof to buy one share of Common Stock at an exercise price
of $100. However, if any person or group becomes the beneficial owner of 25% or
more of the Common Stock (other than pursuant to an offer for all shares that
the independent Directors of the Company determine is fair to, and otherwise in
the best interest of, the Company and its shareholders), each Right not owned by
such person or group will entitle the holder to purchase, at the exercise price
of the Rights, that number of shares of Common Stock (or other consideration)
that would have a market value of two times the exercise price of the Rights.
Similarly, in the event that the Company is a party to a merger or other
business combination transaction, each Right will entitle the holder to
purchase, at the exercise price of the Rights, that number of shares of common
stock of the acquiring company that would have a market value of two times the
exercise price of the Rights. The Rights are redeemable at $.05 per Right prior
to the tenth business day following the public announcement that a person has
acquired beneficial ownership of 25% of the Common Stock. Upon redemption, the
right to exercise the Rights will terminate. The Rights expire on December 31,
2005.
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USE OF PROCEEDS
The Company will not receive any of the proceeds from the resale by the
Selling Stockholder of the Shares of Common Stock offered by this Prospectus.
The Company will receive proceeds from the original issuance of the Shares to
the Selling Stockholder under the Structured Equity Line, the Warrant and the
Additional Warrant. There can be no assurance that the Company will issue any
Shares or receive any proceeds. The amount of proceeds, if any, will depend upon
the market price of the Common Stock, whether the Selling Stockholder elects to
exercise the Warrant and the Additional Warrant, if any, whether the Selling
Stockholder elects to purchase Common Stock as permitted under the terms of the
Structured Equity Line, and whether the Company elects to require the Selling
Stockholder to purchase Common Stock as permitted under the terms of the
Structured Equity Line. For a description of the terms of the Structured Equity
Line, the Warrant and the Additional Warrant, see "THE COMPANY -- Debt and
Equity Financing."
The Company expects that any net proceeds from the Structured Equity
Line, the Warrant and the Additional Warrant will be used to reduce the amount
of outstanding indebtedness under the Revolving Credit, which provides working
capital for the Company. Depending upon the amount and terms of the Company's
indebtedness at the time the Company receives proceeds from the Structured
Equity Line, the Warrant and the Additional Warrant, if any, the Company also
might use the proceeds to repay other indebtedness or for general corporate
purposes to satisfy operating cash flow requirements.
As of December 31, 1996, the Company had outstanding $31.2 million of
debt, consisting of the $5 million Term Loan, $17.5 million drawn from the $22
million Revolving Credit, the $6.8 million Equipment Lease and the $1.9 million
Note. On January 30, 1997, the Company also issued the Debenture.
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The Term Loan is due on September 1, 1998, and bears interest at the
bank's floating prime rate, currently 8.5% per annum. The Revolving Credit is
due on January 15, 1999, and, if the Company is not in default, the Revolving
Credit 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 in advance; the Revolving Credit bears interest at the bank's floating
prime rate, currently 8.5% per annum. The Equipment Lease is payable through
June 2001 in monthly installment rental payments that include an interest
component of 9.0%. The Note is due in November 1997 (except for a principal
amount of $600,000, which was due in November 1996 but as to which a dispute
exists) and bears interest at 8.0%. The terms of the Debenture are described
herein under "THE COMPANY -- Debt and Equity Financing."
The Company's debt increased from $12.1 million on December 31, 1995 to
$31.2 million on December 31, 1996 primarily because of the Company's investment
in its Telecommunications Division. See "THE COMPANY."
SELLING STOCKHOLDER
The Selling Stockholder is Cripple Creek Securities, LLC, a Delaware
limited liability company. The Selling Stockholder has not had a material
relationship with the Company within the past three years, other than as a
result of entering into the Structured Equity Line and related agreements. One
of the Selling Stockholder's members, The Palladin Group, L.P., a Delaware
limited partnership, is the investment manager for Halifax Fund, L.P., which
entered into a Subscription Agreement and related agreements with the Company.
See "THE COMPANY --Debt and Equity Financing." As of the date hereof, the
Selling Stockholder owns no shares of the Company's Common Stock and is offering
herein for resale all of the shares of the Company's Common Stock that it may
acquire under the Structured Equity Line, the Warrant and the Additional
Warrant. As of the date hereof, Halifax owns no shares of the Company's Common
Stock and will register the resale of all of the shares that it may acquire upon
the conversion of the Convertible Debenture and the exercise of the Debenture
Warrant in a separate registration statement to be filed with the Securities and
Exchange Commission.
PLAN OF DISTRIBUTION
The Selling Stockholder, acting as principal for its own account,
directly, through agents designated from time to time,
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or through brokers, dealers, agents or underwriters also to be designated, may
sell all or a portion of the Shares from time to time on terms to be determined
at the time of sale. The Selling Stockholder may from time to time sell all or a
portion of the Shares in routine brokerage transactions on the New York Stock
Exchange, the Pacific Stock Exchange or otherwise at the prices and terms
prevailing at the time of the sale. The Selling Stockholder also may make
private resales directly or through brokers or may make resales pursuant to Rule
144 under the Securities Act. The Selling Stockholder may pay customary
brokerage fees, commissions and expenses.
To the extent required pursuant to Rule 424 under the Securities Act, a
Prospectus Supplement will be filed with the Securities and Exchange Commission
with respect to a particular offering setting forth the terms of any offering,
including the name or names of any underwriters or agents, if any, any
underwriting discounts and other items constituting underwriters' compensation,
the offering price and any discounts or concessions allowed or reallowed or paid
to dealers. Any offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
If underwriters are used in a sale, shares of Common Stock will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The shares may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more
firms acting as underwriters. The underwriter or underwriters with respect to a
particular underwritten offering of shares to be named in the Prospectus
Supplement relating to such offering and, if an underwriting syndicate is used,
the managing underwriter or underwriters, will be set forth on the cover of such
Prospectus Supplement. Unless otherwise set forth in the Prospectus Supplement
relating thereto, the obligations of the underwriters to purchase the Shares
will be subject to conditions precedent and the underwriters will be obligated
to purchase all of the shares if any are purchased.
If dealers are utilized in the sale of shares of Common Stock in respect
of which this Prospectus is delivered, the Selling Stockholder will sell such
shares to the dealers as principals. The dealers may then resell such shares to
the public at varying prices to be determined by such dealers at the time of
resale. The names of the dealers and the terms of the transaction will be set
forth in a Prospectus Supplement relating thereto.
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If an agent is used, the agent will be named, and the terms of the
agency and any commissions will be set forth in a Prospectus Supplement relating
thereto. Unless otherwise indicated in the Prospectus Supplement, any such agent
will be acting on a best efforts basis for the period of its appointment.
Shares may be sold directly by the Selling Stockholder to institutional
investors or others, who may be deemed to be underwriters within the meaning of
the Securities Act with respect to any resale thereof. The terms of any such
sales, including the terms of any bidding or auction process, will be described
in the Prospectus Supplement relating thereto.
Agents, dealers and underwriters may be entitled under agreements
entered into with the Selling Stockholder to indemnification against certain
civil liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which such agents, dealers or underwriters
may be required to make in respect thereof. Agents, dealers and underwriters
may be customers of, engage in transactions with, or perform services for the
Company or the Selling Stockholder in the ordinary course of business.
The Company will bear all costs and expenses of the registration of the
Shares under the Securities Act and certain state securities laws. The Selling
Stockholder will pay any transaction costs associated with effecting any sales
that occur.
The Selling Stockholder is not restricted as to the price or prices at
which it may resell Shares acquired upon the conversion of the Debentures or the
exercise of the Warrants. Such resales may have an adverse effect on the market
price of the Common Stock. Moreover, the Selling Stockholder is not restricted
as to the number of Shares that may be sold at any one time, and it is possible
that a significant number of Shares could be sold at the same time, which also
may have an adverse effect on the market price of the Common Stock.
The Company has agreed to indemnify the Selling Stockholder against
certain civil liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Thomas E. McCabe, the Company's Senior Vice President, General Counsel
and Secretary, has rendered an opinion to the effect that the Common Stock
offered by this Prospectus is duly authorized, validly issued, fully paid and
non-assessable.
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EXPERTS
The consolidated financial statements and the related financial
statement schedule as of June 30, 1996 and 1995 and for each of the three years
in the period ended June 30, 1996 included and incorporated by reference in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is included and incorporated herein by reference,
and have been so included and incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . 4
INFORMATION WITH RESPECT TO THE COMPANY . . . . . . . . . . . . 5
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . 5
RECENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . 10
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . 11
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . 18
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . 20
SELLING STOCKHOLDER . . . . . . . . . . . . . . . . . . . . . 21
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . 21
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 23
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
SEC registration . . . . . . . . . . . $ 6,423
Legal fees and expenses . . . . . . . . 20,000*
Accounting fees and expenses . . . . . 12,000*
Miscellaneous .. . . . . . . . . . . . 5,000*
Total . . . . . . . . . . . . . . . . . $ 43,423*
*Estimates
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law provides, in substance, that
Delaware corporations shall have the power, under specified circumstances, to
indemnify their directors, officers, employees and agents in connection with
actions or suits by or in the right of the corporation, by reason of the fact
that they were or are such directors, officers, employees and agents, against
expenses (including attorneys' fees) and, in the case of actions, suits or
proceedings brought by third parties, against judgment, fines and amounts paid
in settlement actually and reasonably incurred in any such action, suit or
proceeding.
The Company's Certificate of Incorporation provides that a director
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director except for liability (i) for
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit. The Company's Bylaws also
provide that the Company may indemnify its directors, officers and legal
representatives to the fullest extent permitted by Delaware law against all
awards and expenses (including attorneys' fees).
The Company has purchased an insurance policy that purports to insure
its officers and directors against certain liabilities incurred by them in the
discharge of their functions as officers and directors.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit No. Description
- - - ----------- -------------
<S> <C>
4.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1994).
4.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1995).
4.3++ Structured Equity Line Flexible Financing Agreement, dated as of
January 21, 1997, between the Company and Cripple Creek
Securities, LLC (incorporated by reference to Exhibit 10.6 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996).
4.4 125,000 Share Common Stock Purchase Warrant issued by the
Company to Cripple Creek Securities, LLC (incorporated by
reference to Exhibit 10.7 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996). 4.5
Registratio n Rights Agreement, dated as of January 30, 1997,
between the Company and Cripple Creek Securities, LLC
(incorporat ed by reference to Exhibit 10.8 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1996).
5.1+ Opinion of Thomas E. McCabe.
10.1 1985 Employee Stock Option Plan (incorporated by reference to
Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1996).
10.2 1994 Employee Option Plan (incorporated by reference to Exhibit
10.2 to Amendment No. 1 to the Company's Annual Report on Form
10-K for the year ended June 30, 1995).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.3 Officers Stock Option Plan (incorporated by reference to Exhibit
10.3 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1996).
10.4 Cash Compensation Replacement Plan (incorporated by reference to
Exhibit 10.4 to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1996).
10.5 Incentive Compensation Plan (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1995).
10.6 Directors Fee Replacement Plan (incorporated by reference to
Exhibit 10.3 to Amendment No.1 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1996).
10.7 Directors Phantom Stock Plan (incorporated by reference to
Amendment No. 1 to Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1996).
10.8 Directors Retirement Plan (incorporated by reference to
Amendment No. 1 to Exhibit 10.6 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1996).
10.9 Amended and Restated Revolving Credit and Term Loan Agreement,
dated February 12, 1996, between the Company and Mercantile-Safe
Deposit & Trust Company, with First Confirmation and Amendment,
dated May 15, 1996, Second Confirmation and Amendment, dated
July 18, 1996, and Third Confirmation and Amendment, dated
September 24, 1996 (incorporated by reference to Amendment No. 1
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1996).
10.10 Fourth Confirmation and Amendment, dated February 7, 1997, to
Amended and Restated Revolving Credit and Term Loan Agreement,
dated February 12, 1996, between the Company and Mercantile-Safe
Deposit & Trust Company (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.11 Lease Agreement, dated as of June 30, 1989, between the Company
and Centennial III Limited Partnership (incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1989).
10.12 Amendment No. 1 to Lease Agreement, dated as of June 30, 1989,
between the Company and Centennial III Limited Partnership
(incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1990).
10.13 Amendments No. 2, 3, 4 and 5 to the Lease Agreement, dated as of
June 30, 1989, between the Company and Centennial III Limited
Partnership (incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the year ended June 30,
1994).
10.14 Amendment No. 6 to the Lease Agreement, dated as of June 30,
1989, between the Company and Centennial III Limited Partnership
(incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995).
10.15 Amended and Restated Rights Agreement, dated June 30, 1995,
between the Company and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995).
10.16 Purchase and Sale Agreement and Joint Escrow Instructions, dated
April 25, 1995, between General Research Corporation and Bermant
Development Company (incorporated by reference to Exhibit 10.19
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1995).
10.17 First Amendment to Purchase and Sale Agreement and Joint Escrow
Instructions, dated June 12, 1995, between the Company and
Bermant Development Company (incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1995).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.18 Building Lease, dated April 25, 1995, between the Company and
Bermant Development Company (incorporated by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1995).
10.19 Interim Lease, dated April 25, 1995, between the Company and
Bermant Development Company (incorporated by reference to
Exhibit 10.22 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1995).
10.20 Employment Agreement, dated July 1, 1995, between the Company
and Jim Roth (incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended June 30,
1995).
10.21 Note, dated July 9, 1992, and Deed of Trust, dated August 11,
1993, between the Company and Jim Roth (incorporated by
reference to Exhibit 10.15 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1994).
10.22 Employment Agreement, dated December 8, 1995, between the
Company and Gary L. Denman (incorporated by reference to Exhibit
10.17 to Amendment No. 1 to the Company's Annual Report on Form
10-K for the year ended June 30, 1996 ).
10.23 Employment Agreement, dated December 8, 1995, between the
Company and James P. McCoy (incorporated by reference to Exhibit
10.18 to Amendment No. 1 to the Company's Annual Report on Form
10-K for the year ended June 30, 1996).
10.24 Employment Agreement, dated December 8, 1995, between the
Company and Thomas E. McCabe (incorporated by reference to
Exhibit 10.19 to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1996).
10.25 Employment Agreement, dated November 2, 1995, between the
Company and Charles C. Bream (incorporated by reference to
Exhibit 10.20 to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1996).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.26 Employment Agreement, dated April 29, 1996, between the Company
and Ronald B. Alexander (incorporated by reference to Exhibit
10.21 to Amendment No. 1 to the Company's Annual Report on Form
10-K for the year ended June 30, 1996).
10.27 Patent Application Assignment and Royalty Agreement, dated
October 15, 1993, among the Company (as success to SWL Inc.),
Robert E. Pfister and William D. Knight (incorporated by
reference to Exhibit 10.26 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996).
10.28* Convertible Securities Subscription Agreement, dated as of
January 21, 1997, between the Company and Halifax Fund, L.P.
(incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1996).
10.29 $4,000,000 5% Convertible Debenture Due January 30, 2000 issued
by the Company to Halifax Fund, L.P. (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996).
10.30 320,000 Share Common Stock Purchase Warrant issued by the
Company to Halifax Fund, L.P. (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1996).
10.31 Registration Rights Agreement, dated as of January 30, 1997,
between the Company and Halifax Fund, L.P. (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996).
13.1 Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996.
23.1 Consent of Deloitte & Touche LLP.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
23.2+ Consent of Thomas E. McCabe .
24.1+ Power of Attorney.
</TABLE>
+ Previously filed.
++ Exhibits A and B to Exhibit 4.3 are incorporated herein as Exhibits 4.4
and 4.5.
* Exhibits A, B and C to Exhibit 10.28 are incorporated herein as Exhibits
10.29, 10.30 and 10.31.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represents a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; provided,
however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
II-7
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from the registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of Fairfax, Commonwealth of Virginia, on April 17,
1997.
GRC INTERNATIONAL, INC.
By: /s/ Jim Roth
--------------------------
Jim Roth
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the
II-9
<PAGE>
following persons in the capacities and on the dates indicated below:
<TABLE>
<CAPTION>
Signature Title Date
- - - --------- ----- ----
<S> <C> <C>
/s/ Jim Roth
- - - ------------------------- President April 17, 1997
Jim Roth and Chief Executive
Officer (Principal
Executive Officer)
/s/ Ronald B. Alexander April 17, 1997
- - - ------------------------- Senior Vice President-
Ronald B. Alexander Finance, Chief
Financial Officer and
Treasurer (Principal
Financial and
Accounting Officer)
*
- - - ------------------------- Chairman and Director April 17, 1997
Joseph R. Wright, Jr.
*
- - - ----------------------- Director April 17, 1997
H. Furlong Baldwin
*
- - - ----------------------- Director April 17, 1997
Frank J.A. Cilluffo
*
- - - ----------------------- Director April 17, 1997
Leslie B. Disharoon
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
*
- - - ----------------------- Director April 16, 1997
Charles H.P. Duell
*
- - - ----------------------- Director April 16, 1997
Edward C. Meyer
*
- - - ----------------------- Director April 16, 1997
George R. Packard
*
- - - ----------------------- Director April 16, 1997
Herbert Rabin
*
- - - ----------------------- Director April 16, 1997
E. Kirby Warren
</TABLE>
* /s/ Thomas E. McCabe
- - - -----------------------
Thomas E. McCabe
Power of Attorney
II-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- - - ---------- -----------
<S> <C>
4.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1994).
4.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1995).
4.3++ Structured Equity Line Flexible Financing Agreement, dated as of
January 21, 1997, between the Company and Cripple Creek
Securities, LLC (incorporated by reference to Exhibit 10.6 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996).
4.4 125,000 Share Common Stock Purchase Warrant issued by the
Company to Cripple Creek Securities, LLC (incorporated by
reference to Exhibit 10.7 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996). 4.5
Registratio n Rights Agreement, dated as of January 30, 1997,
between the Company and Cripple Creek Securities, LLC
(incorporat ed by reference to Exhibit 10.8 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1996).
5.1+ Opinion of Thomas E. McCabe.
10.1 1985 Employee Stock Option Plan (incorporated by reference to
Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1996).
10.2 1994 Employee Option Plan (incorporated by reference to Exhibit
10.2 to Amendment No. 1 to the Company's Annual Report on Form
10-K for the year ended June 30, 1995).
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.3 Officers Stock Option Plan (incorporated by reference to Exhibit
10.3 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1996).
10.4 Cash Compensation Replacement Plan (incorporated by reference to
Exhibit 10.4 to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1996).
10.5 Incentive Compensation Plan (incorporated by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1995).
10.6 Directors Fee Replacement Plan (incorporated by reference to
Exhibit 10.3 to Amendment No.1 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1996).
10.7 Directors Phantom Stock Plan (incorporated by reference to
Amendment No. 1 to Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1996).
10.8 Directors Retirement Plan (incorporated by reference to
Amendment No. 1 to Exhibit 10.6 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1996).
10.9 Amended and Restated Revolving Credit and Term Loan Agreement,
dated February 12, 1996, between the Company and Mercantile-Safe
Deposit & Trust Company, with First Confirmation and Amendment,
dated May 15, 1996, Second Confirmation and Amendment, dated
July 18, 1996, and Third Confirmation and Amendment, dated
September 24, 1996 (incorporated by reference to Amendment No. 1
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1996).
10.10 Fourth Confirmation and Amendment, dated February 7, 1997, to
Amended and Restated Revolving Credit and Term Loan Agreement,
dated February 12, 1996, between the Company and Mercantile-Safe
Deposit & Trust Company (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996).
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.11 Lease Agreement, dated as of June 30, 1989, between the Company
and Centennial III Limited Partnership (incorporated by
reference to Exhibit 10.17 to the Company's Annual Report on
Form 10-K for the year ended June 30, 1989).
10.12 Amendment No. 1 to Lease Agreement, dated as of June 30, 1989,
between the Company and Centennial III Limited Partnership
(incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1990).
10.13 Amendments No. 2, 3, 4 and 5 to the Lease Agreement, dated as of
June 30, 1989, between the Company and Centennial III Limited
Partnership (incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the year ended June 30,
1994).
10.14 Amendment No. 6 to the Lease Agreement, dated as of June 30,
1989, between the Company and Centennial III Limited Partnership
(incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995).
10.15 Amended and Restated Rights Agreement, dated June 30, 1995,
between the Company and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995).
10.16 Purchase and Sale Agreement and Joint Escrow Instructions, dated
April 25, 1995, between General Research Corporation and Bermant
Development Company (incorporated by reference to Exhibit 10.19
to the Company's Annual Report on Form 10-K for the year ended
June 30, 1995).
10.17 First Amendment to Purchase and Sale Agreement and Joint Escrow
Instructions, dated June 12, 1995, between the Company and
Bermant Development Company (incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1995).
</TABLE>
II-14
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.18 Building Lease, dated April 25, 1995, between the Company and
Bermant Development Company (incorporated by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1995).
10.19 Interim Lease, dated April 25, 1995, between the Company and
Bermant Development Company (incorporated by reference to
Exhibit 10.22 to the Company's Annual Report on Form 10-K for
the year ended June 30, 1995).
10.20 Employment Agreement, dated July 1, 1995, between the Company
and Jim Roth (incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended June 30,
1995).
10.21 Note, dated July 9, 1992, and Deed of Trust, dated August 11,
1993, between the Company and Jim Roth (incorporated by
reference to Exhibit 10.15 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1994).
10.22 Employment Agreement, dated December 8, 1995, between the
Company and Gary L. Denman (incorporated by reference to Exhibit
10.17 to Amendment No. 1 to the Company's Annual Report on Form
10-K for the year ended June 30, 1996 ).
10.23 Employment Agreement, dated December 8, 1995, between the
Company and James P. McCoy (incorporated by reference to Exhibit
10.18 to Amendment No. 1 to the Company's Annual Report on Form
10-K for the year ended June 30, 1996).
10.24 Employment Agreement, dated December 8, 1995, between the
Company and Thomas E. McCabe (incorporated by reference to
Exhibit 10.19 to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1996).
10.25 Employment Agreement, dated November 2, 1995, between the
Company and Charles C. Bream (incorporated by reference to
Exhibit 10.20 to Amendment No. 1 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1996).
</TABLE>
II-15
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.26 Employment Agreement, dated April 29, 1996, between the Company
and Ronald B. Alexander (incorporated by reference to Exhibit
10.21 to Amendment No. 1 to the Company's Annual Report on Form
10-K for the year ended June 30, 1996).
10.27 Patent Application Assignment and Royalty Agreement, dated
October 15, 1993, among the Company (as success to SWL Inc.),
Robert E. Pfister and William D. Knight (incorporated by
reference to Exhibit 10.26 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996).
10.28* Convertible Securities Subscription Agreement, dated as of
January 21, 1997, between the Company and Halifax Fund, L.P.
(incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31,
1996).
10.29 $4,000,000 5% Convertible Debenture Due January 30, 2000 issued
by the Company to Halifax Fund, L.P. (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996).
10.30 320,000 Share Common Stock Purchase Warrant issued by the
Company to Halifax Fund, L.P. (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1996).
10.31 Registration Rights Agreement, dated as of January 30, 1997,
between the Company and Halifax Fund, L.P. (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1996).
13.1 Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996.
23.1 Consent of Deloitte & Touche LLP.
</TABLE>
II-16
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
23.2+ Consent of Thomas E. McCabe .
24.1+ Power of Attorney.
</TABLE>
+ Previously filed.
++ Exhibits A and B to Exhibit 4.3 are incorporated herein as Exhibits 4.4
and 4.5.
* Exhibits A, B and C to Exhibit 10.28 are incorporated herein as Exhibits
10.29, 10.30 and 10.31.
II-17
<PAGE>
================================================================================
- - - --------------------------------------------------------------------------------
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 December 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 issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock January 31, 1997
- - - --------------------- -----------------
$.10 par value 9,342,557 shares
- - - --------------------------------------------------------------------------------
================================================================================
<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 section of this Form 10-Q captioned "Management's
Discussion and Analysis". 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
----
PART I - FINANCIAL INFORMATION
A. FINANCIAL STATEMENTS
<S> <C>
Consolidated Condensed Statements of Income 3
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 8
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
C. PART II - OTHER INFORMATION 28
</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 Six Months Ended
December 31, December 31,
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 30,345 $ 28,268 $ 60,479 $ 60,954
Cost of revenues 27,005 23,854 52,305 51,396
-------- -------- -------- --------
Gross Margin 3,340 4,414 8,174 9,558
Research and Development 1,701 232 2,635 423
Sales and Marketing 1,619 1,185 3,344 1,973
General and Administrative 4,356 3,232 9,005 6,829
Write down of Deferred Software
and Related Costs 14,252 --- 14,252 ---
-------- -------- -------- --------
Operating Income (Loss) (18,588) (235) (21,062) 333
Interest (expense) income, net (516) (83) (652) (20)
-------- -------- -------- --------
Income (Loss) Before Income Taxes (19,104) (318) (21,714) 313
Provision for income taxes --- --- --- ---
-------- -------- -------- --------
Net Income (Loss) $(19,104) $ (318) $(21,714) $ 313
======== ======== ======== ========
Income (Loss) Per Common and
Common Equivalent Share $ (2.05) $ (.03) $ (2.33) $ .03
======== ======== ======== ========
Common Shares used for
EPS Calculation 9,340 9,150 9,321 9,327
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ --------
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,680 $ 2,790
Accounts receivable 26,226 29,966
Unbilled reimbursable costs and fees 5,129 4,033
Inventories, at lower of cost or market 1,810 2,635
Other receivables 1,377 1,018
Prepaid expenses and other 1,885 1,462
------- -------
Total current assets 40,107 41,904
------- -------
PROPERTY AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization of $10,490 and $9,465 12,023 12,267
------- -------
OTHER ASSETS:
Goodwill and other intangible assets, net 2,285 2,311
Deferred software costs, net 576 11,216
Deposits and other 6,334 6,403
------- -------
Total other assets 9,195 19,930
------- -------
TOTAL ASSETS $61,325 $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>
December 31, June 30,
1996 1996
-------------- ---------
(in thousands)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,193 $ 1,823
Accounts payable 3,197 6,382
Accrued compensation and benefits 13,264 13,125
Accrued expenses 2,241 2,095
Other current liabilities 3,009 2,885
-------- --------
Total current liabilities 24,904 26,310
-------- --------
LONG-TERM DEBT 28,026 17,770
-------- --------
OTHER NON-CURRENT LIABILITIES 1,302 1,346
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 9,643,000 shares
and 9,586,000 shares 964 958
Paid-in capital 74,956 74,830
Accumulated deficit (64,982) (43,268)
-------- --------
10,938 32,520
Less: Treasury stock, at cost; 300,000 shares (3,845) (3,845)
-------- --------
Total stockholders' equity 7,093 28,675
-------- --------
$ 61,325 $ 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>
Six Months Ended
December 31,
------------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income (loss) $(21,714) $ 313
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,846 1,774
Write down of deferred software and related costs 14,252 ---
Changes in assets and liabilities:
Accounts receivable and unbilled
reimbursable costs and fees 2,287 3,582
Inventory (454) (864)
Other current assets (657) (1,164)
Accounts payable, accruals and
other current liabilities (2,881) (5,016)
Other, net --- 21
-------- --------
NET CASH USED BY OPERATING ACTIVITIES (6,321) (1,354)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,504) (2,065)
Deferred software costs (2,626) (8,010)
Other, net (374) (61)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (4,504) (10,136)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital lease obligations (503) ---
New borrowings 12,130 10,300
Sale of common stock 132 ---
Other, net (44) (475)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,715 9,825
-------- --------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 890 (1,665)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,790 2,679
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 3,680 $ 1,014
======== ========
</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>
Six Months Ended
December 31,
------------------
1996 1995
------ ------
(in thousands)
<S> <C> <C>
Supplemental disclosures:
Cash transactions:
Interest paid $ 595 $ 156
Income taxes paid 9 25
</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 DECEMBER 31, 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 has been incorporated into the Company's
NetworkVUE(TM) product and as such 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 did
not make a $600 thousand payment due November 27, 1996, because of breaches
of the purchase agreement by QSI. The Company and QSI are in negotiations
to resolve the issue. If negotiations are unsuccessful, there will be an
arbitration of the dispute. The Company does not believe that the result of
such negotiations will have an adverse effect on its results of operations
or financial position.
(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 December 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. No notice of non-renewal was received by October 15, 1996,
and, thus, the Revolving Credit is repayable on January 15, 1999. As of
December 31, 1996, the Company had borrowed $17.5 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>
Debt at December 31, 1996, consists of the following:
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1996
----------------- -------------
<S> <C> <C>
Revolving Credit Agreement $17,476 $ 5,425
Term Loans 5,000 5,000
Equipment Financing 6,841 7,346
Other 1,902 1,822
------- -------
Total Debt $31,219 $19,593
Less: Current Portion 3,193 1,823
------- -------
$28,026 $17,770
======= =======
</TABLE>
At December 31, 1996, the Company was in default of certain covenants under
the Amended and Restated Revolving Credit and Term Loan Agreement, which
default was cured by an amendment to that Agreement dated February 7, 1997
by reducing the tangible net worth requirement to $4 million as of December
31, 1996. For this purpose, the $4 million raised by the Convertible
Debenture issued in January 1997 is counted as equity. In addition,
certain other covenants were amended so that, under the Company's plans
and projections for the next twelve months, the Company expects to remain
in compliance with these covenants for that time period.
(4) Changes in Presentation. Certain amounts in the December 31, 1995
-----------------------
Consolidated Financial Statements have been reclassified to conform to the
December 31, 1996 presentation.
(5) Write Down of Carrying Value of Certain Assets. The Company has decided to
----------------------------------------------
dispose by sale or shutdown of several business units, including its OSU,
NetworkVUE, and APD business units. All assets of these business units
have been written down to net realizable values. Consequently, in the
quarter ended December 31, 1996, the Company recorded a write down of $14.3
million for software development and related costs. The write down was
comprised of $12.3 million in deferred software costs related to the
Company's OSU and NetworkVUE business units, which are to be disposed of
either by sale or shutdown, and $2.0 million of related assets, primarily
inventory. The assets remaining include OSU net assets of $550 thousand,
CIS net assets of $132 thousand, and GRC Instruments of $2.1 million.
(6) Subsequent Event. On January 21, 1997, the Company entered into a
----------------
Convertible Securities Subscription Agreement ("Subscription Agreement")
pursuant to which an investor purchased a $4 million 5% Convertible
Debenture due January 2000 ("Debenture"). Also on January 21, 1997, the
Company entered into a Structured Equity Line Flexible Financing Agreement
("Equity Line Agreement") whereby an investor may purchase up to $18
million in the Company's Common Stock over a 3 1/2 year period to begin
later this calendar year.
The Debenture bears interest at a 5% rate per annum payable quarterly in
cash or, at the Company's option, the amount due may be added to the
outstanding principal due under the Debenture. The Debenture is
convertible into the Company's Common Stock
9
<PAGE>
at the lesser of (i) $11 per share, or (ii) 94% of the low trade during the
3 trading days immediately preceding the date of conversion. The investor
also received a 7-year warrant to purchase 320,000 shares of the Company's
Common Stock at a price of $8.47 per share ("Debenture Warrant"). Under a
related Registration Rights Agreement ("Registration Rights Agreement"),
the Company is obligated to file a registration statement with the
Securities and Exchange Commission with respect to the Company's Common
Stock into which the Debenture is convertible and for which the Debenture
Warrant is exercisable. If the Company is in default under the Debenture,
the investor may put the Debenture to the Company at 120% of the amount
outstanding. The Debenture Warrant is not exercisable for 18 months, but
becomes immediately exercisable if the Company sells substantially all of
its assets or enters into a merger or acquisition or other similar
transaction, and in such event the Debenture Warrant is repriced at the
lesser of (i) $8.47 per share, or (ii) 80% of the Transaction Value (as
defined in the Debenture Warrant), and the investor has the option to put
the Debenture to the Company at 115% of the amount outstanding. Other
terms, conditions, and limitations apply to the Subscription Agreement, the
Debenture, the Registration Rights Agreement and the Debenture Warrant.
Each of these documents is included as an Exhibit to this Form 10-Q.
Under the Structured Equity Line Flexible Financing Agreement ("Equity Line
Agreement") the investor may, but is not required to, purchase up to $3
million of the Company's Common Stock during the first 6 months of the
effectiveness of a registration statement under the Securities Act of 1933
for the shares to be issued. For the 3 years after that initial 6-month
period, the Company can require the investor to purchase up to $3 million
of the Common Stock per quarter up to an aggregate maximum of $18 million
under the Equity Line Agreement. The purchase price is equal to 94% of the
low trade price during the 3 trading days immediately preceding the notice
of purchase by the investor. The investor, however, may not purchase
Common Stock at a price of less than $4 per share. If the Company issues
less than $5 million of its Common Stock under the Equity Line Agreement,
it must pay the investor up to $300,000 as liquidated damages. The
investor also received a 7-year Warrant to purchase 125,000 shares of the
Company's Common Stock at a price of $8.47 per share ("Equity Line
Warrant"). If the Company elects to issue more than $5 million, the
Company will issue an additional 7-year warrant for the purchase of 75,000
shares of the Company's Common Stock ("Additional Equity Line Warrant") at
a price equal to 140% of the price of the Common Stock at the time of the
issuance of the Additional Equity Line Warrant. Under a related
Registration Rights Agreement ("Registration Rights Agreement"), the
Company is obligated to file a registration statement with the Securities
and Exchange Commission with respect to the Company's Common Stock for
which the Equity Line Warrant and the Additional Line Warrant
(collectively, the "Equity Line Warrants") are exchangeable. The Equity
Warrant is not exercisable for 18 months, but becomes immediately
exercisable if the Company sells substantially all of its assets or enters
into a merger or acquisition or other similar transaction, and in such
event is repriced at the lesser of (i) $8.47, or (ii) 80% of the
Transaction Value (as defined in the Equity Line Warrant). The Additional
Equity Line Warrant, when issued, will contain provisions similar to the
Equity Line Warrant. The investor's obligation to purchase under the
Equity Line Agreement is subject to various conditions, including (i) the
effectiveness of a registration statement with respect to the underlying
shares, (ii) limitations based on the price and volume of the Company's
Common Stock, and (iii) the percentage of the Common Stock beneficially
owned by the investor from time to
10
<PAGE>
time. Other terms, conditions, and limitations apply to the Equity Line
Agreement, the Registration Rights Agreement and the Equity Line Warrant.
Each of these documents is included as an Exhibit to this Form 10-Q.
GRC INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED December 31, 1996 and 1995
(unaudited)
Summary
The revenues and operating income and interest expense of the Company are
presented for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- --------------------
12/31/96 12/31/95 12/31/96 12/31/95
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 30,345 $ 28,268 $ 60,479 $ 60,954
========= ========= ========= =========
Write down of assets $ (14,252) $ --- $ (14,252) $ ---
========= ========= ========= =========
Operating income (loss) (18,588) (235) (21,062) 333
Interest income (expense), net (516) (83) (652) (20)
--------- --------- --------- ---------
Income (loss) before income taxes (19,104) (318) (21,714) 313
Provision for income taxes --- --- --- ---
--------- --------- --------- ---------
Net income (loss) $(19,104) $ (318) $(21,714) $ 313
========= ========== ======== =========
</TABLE>
Overview
- - - --------
Beginning in November 1993, the Company expanded beyond its core PSO
business by developing business units in telecommunications, comprised primarily
of the OSU and NetworkVUE business units. From the inception of these projects
through December 31, 1996, the Company has invested the free cash flow from PSO
and has incurred substantial amounts of debt in order to fund the development of
its Telecom Division. During this time, PSO has generated in excess of 90% of
the Company's revenues, has been consistently profitable, with positive cash
flows. PSO revenues and profitability have also increased in the quarter ended
December 31, 1996, and efforts are underway to continue these increases.
During the second fiscal quarter of 1997, ended December 31, 1996, two
significant events occurred with respect to Telecom. First, the Company
received the results of two independent market surveys for the OSU. Second, the
Company commercially released the NetworkVUE product. These matters are
discussed below.
11
<PAGE>
The OSU surveys clarified that the current market for OSU-like devices
is low and likely to remain so for the next two years, with a divergence of
opinion between the surveys as to whether the market would then develop
substantially. Given the Company's liquidity, discussed further below, it can
no longer afford to continue investing in the OSU business unit. Accordingly,
the Company has decided to dispose of the OSU business unit. The disposal will
either be by sale or the Company will shut down the unit as it is presently
structured. Consequently, evaluating the net realizable values of the OSU
assets, the Company at December 31, 1996 has written off $4.0 million of
capitalized software development costs and other costs related to the OSU
business unit, primarily inventory.
The NetworkVUE product has been previewed with potential customers for
approximately one year and has been commercially released since October 1996.
In the four months since the NetworkVUE product was released, several companies
have been evaluating the product, and the Company structured a co-marketing
alliance with a major system integrator and network consultant whereby the
Company would provide design and optimization services using its NetworkVUE
software as a design tool. However, the Company has not recognized significant
product or service revenues from the NetworkVUE software suite as released in
October 1996. Given the Company's liquidity, it can no longer afford to
continue investing in the NetworkVUE business unit. Accordingly, the Company
has decided to dispose of the NetworkVUE business unit by sale or a shutdown.
At the same time, the Company will retain a small complement of personnel in PSO
to market network design consulting services using the NetworkVUE software as a
tool. However, to date, no significant commissions for service engagements have
been received. Consequently, evaluating the net realizable values of the
NetworkVUE assets, the Company at December 31, 1996 has written off $10.4
million of capitalized software costs and other costs related to the NetworkVUE
business unit.
While the Company is withdrawing from its OSU and NetworkVUE business,
it remains fully committed to the Application Software Group, the third and
smallest Telecom component. ASG, although a start-up operation, was essentially
break-even for the six months ended December 31, 1996.
The Company has also decided to dispose of the business units within its
APD division in order to generate additional cash, and expects to do so at
amounts equal to at least net book values.
As a consequence of the write downs and the refocusing by the Company on
its profitable and growing PSO services business, the Company believes that,
after a short period of transition, the Company will resume profitable
operations generating positive cash flows since the profits from PSO operations
would then no longer be overridden by losses from Telecom.
The $4 million Convertible Debenture and $18 million Structured Equity Line
financing, discussed below, improves the Company's liquidity, but the $18
million Structured Equity Line financing is not expected to be available until
later this calendar year, and is subject to various conditions which may limit
its availability. The Company would, therefore, not have been able to continue
absorbing the cash flow losses generated by the OSU and NetworkVUE business
units.
12
<PAGE>
At December 31, 1996, the Company had borrowed $17.5 million against its
Revolving Credit and $5 million against its Term Loan facilities. As discussed
below, if the Company is able to restructure its bank debt to provide for
amortization of the principal outstanding over a term of approximately five
years, rather than "balloon" repayments in 1-1/2 to 2 years as the loans are
presently structured, and there can be no assurances that it will be able to do
so, the Company's cash flow from PSO operations together with the anticipated
cash inflow from the Structured Equity Line financing should be sufficient to
allow the Company to service and amortize its outstanding debt over that term.
Also as previously announced, Smith Barney continues to advise the Company
with respect to a full range of financial and strategic options.
In summary, with a proper execution of a withdrawal from the bulk of its
Telecom and all of its APD business units, the Company will be focused on a
profitable and growing PSO and, with a restructuring of the term of its current
bank debt, should be able to amortize the outstanding balance over approximately
five years.
Results of Operations - Three Months ended December 31, 1996 and 1995
- - - ---------------------------------------------------------------------
Summary of Results of Operations by Segment - Three Months Ended December 31,
- - - -----------------------------------------------------------------------------
1996 and 1995.
- - - -------------
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
12/31/96 12/31/95
----------------------------------- -----------------------------
PSO TD APD Corp GRC PSO TD APD Corp GRC
----------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 27.8 0.8 1.7 --- 30.3 26.3 0.1 1.9 --- 28.3
Gross Profit (Loss) 5.0 (2.0) 0.4 (0.1) 3.3 3.8 --- 0.9 (0.1) 4.4
R&D --- 1.1 0.6 --- 1.7 --- 0.1 0.1 --- 0.2
S&M --- 0.9 0.6 --- 1.6 0.3 0.5 0.5 --- 1.2
G&A 3.3 0.6 0.4 0.2 4.4 2.7 0.3 0.2 0.1 3.2
Write down --- 14.3 --- --- 14.3 --- --- -- --- ---
----------------------------------- ----------------------------
Operating Profit 1.7 (18.9) (1.2) (0.3) (18.6) 0.7 (0.9) 0.1 (0.2) (0.2)
(Loss)
</TABLE>
Note: Numbers may not add due to rounding.
Revenues
- - - --------
The Company's revenues were $30.3 million for the second quarter of fiscal
1997, compared to $28.3 million for the same quarter last fiscal year. The
revenue increase of $2.0 million, or 7%, is attributable to an increase in
revenues from the Company's Professional Service Organization ("PSO") of $1.5
million, an increase in the Company's Telecommunications Division ("Telecom")
revenues of $718 thousand, and a decrease in the Company's Advanced Products
Division ("APD") revenues of $203 thousand.
For PSO, service revenues of $27.2 million for the second quarter of fiscal
1997 increased 8% above service revenues of $25.3 million for the second quarter
of fiscal 1996. Product revenues of $665 thousand for the second quarter of
fiscal 1997 decreased 30% from product revenues of $955 thousand for the second
quarter of fiscal 1996.
13
<PAGE>
For Telecom, second quarter fiscal 1997 revenues were $848 thousand,
compared to $130 thousand for the second quarter of fiscal 1996, comprised as
follows:
. Revenues from the OSU(R) business unit for the second quarter of fiscal
1997 amounted to $71 thousand, compared to $111 thousand for the prior
year.
. Revenues from the NetworkVUE(TM) business unit amounted to $172
thousand, compared to $19 thousand for the prior year.
. And, revenues from the Application Software Group ("ASG") amounted to
$605 thousand, compared to none for the prior year.
For APD, second quarter fiscal 1997 revenues were $1.7 million, compared to
approximately $1.9 million for the second quarter of fiscal 1996, comprised as
follows:
. The GRC Instruments ("GRC Instruments") materials testing business unit
of APD had second quarter 1997 revenues of $894 thousand, a 22% decline
from second quarter 1996 revenues of $1.1 million.
. The Commercial Information Solutions ("CIS") environmental, safety, and
health management software business unit had $189 thousand second
quarter 1997 revenues, compared to revenues of approximately $490
thousand for the prior year quarter, a decline of 61%.
. The Advanced Security Technologies ("AST") business unit of APD, which
now includes what had been the Advanced Technology Services Group
("ATS"), had second quarter 1997 revenues of $588 thousand, compared to
$243 thousand in the previous year's quarter.
Cost of Revenues and Gross Profit
- - - ---------------------------------
The Company's cost of revenues were $27.0 million for the second quarter of
fiscal 1997, compared to $23.9 million for the same quarter last year.
Accordingly, the Company's gross profit for the first quarter of fiscal 1997 was
$3.3 million, 11% of revenues, a 25% decline from the gross profit of $4.4
million, or 16% of revenues, for the second quarter of fiscal 1996.
For PSO, cost of revenues of $22.8 million increased 1% from the $22.5
million cost of revenues for the second quarter of the prior year. Gross profit
of $5.0 million, 18% of revenues, increased by 32% over gross profit of $3.8
million, 14% of revenues, for the prior year's quarter. The increase in PSO
gross margins is due primarily to an increase in the direct labor content of PSO
service revenues, together with an increase in the gross margin earned by that
direct labor content, compared to the prior year quarter.
For Telecom, second quarter cost of revenues and gross profit were $2.8
million and a loss of $2.0 million, respectively, compared to cost of revenues
and gross profit of $134 thousand and a loss of $4 thousand, respectively, for
the second quarter of fiscal 1996, comprised as follows:
14
<PAGE>
. For OSU, second quarter cost of revenues of $835 thousand resulted in a
negative gross profit of $764 thousand, compared to cost of revenues of
$74 thousand resulting in a gross profit of $37 thousand for the second
quarter of fiscal 1996.
. For NetworkVUE, second quarter cost of revenues of $1.5 million resulted
in a negative gross profit of $1.4 million, compared to cost of revenues
of $60 thousand resulting in a negative gross profit of $41 thousand for
the second quarter of fiscal 1996.
. For ASG, second quarter cost of revenues of $444 thousand resulted in a
gross profit of $161 thousand, compared to none for the second quarter
of fiscal 1996.
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, second quarter cost of revenues and gross profit were $1.2 million
and a profit of $438 thousand, respectively, compared to cost of revenues and
gross profit of $1.0 million and a profit of $861 thousand, respectively, for
the second quarter of fiscal 1996, comprised as follows:
. For GRI, second quarter cost of revenues of $467 thousand resulted in a
gross profit of $427 thousand, compared to cost of revenues of $539
thousand resulting in a gross profit of $603 thousand for the second
quarter of fiscal 1996.
. For CIS, second quarter cost of revenues of $316 thousand resulted in a
negative gross profit of $126 thousand, compared to cost of revenues of
$252 thousand resulting in a gross profit of $239 thousand for the
second quarter of fiscal 1996.
. For AST, which includes ATS, second quarter cost of revenues of $451
thousand resulting in a gross profit of $137 thousand, compared to cost
of revenues of $224 thousand resulting in a gross profit of $19 thousand
for the second quarter of fiscal 1996.
Operating Expenses and Operating Income
- - - ---------------------------------------
Including the $14.3 million write off, operating expenses for the second
quarter of fiscal 1997 amounted to $21.9 million. Excluding the $14.3 million
write off, operating expenses for the second quarter amounted to $7.7 million,
or 25% of revenues, compared to $4.6 million, or 16% of revenues for the second
quarter of the prior year, an increase of $3.1 million on a year-to-year basis.
Research & Development expenses of $1.7 million for the second quarter of
fiscal 1997 increased $1.5 million over R&D expenses for the prior year quarter
of $232 thousand. The increase occurred due to the completion of the
development of OSU and NetworkVUE software and the shift of expenditures from
capitalized cost to R&D expense. During the second quarter of fiscal 1997, the
Company capitalized $565 thousand, $342 thousand of which related to
NetworkVUE(TM) and $180 thousand of which related to OSU(R). With the first
commercial release of the NetworkVUE product in mid-October 1996, capitalization
for NetworkVUE stopped and, during the second quarter, prior to the write off of
$12.3 million of capitalized costs, a portion of the amount previously
capitalized with respect to NetworkVUE was amortized to cost of revenues.
15
<PAGE>
Sales and Marketing expenses of $1.6 million for the second quarter of
fiscal 1997 increased $434 thousand, or 37%, over sales and marketing expenses
for the prior year quarter of $1.2 million. This increase arose primarily from
Telecom, where sales and marketing expenses increased from $453 thousand last
year to $942 thousand for the second quarter this year. This increase arose
from the commercial availability of the OSU(R) unit during the first quarter and
of the NetworkVUE(TM) product in the second quarter.
General & Administrative expenses of $4.4 million increased $1.2 million,
or 35%, over the $3.2 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 by $335 thousand from $309 thousand in the
second quarter last year to $644 thousand in the second quarter this year, an
increase of 108%, and in APD where G&A expenses increased from $180 thousand
last year to $390 thousand this year, an increase of 117%.
Write down of Deferred Software and Related Costs
- - - -------------------------------------------------
In the quarter ended December 31, 1996, the Company recorded a write down
of $14.3 million for software development and related costs. The write down was
comprised of $12.3 million in deferred software costs (comprised of $2.0 million
related to OSU(R) and $10.3 related to NetworkVUE(TM)) and $2.0 million of
related assets, primarily inventory. The write down was necessitated by the
Company's decision to withdraw from the OSU and NetworkVUE business and by the
present uncertainty regarding any sale of those businesses.
Operating Profit or Loss
- - - ------------------------
Including the $14.3 million write down, the Company had a second quarter
fiscal 1997 consolidated operating loss of $18.6 million. Excluding the write
down, the Company's operating loss for the second quarter amounted to $4.3
million, consisting of a $1.7 million operating profit from PSO, a $4.7 million
operating loss from Telecom, a $1.2 million operating loss from APD, and $254
thousand in Corporate expenses. This contrasts with a consolidated operating
loss of $235 thousand for the second fiscal quarter of 1996, consisting of
approximately a $713 thousand operating profit from PSO, a $905 thousand
operating loss from Telecom, approximately a $110 thousand operating profit from
APD, and $153 thousand in Corporate expenses.
Net Interest Income or Expense
- - - ------------------------------
Net interest expense in the second quarter of fiscal 1997 was $516
thousand, compared to net interest expense of $83 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 second quarter of fiscal 1997 amounted to $19.1
million, compared to a loss of $318 thousand in the second quarter of fiscal
1996.
16
<PAGE>
Results of Operations - Six Months ended December 31, 1996 and 1995
- - - -------------------------------------------------------------------
Summary of Results of Operations by Segment - Six Months Ended December 31, 1996
- - - --------------------------------------------------------------------------------
and 1995.
- - - --------
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
12/31/96 12/31/95
------------------------------- --------------------------------
PSO TD APD Corp GRC PSO TD APD Corp GRC
------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 55.5 2.0 3.0 --- 60.5 57.5 0.1 3.3 --- 61.0
Gross Profit (Loss) 10.0 (2.5) 0.8 (0.1) 8.2 8.3 --- 1.4 (0.1) 9.6
R&D --- 1.6 1.0 --- 2.6 --- 0.1 0.3 --- 0.4
S&M 0.1 2.0 1.2 --- 3.3 0.5 0.7 0.8 --- 2.0
G&A 6.4 1.4 0.9 (0.3) 9.0 5.7 0.6 0.4 0.1 6.8
Write down --- 14.3 --- --- 14.3 --- --- --- --- ---
------------------------------- --------------------------------
Operating Profit 3.4 (21.7) (2.4) (0.4) (21.1) 2.1 (1.5) (0.1) (0.2) 0.3
(Loss)
</TABLE>
Note: Numbers may not add due to rounding.
Revenues
- - - --------
The Company's revenues were $60.5 million for the first half of fiscal
1997, compared to $61.0 million for the same period last fiscal year, including
$4.5 million attributable to 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. Excluding the joint venture from last year's results,
revenues increased $4 million, or 7%, from $56.5 million to $60.5 million.
Consolidated first half 1997 service revenues of $56.1 million increased 7%,
compared to first half 1996 service revenues, excluding the joint venture
referred to above, of $52.5 million. Consolidated first half 1997 product
revenues of $4.3 million increased 8%, compared to first half 1996 product
revenues of $4 million.
For PSO, excluding the joint venture referred to above, service revenues of
$54.5 million for the first half of fiscal 1997 increased 5% above service
revenues of $51.7 million for the first half of fiscal 1996. Product revenues
of $993 thousand for the first half of fiscal 1997 decreased 25% from product
revenues of $1.3 million for the first half of fiscal 1996.
For Telecom, first half fiscal 1997 revenues were $2.0 million, compared to
$130 thousand for the first half of fiscal 1996. Revenues from the OSU(R)
business unit for the first half of fiscal 1997 amounted to $379 thousand,
compared to $111 thousand for the prior year period; from the NetworkVUE(TM)
business unit amounted to $369 thousand, compared to $19 thousand for the prior
year period; and from the Application Software Group amounted to $1.3 million,
compared to none for the prior year period.
For APD, first half fiscal 1997 revenues were $3.0 million, compared to
approximately $3.3 million for the first half of fiscal 1996. The GRC
Instruments materials testing business unit of APD had first half 1997 revenues
of $1.4 million, a 18% decline from first half 1996 revenues of $1.7 million.
The CIS environmental, safety, and health management software business unit had
$421 thousand first half 1997 revenues, compared to revenues of
17
<PAGE>
approximately $969 thousand for the prior year period, a decline of 57%. The AST
security business unit of APD, which now includes the Advanced Technology
Services Group, had first half 1997 revenues of $1.2 million, compared to $613
thousand in the previous year period, since the security business was not
acquired until the second fiscal quarter of 1996.
Cost of Revenues and Gross Profit
- - - ---------------------------------
The Company's cost of revenues were $52.3 million for the first half of
fiscal 1997, compared to $51.4 million for the same period last year, including
the cost of sales associated with the consolidated joint venture mentioned
above. Excluding the impact of the joint venture, the Company's cost of
revenues for the first half of fiscal 1996 would have been $46.9 million.
The Company's gross profit for the first half of fiscal 1997 was $8.2
million, or 14% of revenues, a 14% decline from the gross profit of $9.6
million, or 16% of revenues, for the first half of fiscal 1996.
For PSO, excluding the joint venture referred to above, cost of revenues of
$45.5 million increased 2% from the $44.8 million cost of revenues for the first
half of the prior year. Gross profit of $10.0 million, or 18% of revenues,
increased by 20% over gross profit of $8.3 million, or 16% of revenues, for the
prior year period. The increase in PSO gross margins is due primarily to an
increase in the direct labor content of PSO service revenues, together with an
increase in the gross margin earned by that direct labor content, compared to
the prior year quarter.
For Telecom, first half fiscal 1997 cost of revenues and gross profit were
$4.5 million and a loss of $2.5 million, respectively, compared to cost of
revenues and gross profit of $143 thousand and a loss of $13 thousand,
respectively, for the first half of fiscal 1996, comprised as follows:
. For OSU, first half cost of revenues of $1.6 million resulted in a
negative gross profit of $1.2 million, compared to cost of revenues of
$74 thousand resulting in a gross profit of $37 thousand for the first
half of fiscal 1996.
. For NetworkVUE, first half cost of revenues of $2.0 million resulted in
a negative gross profit of $1.6 million, compared to cost of revenues of
$69 thousand resulting in a negative gross profit of $50 thousand for
the first half of fiscal 1996.
. For ASG, first half cost of revenues of $933 thousand resulted in a
gross profit of $342 thousand, compared to none for the first half of
fiscal 1996.
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 half cost of revenues and gross profit were $2.2 million and
a profit of $752 thousand, respectively, compared to cost of revenues and gross
profit of $1.9 million and a profit of $1.4 million, respectively, for the first
half of fiscal 1996, comprised as follows:
18
<PAGE>
. For GRI, first half cost of revenues of $700 thousand resulted in a
gross profit of $653 thousand, compared to cost of revenues of $885
thousand resulting in a gross profit of $835 thousand for the first half
of fiscal 1996.
. For CIS, first half cost of revenues of $525 thousand resulted in a
negative gross profit of $104 thousand, compared to cost of revenues of
$471 thousand resulting in a gross profit of $498 thousand for the first
half of fiscal 1996.
. For AST, which includes ATS, first half cost of revenues of $1.0 million
resulted in a gross profit of $202 thousand, compared to cost of
revenues of $590 thousand resulting in a gross profit of $23 thousand
for the first half of fiscal 1996.
Operating Expenses and Operating Income
- - - ---------------------------------------
Including the $14.3 million write off, operating expenses for the first
half of fiscal 1997 amounted to $29.2 million. Excluding the $14.3 million
write off, operating expenses for the first half of fiscal 1997 amounted to
$15.0 million, or 25% of revenues, compared to $9.2 million, or 16% of revenues
for the first half of the prior year (excluding the revenues from the minority
portion of the consolidated joint venture), an increase of $5.8 million on a
year-to-year basis.
Research & Development expenses of $2.6 million for the first half of
fiscal 1997 increased $2.2 million over R&D expenses for the prior year period
of $423 thousand. The increase occurred due to the completion of the
development of OSU and NetworkVUE software and the shift of expenditures from
capitalized cost to R&D expense. During the first half of fiscal 1997, the
Company capitalized $2.6 million, $2.0 million of which related to
NetworkVUE/TM/, $438 thousand of which related to OSU(R), and $94 thousand of
which related to ASG. With the prior release of the OSU network interface and
the first commercial release of the NetworkVUE product in mid-October, 1996, the
capitalization of development costs has stopped, and, prior to the $12.3 million
write off of capitalized costs, the amortization to cost of revenues of amounts
previously capitalized with respect to OSU and NetworkVUE increased
substantially compared to prior periods.
Sales and Marketing expenses of $3.3 million for the first half of fiscal
1997 increased $1.3 million, or 70%, over sales and marketing expenses for the
prior year period of $2.0 million. This increase arose primarily from Telecom,
where sales and marketing expenses increased from $719 thousand last year to
$2.0 million for the first half of this year. This increase arose from the
commercial availability of the OSU(R) unit and NetworkVUE/TM/ product during the
first half of the 1997 fiscal year.
General & Administrative expenses of $9.0 million increased $2.2 million,
or 32%, over the $6.8 million incurred in the prior year period. The increase
in G&A expense arose primarily in the increased infrastructure related to
Telecom where G&A expenses increased from $638 thousand in the first half last
year to $1.4 million in the first half this year, an increase of 124%, and in
APD where G&A expenses increased from $414 thousand last year to $879 thousand
this year, an increase of 112%.
19
<PAGE>
Write down of Deferred Software and Related Costs
- - - -------------------------------------------------
In the quarter ended December 31, 1996, the Company recorded a write down
of $14.3 million for software development and related costs. The write down was
comprised of $12.3 million in deferred software costs (comprised of $2.0 million
related to OSU(R) and $10.3 related to NetworkVUE/TM/) and $2.0 million of
related assets, primarily inventory. The write down was necessitated by the
Company's decision to withdraw from the OSU and NetworkVUE business and by the
present uncertainty regarding any sale of those businesses.
Operating Profit or Loss
- - - ------------------------
Including the $14.3 million write down, the Company had a first half fiscal
1997 consolidated operating loss of $21.1 million. Excluding the write down,
the Company's operating loss amounted to a loss of $6.8 million, consisting of a
$3.4 million operating profit from PSO, a $7.5 million operating loss from
Telecom, a $2.4 million operating loss from APD, and $382 thousand in Corporate
expenses. This contrasts with a consolidated operating profit of $333 thousand
for the first fiscal half of 1996, consisting of approximately a $2.1 million
operating profit from PSO, a $1.5 million operating loss from Telecom, and
approximately a $120 thousand operating loss from APD, and $175 thousand in
Corporate expenses.
Net Interest Income or Expense
- - - ------------------------------
Net interest expense in the first half of fiscal 1997 was $652 thousand,
compared to net interest expense of $20 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 half of fiscal 1997 amounted to $21.7 million,
compared to a profit of $313 thousand in the first half of fiscal 1996.
The Company's PSO Business
- - - --------------------------
PSO derives substantially all of its business from service contracts with
the Department of Defense of the United States government. Given PSO's
historically high win rate, 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
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.
This business, however, 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 December 31, 1996, the Company had openings for approximately 219
employees for
20
<PAGE>
positions related to PSO. This contrasts with the Company's openings at June 30,
1996 for 209 employees for positions related to PSO. An inability to fill a
substantial portion of these current openings could have a materially adverse
impact on PSO's revenue and profitability growth. Although PSO's contracts
number approximately 150, and the average contract size is small, the loss of
one or more of the larger contracts may have a substantial adverse impact on
PSO's revenues and profitability.
Events Leading to the Decision to Withdraw from the OSU Business
- - - ----------------------------------------------------------------
Late in the second quarter of fiscal 1997, the Company received the results
of two independent market analyses for the OSU(R) Network Interface product for
the non-governmental North American market.
The first survey, conducted by a leading market research consulting firm,
concluded that only a modest addressable market for the OSU-like product will
emerge over the next five years, and that the total cumulative market would be
limited to approximately 2,400 units by 2001, with the addressable market in
1997 and 1998 approximately 133 and 362 units, respectively.
The second market analysis was presented by a specialist firm focusing on a
theory of technology substitution (Fisher-Pry Substitution Curves), where, in
this case, the substitution is SONET based wideband telecommunications as a
substitution for asynchronous communications technology. The critical assumption
in this study is that as bandwidth requirements by many corporate and Internet
related applications begin to exceed DS-1 and DS-3 transmission rates, a
rationale, based on economics and scaleability, will develop to cause a major
movement to SONET based services. As a result, this study projected that the
addressable market for OSU-like devices will exceed 45,000 by 2004. The growth
in bandwidth demand must be sufficiently large to justify the investment by
telecommunications service companies in terminating equipment needed to shift
from current asynchronous to synchronous transmission protocols required for the
Company's product.
Of critical importance, however, to the OSU's near term prospects and the
Company's subsequent decision to withdraw from the OSU business, is the fact
that both studies agree that the addressable market for OSU-like devices through
1998 will remain relatively flat. This is borne out in the marketplace where
delays in broadband SONET service deployments have continued. The divergence
between the studies occurs in their respective estimates of the addressable
market after 1998.
In any case, based on the market surveys, in order for the Company to
achieve significant profits from the OSU product, in addition to the development
of market demand for the product, the product would probably need to be
redesigned so as to reduce its cost of goods sold. This would require further
investment in product development expense of approximately $2 million with
respect to the OSU.
At December 31, 1996, prior to the write down, the Company had $2.0 million
of capitalized software development costs on its balance sheet related to the
OSU product, which was being amortized over a 5-year period.
21
<PAGE>
As discussed below, with the Company's current liquidity shortages, the
Company has concluded that it is not possible for the Company to continue
investing at current levels in the OSU business. Consequently, the Company has
offered the OSU business unit for sale. In the absence of a sale, the OSU
business unit, as it is presently structured, will be shut down to preserve the
Company's liquidity. In the case of a shutdown, the Company would pursue the
sale of the intellectual property and other assets developed with respect to the
OSU.
Events Leading to the Decision to Withdraw from the NetworkVUE Business
- - - -----------------------------------------------------------------------
During the second fiscal quarter of 1997, the Company completed and
commercially released the initial version of its NetworkVUE suite of software
modules for the design and optimization of wide area networks. Additional
functionality for the initial release was scheduled to be completed by June
1997. This includes such features as the ability to design and simulate public
frame relay networks, including time division multiplexing and constant bit rate
transmission protocols. Longer term development would have included ISDN, ATM,
and LANs. These features may be important for the widespread acceptance of the
product by potential customers. Due to a lack of product sales, the Company's
operating plans shifted from a licensing of its software to the providing of
wide area network design and optimization services, using the NetworkVUE
software modules as a proprietary competitive advantage in offering these
services. The Company structured a co-marketing alliance with a major system
integrator and network consultant whereby the Company would provide design and
optimization services using its NetworkVUE software as a design tool. However,
the Company has not recognized significant product or service revenues from the
NetworkVUE software suite as released in October 1996.
With the Company's current liquidity shortages, it is not possible for the
Company to continue investing at current levels in the NetworkVUE business.
Consequently, the Company has offered the NetworkVUE business unit for sale. In
the absence of a sale, the NetworkVUE business unit, as its is presently
structured, will be shut down to preserve the Company's liquidity. In the case
of a shutdown, the Company would pursue the sale of the intellectual property
and other assets developed with respect to NetworkVUE.
New York Stock Exchange Continued Listing Requirements
- - - ------------------------------------------------------
The Company's shares of common stock are listed and traded primarily on the
New York Stock Exchange ("NYSE"), but also on the Pacific Stock Exchange. Rules
801.00 and 802.00 of the NYSE Listed Company Manual ("NYSE Manual") contain
standards for the potential de-listing from trading of a list company's
securities. At December 31, 1996, the Company did not comply with the net
tangible asset requirement of Rule 802. If the NYSE were to consider de-listing
the Company's common shares, it would consider the Company's compliance with the
original listing requirements contained in Rule 102.01. If so, the Company may
have difficulty complying with the requirements for "aggregate market value of
publicly-held shares" and the requirement for "demonstrated earning power". The
Company has not yet had any communications with the NYSE regarding this issue.
Events Subsequent to December 31, 1996
- - - --------------------------------------
Subsequent to December 31, 1996, the Company (i) took actions to reduce
operating expenses and cash used in operations, (ii) proceeded with steps
previously commenced to sell or shut down all business units within APD, (iii)
circulated offering memoranda in order to solicit purchase
22
<PAGE>
interests for its OSU and NetworkVUE business units, (iv) entered into financing
transactions to raise $4 million in a Convertible Debenture and $18 million in a
Structured Equity Financing Line (see Part II, Item 5 of this Form 10-Q), and
(v) continued pursuing actions as advised by its financial adviser, Smith
Barney, with respect to a full range of financial and strategic options for the
Company as a whole.
Operating Expense Reductions. During January 1997, the Company took steps
----------------------------
to reduce its operating expense levels and negative cash flow from a monthly
average outflow of $2.0 million per month during the first half of fiscal 1997
to approximately $1 million per month when "steady state" is achieved in June
1997. This was accomplished by reducing the level of employment in OSU,
NetworkVUE, and APD by laying off some employees and transferring others to PSO.
Sixty-one employees were laid off and 24 employees were transferred to PSO.
Severance payments amounted to approximately $566 thousand. By June 1997, the
monthly reduction in the cash outflow is expected to amount to a cash savings of
approximately $1 million. However, this would imply that the monthly cash
outflow in June related to OSU and NetworkVUE would still remain at
approximately $1 million per month, if no additional steps were taken, derived
approximately equally from the OSU and the NetworkVUE business units.
Therefore, the Company is taking additional steps to generate cash and reduce
expenses, as discussed below.
Disposition efforts regarding the Advanced Products Division. During the
------------------------------------------------------------
second quarter of fiscal 1997 and continuing in the third fiscal quarter
beginning January 1, 1997, the Company is pursuing the sale or shutdown of all
business units within APD. The Company anticipates these sales to be completed
in the near term. The cash generated from these sales will assist the Company by
providing additional short-term liquidity.
Offering Memoranda with respect to the OSU and NetworkVUE business units.
------------------------------------------------------------------------
The Company, in conjunction with its investment bankers, Smith Barney, has begun
circulating offering memoranda with respect to its OSU and NetworkVUE business
units within Telecom, seeking one or more potential buyers interested in
purchasing either of the business units. In the absence of sales, the Company
will shut down the respective units as they are presently structured, causing
further staff and operating expense reductions. In that event, the Company will
continue to seek to sell the intellectual property and other assets related to
those business units. Consequently, at December 31, 1996, the Company wrote off
$14.3 million in capitalized software and other assets related to those business
units.
Financing. On January 30, 1997, the Company issued $4 million face amount
---------
Convertible Debentures. The Company also entered into an $18 million structured
equity financing line whereby the investor may purchase up to $3 million of the
Company's common stock per quarter beginning six months after the effectiveness
of a registration statement, which the Company intends to file in the near
future. For details and other terms and conditions of these transactions, see
Part II, Item 5 of this Form 10-Q.
Liquidity and Capital Resources
- - - -------------------------------
The Company had $3.7 million in cash and cash equivalents at December 31,
1996, compared to $1 million at December 31, 1995 and $2.8 million at June 30,
1996.
Net cash used in operations amounted to $6.3 million for the first half
of fiscal 1997, compared to $1.4 million for the first half of fiscal 1996. Net
cash used in investing activities for
23
<PAGE>
the first half of fiscal 1997 amounted to $4.5 million, compared to $10.1
million for the prior year period. Net cash provided by financing activities
amounted to $11.7 million for the first half of fiscal 1997, compared to $9.8
million provided in the first half of fiscal 1996.
Cash flows from operations, adjusted for cash used in developing software,
was a negative $8.9 million and a negative $9.4 million in the first half of
fiscal 1997 and 1996, respectively.
During fiscal years 1994, 1995, 1996, and the first half 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 $43 million, comprised of $23 million for OSU, $18 million for
NetworkVUE, and $2 million for ASG. This was funded primarily by a combination
of internally generated cash flows from PSO and from increased bank debt.
As a result of the increase in funded debt and continued operating losses
during the first half of fiscal 1997, the Company's ratio of total funded debt
to total capitalization amounted to 82%, compared to 48% at September 30, 1996
and 41% at June 30, 1996.
At December 31, 1996, the Company had $31.2 million of funded debt, $3.2
million of which was classified as short term, and $28.0 million of which was
classified as long term. Of the $31.2 million, $22.5 million was bank debt,
$6.8 million related to equipment lease financings, and $1.9 million was a note
payable related to the 1996 acquisition of assets from Quintessential Solutions,
Inc. The Company had no bank debt at June 30, 1995 and $17.8 million of bank
debt and equipment lease financings at June 30, 1996.
During the first half of fiscal 1997, the Company increased its bank debt
under the Loan Agreement by $12.1 million, a use of cash for operations and
investing activities of approximately $2.0 million per month. Due to the
reductions in operating expenses effected in January 1997, the Company expects
to reduce its cash outflow to $1 million per month by June 1997, with a
transition to that level during the intervening months. At December 31, 1996,
$4.5 million was the remaining balance available on the Company's revolving line
of credit. In January 1997, the Company issued $4 million in face amount of
Convertible Debentures. At January 31, 1997, the Company had approximately
$9.6 million in cash and available credit. The Company estimates that its
minimum required operating cash and credit level is approximately $4.5 million.
Given these requirements and projections of short term liquidity, the Company
has taken significant additional actions, as described above in the section
captioned "Events Subsequent to December 31, 1996".
The credit facilities with the Company's bank consist of a fully used $5
million term loan ("Term Loan"), a $22 million revolving line of credit
("Revolving Credit"), of which $17.5 million was used at December 31, 1996, and
a $6.8 million debt arising from the equipment financing ("Equipment Lease")
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 Credit is due on January 15, 1999,
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. No notice of non-renewal was received by October 15, 1996,
and, thus, the Revolving Credit is repayable on January 15, 1999. The Revolving
Credit bears interest at the bank's floating prime rate, currently 8.25% per
annum. The Term
24
<PAGE>
Loan and Revolving Credit facilities are collateralized by the Company's working
capital and equipment. The Equipment Lease is for a term of 60 months which
commenced in June 1996.
The Amended and Restated Revolving Credit and Term Loan Agreement ("Loan
Agreement") containing the Term Loan and Revolving 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. At December 31, 1996, the Company was in
breach of a financial covenant under the Loan Agreement, namely, a covenant
requiring that tangible net worth be at least $7 million, whereas the Company's
tangible net worth at December 31, 1996 was $4.2 million.
On February 7, 1997, the Loan Agreement was again amended as of December
31, 1996, to bring the Company into compliance by reducing the tangible net
worth requirement to $4 million as of December 31, 1996. For this purpose, the
$4 million raised by the Convertible Debenture issued in January 1997 is counted
as equity. In addition, certain other covenants were amended so that, under the
Company's plans and projections for the next twelve months, the Company expects
to remain in compliance with these covenants for that time period. By a letter
dated February 6, 1997, the Company's bank has stated its view that advances
under the Revolving Credit facility should not be used for leasehold
improvement office furniture or computer equipment, and the bank has asked that
the proceeds of business-unit sales be used to repay the $5 million Term Credit.
The Company and the bank are in continuing discussions on this subject.
If the Company is again in default under its Loan Agreement and cannot
secure a waiver or amendment from the bank, then, together with cross defaults
under the equipment leasing agreement, any amounts then outstanding under the
Term Loan, the Revolving Credit, and the Equipment Lease, which at December 31,
1996 amounted to $29 million, would immediately become due and payable.
Depending on the circumstances, it may not be possible for the Company to make
or finance such an immediate payment.
With respect to long-term liquidity, the principal amount outstanding under
the Revolving Credit, amounting to $17.5 million at December 31, 1996, is due in
January, 1999, unless again extended. In addition, the $5 million principal
amount outstanding under the Term Loan is due in September 1998. The Company is
actively considering whether and how to finance the repayment of this $22.5
million in debt. The Company believes that its anticipated cash flows will be
sufficient to repay the $6.8 million Equipment Lease Financing over its existing
60-month term.
However, if the Company can restructure the term of its debt, either with
the current bank lender or through a refinancing with an alternate source of
credit, and there can be no assurance that the Company will be able to do
either, then the Company believes that, with the shutdown of the OSU and
NetworkVUE business units, the Company should be able to service its debt and
amortize the outstanding principal balances over the next 5 years with the free
cash generated by the PSO operations and the anticipated draw down of the $18
million Structured Equity Line financing. The $18 million Structured Equity
Line, however, is subject to various terms and conditions, which may limit or
affect its availability. See Part II, Item 5 of this Form 10-Q.
25
<PAGE>
Classification of Bank Debt as Current or Long-Term on the Company's Balance
- - - ----------------------------------------------------------------------------
Sheet
- - - -----
The Company was in default of its Loan Agreement at December 31, 1996, but
secured an amendment on February 7, 1997 which brought the Company back into
compliance as of December 31, 1996 and amended the financial covenants
prospectively to levels which the Company believes, under its current plans and
projections for continuing operations, will allow the Company to remain in
compliance over the next twelve months. Whether the Company will remain in
compliance with the amended financial covenants under the Loan Agreement depends
on circumstances which may arise, such as the successful withdrawal from various
business units now held for disposition and the results of the Company's
operations.
In light of all of these factors, the Company continues to classify the
amounts outstanding under the Loan Agreement and the non-current amounts owing
under the Equipment Lease as long term debt, rather than as current liabilities.
Outlook
- - - -------
With the Company's withdrawal from the OSU, NetworkVUE and APD businesses,
the Company will focus on its growing and profitable PSO operation. After a
transition period, which will include substantial losses in the Company's third
fiscal quarter ending March 31, 1997, the Company expects to return to
profitability and generate positive cash flows from operations. Thereafter, the
remaining issue with respect to liquidity would be restructuring the term of the
Company's current bank debt so that it is amortized over a period of years, such
as a five year level debt service amortization period. With the positive free
cash flow expected from PSO and with the potential $18 million to be raised from
the Structured Equity Line financing, the Company should be able to service its
debt and reduce substantially the outstanding principal amount of bank debt
outstanding.
Risk Factors
- - - ------------
In order to accomplish the above described Outlook, the Company faces the
following risk factors:
. Properly executing a plan of withdrawal from the Company's OSU,
NetworkVUE and APD businesses.
. Managing continuing operations and the plan of withdrawal within the
Company's available short term liquidity resources.
. Restructuring the term of its bank debt either with the Company's
current bank or through a refinancing with an alternative source of
credit.
. Continuing the Company's successful efforts to grow the PSO business and
generate the positive free cash flow needed to support the debt service
described above.
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General risk factors include:
. The ability of PSO to keep and attract the personnel required to service
its current and future contract portfolio.
. The dependence of PSO upon the government contracting, and particularly
the U.S. Government, Department of Defense contracting business,
mentioned above in this Form 10-Q.
. The high degree of financial leverage under which the Company will
continue to operate until its current debt levels are reduced and its
equity levels increased.
. The dilution to current holders of the Company's common stock through
the issuance of additional equity to assist in paying down the debt.
. The availability of funds as required from the Structured Equity Line
Financing.
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PART II - OTHER INFORMATION
Items 1, 2, 3 and 4 are Inapplicable.
- - - -------------------------------------
Item 5 Other Information.
- - - -------------------------
On January 21, 1997, the Company entered into a Convertible Securities
Subscription Agreement ("Subscription Agreement") pursuant to which an investor
purchased a $4 million 5% Convertible Debenture due January 2000 ("Debenture").
Also on January 21, 1997, the Company entered into a Structured Equity Line
Flexible Financing Agreement ("Equity Line Agreement") whereby an investor may
purchase up to $18 million in the Company's Common Stock over a 3 1/2 year
period to begin later this calendar year.
The Debenture bears interest at a 5% rate per annum payable quarterly in cash
or, at the Company's option, the amount due may be added to the outstanding
principal due under the Debenture. The Debenture is convertible into the
Company's Common Stock at the lesser of (i) $11 per share, or (ii) 94% of the
low trade during the 3 trading days immediately preceding the date of
conversion. The investor also received a 7-year warrant to purchase 320,000
shares of the Company's Common Stock at a price of $8.47 per share ("Debenture
Warrant"). Under a related Registration Rights Agreement ("Registration Rights
Agreement"), the Company is obligated to file a registration statement with the
Securities and Exchange Commission with respect to the Company's Common Stock
into which the Debenture is convertible and for which the Debenture Warrant is
exercisable. If the Company is in default under the Debenture, the investor may
put the Debenture to the Company at 120% of the amount outstanding. The
Debenture Warrant is not exercisable for 18 months, but becomes immediately
exercisable if the Company sells substantially all of its assets or enters into
a merger or acquisition or other similar transaction, and in such event the
Debenture Warrant is repriced at the lesser of (i) $8.47 per share, or (ii) 80%
of the Transaction Value (as defined in the Debenture Warrant), and the investor
has the option to put the Debenture to the Company at 115% of the amount
outstanding. Other terms, conditions, and limitations apply to the Subscription
Agreement, the Debenture, the Registration Rights Agreement and the Debenture
Warrant. Each of these documents is included as an Exhibit to this Form 10-Q.
Under the Structured Equity Line Flexible Financing Agreement ("Equity Line
Agreement") the investor may, but is not required to, purchase up to $3 million
of the Company's Common Stock during the first 6 months of the effectiveness of
a registration statement under the Securities Act of 1933 for the shares to be
issued. For the 3 years after that initial 6-month period, the Company can
require the investor to purchase up to $3 million of the Common Stock per
quarter up to an aggregate maximum of $18 million under the Equity Line
Agreement. The purchase price is equal to 94% of the low trade price during the
3 trading days immediately preceding the notice of purchase by the investor.
The investor, however, may not purchase Common Stock at a price of less than $4
per share. If the Company issues less than $5 million of its Common Stock under
the Equity Line Agreement, it must pay the investor up to $300,000 as liquidated
damages. The investor also received a 7-year Warrant to purchase 125,000 shares
of the Company's Common Stock at a price of $8.47 per share ("Equity Line
Warrant"). If the Company elects to issue more than $5 million, the Company
will issue an additional 7-year warrant for the purchase of 75,000 shares of the
Company's Common Stock ("Additional Equity Line Warrant") at a price equal to
140% of the price of the Common Stock at the time of the issuance of the
Additional Equity Line Warrant. Under a related Registration Rights Agreement
("Registration Rights Agreement"), the Company is
28
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obligated to file a registration statement with the Securities and Exchange
Commission with respect to the Company's Common Stock for which the Equity Line
Warrant and the Additional Line Warrant (collectively, the "Equity Line
Warrants") are exchangeable. The Equity Warrant is not exercisable for 18
months, but becomes immediately exercisable if the Company sells substantially
all of its assets or enters into a merger or acquisition or other similar
transaction, and in such event is repriced at the lesser of (i) $8.47, or (ii)
80% of the Transaction Value (as defined in the Equity Line Warrant). The
Additional Equity Line Warrant, when issued, will contain provisions similar to
the Equity Line Warrant. The investor's obligation to purchase under the Equity
Line Agreement is subject to various conditions, including (i) the effectiveness
of a registration statement with respect to the underlying shares, (ii)
limitations based on the price and volume of the Company's Common Stock, and
(iii) the percentage of the Common Stock beneficially owned by the investor from
time to time. Other terms, conditions, and limitations apply to the Equity Line
Agreement, the Registration Rights Agreement and the Equity Line Warrant. Each
of these documents is included as an Exhibit to this Form 10-Q.
Item 6(a) Exhibits.
- - - -------------------
Exhibit No. Description
------- --- -----------
10.1 Fourth Confirmation and Amendment dated February 7, 1997 and
effective as of December 31, 1996 to Amended and Restated Revolving
Credit and Term Loan Agreement between the Company and Mercantile-
Safe Deposit and Trust Company
10.2 Convertible Securities Subscription Agreement dated as of January
21, 1997 between the Company and Halifax Fund, L.P. ("Halifax")
10.3 $4,000,000 5% Convertible Debenture Due January 30, 2000 (the
"Debenture") issued by the Company to Halifax
10.4 320,000 Share Common Stock Purchase Warrant issued by the Company to
Halifax in connection with the Debenture
10.5 Registration Rights Agreement dated as of January 30, 1997 between
the Company and Halifax relating to the Debenture
10.6 Structured Equity Line Flexible Financing Agreement ("Equity Line
Agreement") dated as of January 21, 1997 between the Company and
Cripple Creek Securities, LLC ("Cripple Creek")
10.7 125,000 Share Common Stock Purchase Warrant issued by the Company to
Cripple Creek in connection with the Equity Line Agreement
10.8 Registration Rights Agreement dated as of January 30, 1997 between
the Company and Cripple Creek relating to the Equity Line Agreement
Item 6(b) is Inapplicable
- - - -------------------------
29
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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, Treasurer, Chief
Financial Officer & Chief Accounting Officer
February 14, 1997
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Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 on Form S-2 to Registration
Statement No. 333-22087 of GRC International, Inc. on Form S-3 of our report
dated August 20, 1996, included and incorporated by reference in the Annual
Report on Form 10-K of GRC International, Inc. for the year ended June 30, 1996,
and to the use of our report dated August 20, 1996, appearing in the Prospectus,
which is part of this Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
McLean, Virginia
April 16, 1997
