19
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 April 30, 1998
- --------------------- --------------
$.10 par value 10,206,506 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.
Page
PART I - FINANCIAL INFORMATION
A. FINANCIAL STATEMENTS
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 10
C. PART II - OTHER INFORMATION 18
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.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- ------------------------
1998 1997 1998 1997
--------- ---------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 35,307 $ 29,311 $ 92,177 $ 86,348
Cost of revenues 29,547 24,336 76,186 71,105
Indirect costs and other costs 4,280 3,936 11,906 12,111
--------- --------- --------- ----------
Operating income 1,480 1,039 4,085 3,132
Interest expense, net (425) (445) (1,452) (922)
--------- --------- ---------- ----------
Income from continuing operations
before income tax benefit 1,055 594 2,633 2,210
Income tax benefit 2,493 8,200 4,078 8,200
--------- --------- ---------- -----------
Income from continuing operations 3,548 8,794 6,711 10,410
Gain (loss) from discontinued operations
(net of tax) --- (8,278) 758 (31,611)
--------- ---------- ---------- -----------
Net Income (loss) $ 3,548 $ 516 $ 7,469 $ (21,201)
========== ========== ========== ===========
Income (loss) per common and
common equivalent share:
Basic
Continuing operations $ 0.36 $ 0.94 $ 0.69 $ 1.12
Discontinued operations - (0.88) 0.08 (3.39)
----------- ---------- ----------- -----------
Net income (loss) $ 0.36 $ 0.06 $ 0.77 $ (2.27)
=========== ========== =========== ===========
Number of shares used in EPS
calculation 9,803 9,342 9,737 9,328
=========== ========== =========== ===========
Diluted
Continuing operations $ 0.35 $ 0.89 $ 0.68 $ 1.06
Discontinued operations - (0.83) 0.07 (3.21)
----------- ----------- ----------- -----------
Net income (loss) $ 0.35 $ 0.06 $ 0.75 $ (2.15)
=========== ========== =========== ===========
Number of shares used in EPS
calculation 10,266 10,203 10,260 9,847
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
GRC INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
---------- --------
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 968 $ 5,756
Accounts receivable, net 26,003 25,087
Unbilled reimbursable costs and fees, net 3,885 4,076
Other receivables 1,072 1,090
Prepaid expenses and other current assets 1,004 576
Deferred income taxes 2,686 2,686
-------- ---------
Total current assets 35,618 39,271
-------- ---------
PROPERTY AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization of $10,021 and $9,414 9,444 10,553
-------- --------
OTHER ASSETS:
Goodwill and other intangible assets, net 2,127 2,409
Deferred software costs, net 378 461
Deferred taxes 12,503 8,896
Deposits and other 4,424 4,374
-------- --------
Total other assets 19,432 16,140
-------- --------
TOTAL ASSETS $ 64,494 $ 65,964
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
GRC INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------- ---------
(in thousands)
CURRENT LIABILITIES:
<S> <C> <C>
Current maturities of long-term debt $ 1,411 $ 1,679
Accounts payable 2,469 2,610
Accrued compensation and benefits 11,932 12,210
Accrued expenses and other current liabilities 2,804 2,313
Net liabilities of discontinued operations 202 4,591
-------- --------
Total current liabilities 18,818 23,403
-------- --------
LONG-TERM LIABILITIES:
Long-term debt 22,779 28,153
Other long-term liabilities 1,286 1,332
-------- --------
Total long-term liabilities 24,065 29,485
-------- --------
COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY:
Commonstock, $.10 par value
Authorized - 30,000,000 shares
Issued - 10,075,000 shares
and 9,849,000 shares 1,010 985
Paid-in capital 77,995 76,954
Accumulated deficit (53,549) (61,018)
-------- --------
25,456 16,921
Less: Treasury stock, at cost; 300,000 shares (3,845) (3,845)
-------- --------
Total stockholders' equity 21,611 13,076
-------- --------
$ 64,494 $ 65,964
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
GRC INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1997
------- ------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM CONTINUING OPERATIONS:
Income from continuing operations $ 6,711 $ 10,410
Reconciliation of income from continuing operations:
Depreciation and amortization 2,384 1,630
Loss provision on current assets 320 818
Deferred income tax benefit (4,112) (8,159)
Write-down of deferred software and related costs 67 ---
Changes in assets and liabilities:
Accounts receivable and unbilled
reimbursable costs and fees (1,042) (89)
Prepaid expenses and other current assets (413) (307)
Accounts payable, accruals and
other current liabilities 106 (2,820)
Other (73) 201
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,948 1,684
-------- --------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Gain (Loss) from discontinued operations 758 (31,611)
Reconciliation of income from discontinued operations:
Non-cash charges and changes in working capital (4,318) 11,902
Proceeds from sale of discontinued operations 400 6,391
-------- -------
NET CASH USED BY DISCONTINUED OPERATIONS (3,160) (13,318)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (1,017) (1,281)
Deferred software costs --- (222)
Other 17 (100)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (1,000) (1,603)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital lease obligations (4,984) (951)
Bank borrowings 503 15,844
Issuance of common stock (95) 281
Other --- 1
-------- --------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (4,576) 15,175
-------- --------
NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS (4,788) 1,938
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,756 2,780
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 968 $ 4,718
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
GRC INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1997
------- ------
(in thousands)
<S> <C> <C>
Supplemental disclosures:
Cash paid for:
Interest $1,578 $1,027
Income taxes $ 37 $ 12
Other non-cash financing activities:
Conversion of debenture to common stock $1,375 $ ---
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
GRC INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 1998
(unaudited)
(1) The condensed consolidated 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
condensed consolidated 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, 1997.
(2) At March 31, 1998, the Company had a revolving credit agreement that
provides for secured borrowings of up to $22 million, of which $16.3
million (or $15.3 million, net of cash) was utilized at March 31, 1998.
The agreement extends to January 2000, with the bank required to
provide 15 months prior written notice to terminate the facility
(absent any defaults under the agreement). The bank has provided up to
an additional $8 million in term loan financing under a standby
facility, available on an offering basis, with borrowings thereunder
due September 1, 1999, of which $4.75 million was utilized at March 31,
1998. Advances under the revolving credit agreement and the term loans
accrue interest at the bank's prime rate which was 8.5% as of March 31,
1998. The collateral under the Amended and Restated Revolving Credit
and Term Loan Agreement includes all of the Company's assets, except
for property and equipment.
The revolving credit agreement contains certain covenants, including a
material adverse change clause, which requires the Company to maintain
certain minimums for earnings, tangible net worth working capital and
debt ratios. The Amended and Restated Revolving Credit and Term Loan
Agreement containing the term loan and the revolving line of credit was
amended as of March 31, 1996, June 30, 1996, December 31, 1996, and on
March 31, 1997 to reduce various financial ratio covenant levels so as
to bring the Company into compliance with those covenants as of those
dates.
In June 1996, the Company completed a $7.5 million financing of
substantially all of its furniture and equipment. The loan was
originally to be amortized over a five year period at an interest rate
of 9%, but with partial paydowns that were made from the proceeds of
the following divestitures, the loan is now anticipated to be fully
retired by the end of fiscal 1999. On April 30, 1997, the Company
applied the $2 million in proceeds from the sale of its GRC
Instruments/Dynatup business against its obligations under the
equipment financing. In June and July 1997, the Company applied $1.5
million in proceeds from the sale of its OSU business against its
obligations under the equipment financing. As of March 31, 1998, the
outstanding balance on the equipment financing was $1.4 million.
<PAGE>
Debt at March 31, 1998 and June 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
-------------- -------------
<S> <C> <C>
Revolving Credit Agreement $ 16,299 $ 19,267
Term Loans 4,750 4,900
Convertible Debenture 1,719 2,758
Equipment Financing 1,396 2,871
Other 26 36
-------- --------
Total Debt $ 24,190 $ 29,832
Less: Current Portion 1,411 1,679
-------- --------
Long Term Debt $ 22,779 $ 28,153
======== ========
</TABLE>
(3) Discontinued Operations. Since the Company adopted its plan to dispose
of the Company's Telecommunications and Advanced Products Divisions in
February of 1997, the Company has successfully sold essentially all of
the business units comprising those divisions, i.e., the OSU(R) Network
Interface, GRC Instruments/Dynatup, Vindicator, NetworkVUE, and
Commercial Information Solutions ("CIS") business units. The income
from discontinued operations for the first nine months of fiscal 1998
is the combination of a $472 thousand reduction of a $2.0 million note
to Quintessential Solutions, Inc. ("QSI") which is reported net of tax
of $182 thousand, and a reversal of $750 thousand of discontinued
operations reserves, net of tax of $282 thousand. The reduction in the
QSI debt arose by mutual agreement and resolved a dispute between the
Company and QSI related to the acquisition of software used in the now
discontinued NetworkVUE business unit. The reduction in discontinued
operations reserves is a result of the Company's sale of its final two
discontinued business units. The Company sold its Commercial
Information Solutions ("CIS") business unit on December 19, 1997 and
its NetworkVUE business unit on January 8, 1998. Additional information
is provided below in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section.
(4) Income Taxes. The Company recognized an incremental deferred tax asset
of $3.6 million through the first nine months of fiscal year 1998. As a
result of the discontinuance of the Company's Telecommunications and
Advanced Products Divisions, the losses generated by those discontinued
operations no longer offset the profits generated by the Company's
service operations. Accordingly, the Company expects to realize its
income tax carryforwards in the future.
<PAGE>
GRC INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED March 31, 1998 and 1997
(unaudited)
Summary
The revenues and operating income and interest expense of the Company are
presented for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ----------------------
3/31/98 3/31/97 3/31/98 3/31/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 35,307 $ 29,311 $ 92,177 $ 86,348
======== ========= ========= ========
Operating income 1,480 1,039 4,085 3,132
Interest expense, net (425) (445) (1,452) (922)
-------- --------- --------- --------
Income from continuing operations
before income tax benefit 1,055 594 2,633 2,210
Income tax benefit 2,493 8,200 4,078 8,200
Gain (loss) from discontinued
operations (net of tax) --- (8,278) 758 (31,611)
--------- ---------- --------- --------
Net income (loss) $ 3,548 $ 516 $ 7,469 $(21,201)
========= ========== ========= ========
</TABLE>
Results of Operations - Three Months Ended March 31, 1998 and 1997
- ------------------------------------------------------------------
Revenues
- --------
Revenues for the third quarter of fiscal 1998 increased 20.5% to $35.3 million
from $29.3 million for the same quarter in fiscal 1997.
For the third quarter of fiscal 1998, revenues of $35.3 million consisted of
$34.5 million in services revenues and $0.8 million in product revenues. For the
third quarter of fiscal 1997, revenues of $29.3 million consisted of $28.5
million in services revenue and $0.8 million in product revenues. The total
revenue increase of $6.0 million during the third quarter of fiscal 1998 is
primarily the result of increased U.S. government contract awards, additional
subcontract revenue, along with a significant increase in the number of new
hires during fiscal 1998.
<PAGE>
Cost of Revenues and Gross Profit
- ---------------------------------
Cost of revenues for the third quarter of fiscal 1998 increased 21.4% to $29.5
million, or 83.6% of revenues, from $24.3 million, or 82.9% of revenues, for the
same quarter in fiscal 1997. The cost of revenue increase of $5.2 million is a
direct result of the increase in revenues.
Gross profit for the third quarter of fiscal 1998 increased 16.0% to $5.8
million, or 16.4% of revenues, from $5.0 million, or 17.1% of revenues, for the
same quarter in fiscal 1997. The gross profit increase of $800 thousand is a
direct result of increased revenues.
Operating Expenses and Operating Income
- ---------------------------------------
Operating expenses consist of selling, general and administrative, research and
development, and other costs. Operating expenses for the third quarter of fiscal
1998 increased 10.3% to $4.3 million, or 12.2% of revenues, from $3.9 million,
or 13.3% of revenues, for the same quarter in fiscal 1997. The operating
expenses increase of approximately $400 thousand is primarily the result of an
increase in general and administrative expenses to support the growth in
contract revenues.
Operating Income for the third quarter of fiscal 1998 increased 50.0% to $1.5
million, or 4.2% of revenues, from $1.0 million, or 3.4% of revenues, for the
same quarter of fiscal 1997. The income increase of approximately $500 thousand
is a direct result of increased revenues.
Net Interest Income or Expense
- ------------------------------
Net interest expense for the third quarter of fiscal 1998 decreased 4.5% to $425
thousand, or 1.2% of revenues, from $445 thousand, or 1.5% of revenues, for the
third quarter of fiscal 1997. This slight decrease of $20 thousand reflects a
reduction in debt previously incurred in order to fund what are now discontinued
operations.
Income Tax Benefit
- ------------------
As a result of tax losses incurred in prior periods, the Company, at June 30,
1997, had tax loss carryforwards amounting to $64 million. Under Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), the Company is required to
recognize the value of these tax loss carryforwards if it is more likely than
not that they will be realized by reducing the amount of income taxes payable in
future income tax returns. The Company's continuing operations consist of its
information technology services business. The Company has been profitably
engaged in this business for over 30 years and projects continued profitability
in the future. In recent years, the Company's losses have been due to this
profitability being more that offset by the losses generated from the
Telecommunications and Advanced Products Divisions. With those Divisions now
having been discontinued, the Company expects to report profits for income tax
purposes in the future. As a consequence, the Company has now recognized a
portion of the benefit available from its tax loss carryforwards. As of March
31, 1998, the Company's total net deferred tax asset is $15.2 million, which is
comprised of current deferred taxes of $2.7 million and long term deferred taxes
of $12.5 million.
<PAGE>
The tax benefit for the third quarter of fiscal 1998 was $2.5 million, compared
to $8.2 million for the third quarter of fiscal 1997.
Income or Loss from Continuing Operations
- -----------------------------------------
Income from continuing operations for the third quarter of fiscal 1998 decreased
60.2% to $3.5 million, or 9.9% of revenues, from $8.8 million, or 30.0% of
revenues, for the third quarter of fiscal 1997. The $5.3 million decrease in
income from continuing operations is a direct result of the significant variance
in the tax benefit of the Company's tax loss carryforwards between third quarter
fiscal 1998 and 1997.
Discontinued Operations
- -----------------------
During the quarter ended March 31, 1997, the Company adopted a plan to dispose
of the Company's Telecommunications and Advanced Products Divisions
("Discontinued Divisions"). As of January 8, 1998, all business units within the
Discontinued Divisions have been sold, except for a small software services
group which has been transferred to continuing operations.
On April 30, 1997, the Company sold the assets and liabilities of its GRC
Instruments/Dynatup business unit for approximately $2.0 million. The proceeds
received were used to repay a portion of the Company's obligation under the
Equipment Lease.
On June 5, 1997, the Company sold the assets of its Vindicator security business
unit within its discontinued Advanced Products Division. The sale was for book
value of approximately $700 thousand, with payment of $100 thousand at closing
and $150 thousand 90 days thereafter, both of which payments have been received
by the Company. The remainder of the purchase price is payable at a rate of 6%
of sales, but in all events, any remaining balance is payable in a lump sum at
December 31, 1998.
On June 27, 1997, the Company sold the assets and liabilities of its OSU(R)
Network Interface ("OSU") business unit within its discontinued
Telecommunications Division. The sale was a cash payment of $1.5 million payable
in part at, and the remainder shortly after, closing, both of which payments
have been received by the Company, and a royalty schedule on sales of the OSU or
derivatives over the next 10 years. The proceeds received were used to repay a
portion of the Company's obligation under the Equipment Lease.
On December 19, 1997, the Company sold the assets of its Commercial Information
Solutions ("CIS") component of the Company's discontinued Advanced Products
Division in exchange for royalties on future sales of Flow Gemini and derivative
products and related services.
On January 8, 1998, the Company sold the assets of its NetworkVUE business unit
within the Company's discontinued Telecommunications Division in exchange for
royalties on future sales of NetworkVUE, NetSolve and derivative products and
related services.
Income from discontinued operations for the third quarter of fiscal 1998 net of
tax was $0, compared to a loss of $8.3 million during the same quarter of fiscal
1997.
<PAGE>
Results of Operations - Nine Months Ended March 31, 1998 and 1997
- -----------------------------------------------------------------
Revenues
- --------
Revenues for the first three quarters of fiscal 1998 increased 6.8% to $92.2
million from $86.3 million for the same period in fiscal 1997.
For the first three quarters of fiscal 1998, revenues of $92.2 million consisted
of $90.7 million in services revenues and $1.5 million in product revenues.
During the same period of fiscal 1997, revenues of $86.3 million consisted of
$85.0 million in services revenue and $1.3 million in product revenues. The
total revenue increase of $5.9 during the first three quarters of fiscal 1998 is
primarily the result of increased staffing, additional U.S. government contract
awards, and a significant increase in subcontract revenues.
Cost of Revenues and Gross Profit
- ---------------------------------
Cost of revenues for the first three quarters of fiscal 1998 increased 7.2% to
$76.2 million, or 82.6% of revenues, from $71.1 million, or 82.4% of revenues,
for the same period in fiscal 1997. The cost of revenue increase of $5.1 million
is directly related to the increase in revenues during the same period
Gross profit for the first three quarters of fiscal 1998 increased 4.9% to
$15.99 million, or 17.3% of revenues, from $15.24 million, or 17.7% of revenues,
for the same period in fiscal 1997. This increase of $750 thousand is a direct
result of the increase in revenues during the same period.
Operating Expenses and Operating Income
- ---------------------------------------
Operating expenses consist of selling, general and administrative, research and
development, and other costs. Operating expenses for the first three quarters of
fiscal 1998 decreased 1.7% to $11.9 million, or 12.9% of revenues, from $12.1
million, or 14.0% of revenues, for the same period in fiscal 1997. Despite the
slight decrease of approximately $200 thousand during the first nine months of
fiscal 1998, compared to the same period for fiscal 1997, the Company expects
operating expenses to increase compared to prior year by the end of fiscal 1998
as a result of supporting anticipated growth in contract revenues.
Operating Income for the first three quarters of fiscal 1998 increased 32.2% to
$4.1 million, or 4.4% of revenues, from $3.1 million, or 3.6% of revenues, for
the same period of fiscal 1997. The increase in operating income of
approximately $1.0 million is the direct result of the increase in revenues
during the first three quarters of fiscal 1998.
Net Interest Income or Expense
- ------------------------------
Net interest expense for the three quarters of fiscal 1998 increased 62.7% to
$1.5 million, or 1.6% of revenues, from $922 thousand, or 1.1% of revenues, for
the same period of fiscal 1997. The increase in net interest expense of
approximately $600 thousand reflects the significant increase in debt carried
during the first three quarters of fiscal 1998 reflecting funds borrowed in the
prior year to fund the Company's discontinued operations.
<PAGE>
Income Tax Benefit
- ------------------
As disclosed above, the Company expects to realize its deferred tax asset as a
result of eliminating the loss generating discontinued divisions. As a
consequence, the Company has now recognized a portion of the benefit available
from its tax loss carryforwards. As of March 31, 1998, the Company's total net
deferred tax asset is $15.2 million, which is comprised of current deferred
taxes of $2.7 million and long term deferred taxes of $12.5 million.
The tax benefit for the first three quarters of fiscal 1998 increased 50.0% to
$4.1 million, or 4.4% of revenues, from $8.2 million, or 9.5% of revenues, for
the same period in fiscal 1997.
Income or Loss from Continuing Operations
- -----------------------------------------
Income from continuing operations for the first three quarters of fiscal 1998
decreased 35.5% to $6.7 million, or 7.3% of revenues, from $10.4 million, or
12.1% of revenues, for the same period of fiscal 1997. The $3.7 million decrease
in income from continuing operations is a direct result of the tax benefit of
the Company's tax loss carryforwards.
Discontinued Operations
- -----------------------
As discussed above, as of January 8, 1998, the Company has sold all business
units within its Discontinued Divisions.
Income from discontinued operations for the first three quarters of fiscal 1998
net of tax, was $758 thousand, compared to a loss of $31.6 million during the
same period of fiscal 1997. The income from discontinued operations during the
first three quarters of fiscal 1998 is the result of a reversal of $750 thousand
of reserves, net of tax of $282 thousand, as a result of selling its CIS and
NetworkVUE business units, and of a $472 thousand reduction, net of tax of $182
thousand, of a $2.0 million note to Quintessential Solutions, Inc.
("QSI").
Financing
- ---------
In January 1997, the Company issued a $4 million 5% Convertible Debenture due
January 2000 ("Debenture"). As of April 21, 1998, the Debenture was fully
converted into 804,322 shares. The Debenture 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 filed a registration
statement with the Securities and Exchange Commission (which registration
statement has now become effective) with respect to the Company's Common Stock
into which the Debenture was converted and for which the Debenture Warrant is
exercisable. 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
Registration Rights Agreement and the Debenture Warrant, which were filed as
Exhibits to the Company's report on Form 10-Q for the quarter ended December 31,
1996.
Also in January 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
<PAGE>
the Company's Common Stock over a 3 year period currently expected to begin July
1, 1998. Under the Equity Line Agreement, the Company may require the investor
to purchase up to $1.5 million of the Common Stock per quarter, subject to
various conditions, including limitations related to the dollar trading volume
of the Company's Common Stock. In addition, if certain additional, more
stringent trading volume limitations are met, the Company may require the
investor to purchase up to an additional $1.5 million per quarter. In all cases,
purchases by the investor are limited to an aggregate maximum of $18 million.
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 if such low trade price is less than $4
per share. If the Company issues less than $5 million of its Common Stock under
the Equity Line Agreement, it must under certain circumstances 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 of Common Stock under the Equity Line Agreement, 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 filed 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 Line
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, if and when issued,
would 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 (which registration statement became effective
in 1997), (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, which have been filed as Exhibits to the Company's report on Form 10-Q
for the Quarter ended December 31, 1996. The investor has not yet purchased any
shares under the Equity Line Agreement.
Liquidity and Capital Resources
- -------------------------------
The Company had $968 thousand in cash and cash equivalents at March 31, 1998,
compared to $5.8 million at June 30, 1997.
Net cash provided by operations amounted to $3.9 million during the first three
quarters of fiscal 1998, compared to cash provided by operations of $1.7 million
for the first three quarters of fiscal 1997. Net cash used by discontinued
operations amounted to $3.2 million during the first three quarters of fiscal
1998, compared to $13.3 million used during the same period of fiscal year 1997.
Net cash used by investing activities during the first three quarters of fiscal
1998 amounted to $1.0 million, compared to $1.6 million during the same period
for fiscal year 1997. Net cash used by financing activities amounted to $4.6
million during the first three quarters of fiscal 1998, compared to net cash
provided of $15.2 million during the first three quarters of fiscal 1997.
<PAGE>
As a result of the decrease in debt and increase in operating income during the
first half of fiscal 1998, the Company's ratio of total debt (net of cash) to
total capitalization amounted to 52% at March 31, 1998, compared to 67% at June
30, 1997.
At March 31, 1998, the carrying value of the Company's debt amounted to $24.2
million, $1.4 million of which was classified as short term, and $22.8 million
of which was classified as long term. The Company had $29.8 million of bank debt
and equipment lease financing at June 30, 1997.
The credit facilities with the Company's bank consist of an $8 million term loan
standby facility, available on an offering basis, with borrowings thereunder due
September 1, 1999 ("Term Loan") of which $4.8 million was drawn down at March
31, 1997, a $22 million revolving line of credit ("Revolving Credit"), of which
$16.2 million was used at March 31, 1998, and a $1.4 million debt (as of March
31, 1998) arising from the equipment financing ("Equipment Lease") arranged with
the bank's equipment leasing subsidiary. See Note (7) - Subsequent Events.
The Term Loan is due on September 1, 1999, and bears interest at the bank's
floating prime rate, currently 8.5% per annum. If the Company is unable to
obtain an extension of the Term Loan, it intends to pay it out of a combination
of (i) operating cash flows, (ii) the Revolving Credit, and/or (iii) the Equity
Line Agreement. The Revolving Credit is due on January 15, 2000, 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 January 15, 1998, and, thus, the
Revolving Credit currently is repayable on January 15, 2000. The Revolving
Credit has been renewed each year to date, although there is no guarantee of
renewal. The Revolving Credit bears interest at the bank's floating prime rate,
currently 8.5% per annum. The Term Loan and Revolving Credit facilities are
collateralized by the Company's working capital and equipment. The Equipment
Lease was originally for a term of 60 months which commenced in June 1996 and
bears interest at 9%. It is now expected to be paid in full by the end of fiscal
1999, under a revised payment schedule.
The Amended and Restated Revolving Credit and Term Loan Agreement ("Loan
Agreement") containing the Term Loan and Revolving Credit has been amended from
time to time (most recently on March 31, 1997) to amend various financial ratio
covenants so as to bring the Company into compliance with those covenants as of
those dates. At March 31, 1998, the Company was in compliance with its covenants
under this Agreement.
The chairman of the board of the bank providing the credit under the Loan
Agreement and Equipment Lease is a member of the board of directors of the
Company. The Company believes that the terms of its credit agreements with the
bank are substantially similar to those that could have been obtained from an
unaffiliated third party.
Quantitative and Qualitative Information About Market Risk
- ----------------------------------------------------------
The Company does not hold instruments which are sensitive to interest rate,
foreign currency exchange, commodity price, or equity risks. As previously
discussed, the Company, under its bank debt, is a net borrower at floating prime
rates. Thus an increase in bank prime rates would have a significant adverse
impact on the Company's profitability and cash flows.
<PAGE>
Outlook
- -------
With the discontinuation of the Telecommunications and Advanced Products
Divisions, the Company is now entirely focused on its information technology and
professional services business. This business has been and is expected to remain
profitable with positive operating cash flows. With the positive free cash flow
expected from the services business and with the potential to raise additional
equity from the Company's Equity Line Agreement, the Company expects, over time,
to be able to continue to reduce the outstanding principal amount of its bank
debt.
Risk Factors
- ------------
The Company and its shareholders face a number of risks, including, but not
limited to:
* The Company's ability to sufficiently grow its services business to
generate the needed positive free cash flow to support the debt service
described above.
* The Company's ability to achieve its targeted levels of profitability by
successfully managing its overall cost structure within its bid rates on
government contracts.
* The Company's ability to keep and attract the personnel required to service
its current and future contract portfolio.
* A dependence upon government contracting in general, and particularly a
high concentration of the Company's business with the U.S. Government,
Department of Defense and its instrumentalities.
* 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 Company's ability to manage within amounts accrued for, and to fund
residual net cash expenditures required by, its discontinued operations.
* Dilution which may result from (i) sales of stock by the Company under the
Equity Line Agreement, (ii) exercise of the Debenture Warrant and Equity
Line Warrant, and (iii) exercise of employee and director stock options.
* The risk that the Company will not be able to sell stock under the Equity
Line Agreement in the event various conditions set forth therein are not
satisfied.
<PAGE>
PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are inapplicable.
- ----------------------------------------
Item 6(a) Exhibits.
- -------------------
Exhibit No. Description
----------- -----------
11 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
Item 6(b) is inapplicable.
- --------------------------
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRC INTERNATIONAL, INC.
By: /s/ Ronald B. Alexander
--------------------------------------------
Ronald B. Alexander
Senior Vice President, Treasurer, Chief
Financial Officer & Chief Accounting Officer
May 15, 1998
GRC International, Inc.
Statement of Computation of Earnings Per Share
(in thousands except for per share amounts)
<TABLE>
<CAPTION>
Exhibit 11
QTR ENDING YTD ENDING
BASIC 3/31/98 3/31/97 3/31/98 3/31/97
<S> <C> <C> <C> <C>
Weighted Average Number of Shares of Common
Stock Outstanding 9,803 9,342 9,737 9,328
Income (Loss) from Continuing Operations 3,548 8,794 6,711 10,410
Income (Loss) from Discontinuing Operations --- (8,278) 758 (31,611)
==================== ====================
Net Income (Loss) 3,548 516 7,469 (21,201)
==================== ====================
Per Share Amount:
Income (Loss) from Continuing Operations 0.36 0.94 0.69 1.12
Income (Loss) from Discontinuing Operations --- (0.88) 0.08 (3.39)
==================== ====================
Net Income (Loss) 0.36 0.06 0.77 (2.27)
==================== ====================
FULLY DILUTED
Weighted Average Number of Shares of Common
Stock Outstanding 9,803 9,342 9,737 9,328
Net Effect of Dilutive Stock Options
Based on the Treasury Stock Method
Using Average Market Price 138 64 138 191
Net Effect of Convertible Debenture
Based on the
if Converted Method 325 793 385 328
-------------------- --------------------
Weighted Average Shares Outstanding 10,266 10,203 10,260 9,847
-------------------- --------------------
Income (Loss) from Continuing Operations 3,548 8,794 6,711 10,410
Interest and Amortization on
Convertible Debenture 47 68 213 68
Adjusted Income (Loss) from Continuing Operations 3,595 8,862 6,924 10,478
Income (Loss) from Discontinuing Operations --- (8,278) 758 (31,611)
==================== ====================
Adjusted Net Income (Loss) 3,595 584 7,682 (21,133)
==================== ====================
Per Share Amount:
Adjusted Income (Loss) from Continuing Operations 0.35 0.87 0.68 1.06
Income (Loss) from Discontinuing Operations --- (0.81) 0.07 (3.21)
==================== ====================
Adjusted Net Income (Loss) 0.35 0.06 0.75 (2.15)
==================== ====================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> MAR-31-1998
<CASH> 968
<SECURITIES> 0
<RECEIVABLES> 26,044
<ALLOWANCES> 41
<INVENTORY> 17
<CURRENT-ASSETS> 35,618
<PP&E> 20,009
<DEPRECIATION> 10,565
<TOTAL-ASSETS> 64,494
<CURRENT-LIABILITIES> 18,818
<BONDS> 0
0
0
<COMMON> 1,010
<OTHER-SE> 20,601
<TOTAL-LIABILITY-AND-EQUITY> 64,494
<SALES> 92,177
<TOTAL-REVENUES> 92,177
<CGS> 76,186
<TOTAL-COSTS> 76,186
<OTHER-EXPENSES> 11,906
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,452
<INCOME-PRETAX> 2,633
<INCOME-TAX> 4,078
<INCOME-CONTINUING> 6,711
<DISCONTINUED> 758
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,469
<EPS-PRIMARY> .77
<EPS-DILUTED> .75
</TABLE>
