18
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, 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 January 31, 1999
- --------------------- ----------------
$.10 par value 10,237,863 shares
1
<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 17
Note: The consolidated condensed financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations although the Company believes that the disclosures are
adequate to make the information presented not misleading.
It is suggested that these consolidated condensed financial
statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest
annual report on Form 10-K.
2
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except for per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- ---------------------------
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 39,052 $ 29,705 $ 75,808 $ 56,870
Cost of revenues 32,896 24,479 63,860 46,639
Indirect costs and other costs 3,926 4,031 7,601 7,626
--------- --------- --------- ---------
Operating income 2,230 1,195 4,347 2,605
Interest expense, net (340) (499) (692) (1,027)
--------- --------- --------- ---------
Income from continuing operations
before income tax benefit 1,890 696 3,655 1,578
Income tax benefit 1,210 1,331 2,475 1,585
--------- --------- --------- ---------
Income from continuing operations 3,100 2,027 6,130 3,163
Gain from discontinued operations
(net of tax) 140 468 194 758
---------- ---------- --------- ---------
Net Income $ 3,240 $ 2,495 $ 6,324 $ 3,921
========== ========== ========= =========
Income per common and
common equivalent share:
Basic
Continuing operations $ 0.31 $ 0.21 $ 0.60 $ 0.32
Discontinued operations 0.01 0.05 0.02 0.08
---------- ---------- --------- --------
Net income $ 0.32 $ 0.26 $ 0.62 $ 0.40
========== ========== ========== =========
Number of shares used in EPS
calculation 10,222 9,777 10,218 9,704
========== ========== ========= ========
Diluted
Continuing operations $ 0.30 $ 0.20 $ 0.59 $ 0.32
Discontinued operations 0.01 0.05 0.02 0.08
---------- ---------- ---------- --------
Net income $ 0.31 $ 0.25 $ 0.61 $ 0.40
========== ========== ========== ========
Number of shares used in EPS
calculation 10,411 9,914 10,438 9,834
========== ========== ========== =========
The accompanying notes are an integral part of these statements.
</TABLE>
3
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,012 $ 3,648
Accounts receivable, net 28,888 28,702
Unbilled reimbursable costs and fees, net 5,461 4,189
Other receivables 1,053 893
Prepaid expenses and other current assets 705 486
Deferred income taxes 1,239 1,239
--------- ---------
Total current assets 40,358 39,157
--------- ---------
PROPERTY AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization of $12,378 and $11,069 8,844 9,569
--------- ---------
OTHER ASSETS:
Goodwill and other intangible assets, net 2,115 2,176
Deferred software costs, net --- 349
Deferred taxes 19,157 16,678
Deposits and other 3,340 3,334
--------- ---------
Total other assets 24,612 22,537
--------- ---------
TOTAL ASSETS $ 73,814 $ 71,263
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
(in thousands)
CURRENT LIABILITIES:
<S> <C> <C>
Current maturities of long-term debt $ 12 $ 975
Accounts payable 2,664 3,897
Accrued compensation and benefits 11,957 13,268
Accrued expenses and other current liabilities 2,731 1,944
Net liabilities of discontinued operations 417 297
---------- ---------
Total current liabilities 17,781 20,381
---------- ---------
LONG-TERM LIABILITIES:
Long-term debt 22,023 23,264
Other long-term liabilities 287 258
---------- ---------
Total long-term liabilities 22,310 23,522
---------- ---------
Total liabilities 40,091 43,903
---------- ---------
COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY:
Commonstock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 10,535,491 shares
and 10,508,791 shares 1,054 1,051
Paid-in capital 79,748 79,712
Accumulated deficit (43,234) (49,558)
---------- ---------
37,568 31,205
Less: Treasury stock, at cost; 300,000 shares (3,845) (3,845)
---------- ---------
Total stockholders' equity 33,723 27,360
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY: $ 73,814 $ 71,263
========== =========
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------------
1998 1997
------- ------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM CONTINUING OPERATIONS:
Income from continuing operations $ 6,324 $ 3,163
Reconciliation of income from continuing operations:
Depreciation and amortization 1,785 1,591
Deferred income tax benefit (2,479) (1,585)
Changes in assets and liabilities:
Accounts receivable and unbilled
reimbursable costs and fees (219) (1,549)
Prepaid expenses and other current assets (1,618) (782)
Accounts payable, accruals and
other current liabilities (2,720) (641)
Other 372 (56)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,445 141
--------- --------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Gain from discontinued operations 194 758
Reconciliation of income from discontinued operations:
Non-cash charges and changes in working capital (74) (2,265)
Proceeds from sale of discontinued operations --- 400
--------- --------
NET CASH PROVIDED BY (USED IN)
DISCONTINUED OPERATIONS 120 (1,107)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (999) (620)
Other --- (55)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (999) (675)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital lease obligations (1,241) (1,180)
Bank borrowings --- 503
Issuance of common stock 39 (31)
--------- --------
NET CASH USED IN FINANCING ACTIVITIES (1,202) (708)
--------- --------
NET DECREASE IN CASH & CASH EQUIVALENTS (636) (2,349)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,648 5,756
--------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 3,012 $ 3,407
========= ========
The accompanying notes are an integral part of these statements.
</TABLE>
6
<PAGE>
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-----------------
1998 1997
------ -----
(in thousands)
<S> <C> <C>
Supplemental disclosures:
Cash paid for:
Interest $ 822 $1,036
Income taxes $ 126 $ 30
Other non-cash financing activities:
Conversion of debenture to common stock $ --- $1,275
The accompanying notes are an integral part of these statements.
</TABLE>
7
<PAGE>
GRC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED DECEMBER 31, 1998
(unaudited)
(1) Basis of Presentation. 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, 1998.
(2) New Accounting Pronouncements. In 1999, the Company will be required to
adopt the provisions of Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income, and SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information.
The Company has not completed its evaluation of the impact that the
adoption of such statements will have on its financial statements.
(3) Debt. The Company has a $22 million revolving credit agreement and an
additional $8 million available in term loan financing, on an approval
basis, both at the bank's prime rate, currently 7.75%.
Debt at December 31, 1998 and June 30, 1998 consisted of the following:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
----------------- -------------
<S> <C> <C>
Revolving Credit Agreement $ 17,270 $ 18,506
Term Loans 4,750 4,750
Equipment Financing --- 961
Other 15 22
-------- --------
Total Debt 22,035 24,239
Less: Current Portion --- (975)
-------- --------
Long Term Debt $ 22,035 $ 23,264
======== ========
</TABLE>
(4) Income Taxes. As a result of tax losses incurred in prior periods, the
Company, under Statement of Financial Accounting Standards No. 109
("SFAS 109"), 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.
8
<PAGE>
At June 30, 1998, the Company had net operating loss carryforwards of
approximately $64 million available to reduce future tax liabilities.
Of these, $10 million expire in 1999, $15 million expire between 2000
and 2010, $27 million expire in 2011, and $12 million expire in 2012.
During the first half of fiscal 1999, the Company recognized an
additional tax benefit of $2.5 million, increasing the Company's total
deferred tax asset to $20.4 million.
The Company expects the remaining tax benefit related to the net
operating loss carryforwards to be recognized as income in the second
half of fiscal 1999. Beginning in fiscal 2000, the Company expects to
report a tax provision against income.
9
<PAGE>
GRC INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1998 and 1997
(unaudited)
Business Overview
- -----------------
The Company generates substantially all of its revenues from its professional
services business, primarily with the U.S. Government. Its capabilities focus on
information technology services provided to the Department of Defense,
intelligence agencies and other Federal civilian agencies. A principal goal of
the Company is to position itself as a prime contractor in all of its markets.
In fiscal year 1998, the Company was awarded a large systems integration
contract to assist the U.S. Army in its program to modernize its logistics
support systems called the Global Combat Support Systems ("GCSS"). This program
has been the primary source of revenue growth for the Company over the past
year. The Company plans to pursue its goal of internal growth by pursuing other
similar large programs and by continuing to grow through smaller task order
awards on its already extensive customer and contract base.
Further, the Company is seeking additional growth through acquisitions. The
focus is on businesses in the Company's general field of interest in U.S.
Government professional services that will fit within the Company's business
culture and will be complementary in terms of technology, domain knowledge and
customer base, as well as add to shareholder value. At this time, the Company
cannot predict its ability to identify and close on such acquisiton targets on
terms that would be attractive to the Company.
The Company has also targeted improvement in its operating margins. In the past
year, operating margins have improved substantially as a result of significant
revenue growth and contol over growth of operating expenses. The Company will
continue to pursue this objective, but cannot provide assurance of its ability
to continue to improve operating margins.
At December 31, 1998, the Company's total contract backlog was $603 million,
compared to $450 million at June 30, 1998. The Company includes in backlog its
best estimate of revenues that it expects to generate over the term of the
contracts. The increase since the end of its last fiscal year has primarily been
from additional awards under the GCSS program.
10
<PAGE>
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
------------------------- -----------------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 39,052 $ 29,705 $ 75,808 $ 56,870
Operating income 2,230 1,195 4,347 2,605
Interest expense, net (340) (499) (692) (1,027)
-------- -------- -------- --------
Income from continuing operations
before income tax benefit 1,890 696 3,655 1,578
Income tax benefit 1,210 1,331 2,475 1,585
Gain from discontinued
operations (net of tax) 140 468 194 758
-------- -------- -------- --------
Net income $ 3,240 $ 2,495 $ 6,324 $ 3,921
========= ========= ========= =========
</TABLE>
Results of Operations - Three Months Ended December 31, 1998 and 1997
- ---------------------------------------------------------------------
Revenues
- --------
Revenues for the second quarter of fiscal 1999 increased 31.5% to $39.1 million
from $29.7 million for the same quarter in fiscal 1998. The revenue increase of
$9.4 million during the second quarter of fiscal 1999 is primarily the result of
increased U.S. Government contract awards and additional subcontract revenue,
with 76% of the revenue growth from the GCSS program.
Cost of Revenues
- ----------------
Cost of revenues for the second quarter of fiscal 1999 increased 34.4% to $32.9
million, or 84.2% of revenues, from $24.5 million, or 82.4% of revenues, for the
same quarter in fiscal 1998. The cost of revenue increase of $8.4 million is a
direct result of the increase in revenues.
The increase in cost of revenues as a percent of revenues is the result of
significant increases in direct subcontract costs.
Indirect Expenses and Other Costs
- ---------------------------------
Indirect expenses consist of selling, general and administrative, research and
development, and other costs. Indirect expenses for the second quarter of fiscal
1999 decreased 2.6% to $3.9 million, or 10.1% of revenues, from $4.0 million, or
13.6% of revenues, for the same quarter in fiscal 1998. The relatively flat
level of indirect expenses during this period of revenue growth
11
<PAGE>
reflects the Company's ability to efficiently leverage its existing
infrastructure to support increased business volume.
Operating income for the second quarter of fiscal 1999 increased 86.6% to $2.2
million, or 5.7% of revenues, from $1.2 million, or 4.0% of revenues, for the
same quarter of fiscal 1998. The income increase of approximately $1.0 million
is the result of increased revenues, control over operating expenses, and a $150
thousand favorable profit adjustment related to settlement of an incurred cost
audit completed in the second quarter of fiscal 1999.
Net Interest Expense
- --------------------
Net interest expense for the second quarter of fiscal 1999 decreased 31.9% to
$340 thousand, or 0.9% of revenues, from $499 thousand, or 1.7% of revenues, for
the second quarter of fiscal 1998. This decrease of $159 thousand reflects a
reduction in debt and lower interest rates.
Income Tax Benefit
- ------------------
The tax benefit recognized in the second quarter of fiscal 1999 was $1.2
million. This tax benefit was the result of changes in the estimate of the
ultimate recovery of the Company's net operating loss carryforwards. See Note 4
to the Financial Statements.
Income from Continuing Operations
- ---------------------------------
Income from continuing operations for the second quarter of fiscal 1999
increased 52.9% to $3.1 million, or 7.9% of revenues, from $2.0 million, or 6.8%
of revenues, for the second quarter of fiscal 1998. The $1.1 million increase in
income from continuing operations is the result of the increased revenues,
control over operating expenses, and the favorable incurred cost audit
adjustment noted above.
Discontinued Operations
- -----------------------
Income from discontinued operations for the second quarter of fiscal 1999 net of
tax was $140 thousand, compared to $468 thousand during the same quarter of
fiscal 1998. The income from discontinued operations during the second quarter
of fiscal 1999 consisted of royalties from the Vindicator and OSU businesses.
Results of Operations - Six Months Ended December 31, 1998 and 1997
- -------------------------------------------------------------------
Revenues
- --------
Revenues for the first half of fiscal 1999 increased 33.3% to $75.8 million from
$56.9 million for the same period in fiscal 1998. The revenue increase of $18.9
during the first half of fiscal 1999 is primarily the result of additional U.S.
Government contract awards and additional subcontract revenues, with 63% of the
revenue growth from the GCSS program.
Cost of Revenues
- ----------------
Cost of revenues for the first half of fiscal 1999 increased 36.9% to $63.9
million, or 84.2% of revenues, from $46.6 million, or 82.0% of revenues, for the
same period in fiscal 1998. The cost of revenue increase of $17.2 million is
directly related to the increase in revenues during
12
<PAGE>
the same period. The increase in cost of revenues as a percent of revenues is
the result of significant increases in direct subcontract costs.
Indirect Expenses and Other Expenses
- ------------------------------------
Indirect expenses consist of selling, general and administrative, research and
development, and other costs. Indirect expenses for the first half of fiscal
1999 of $7.6 million decreased slightly from the level in the first half of
fiscal 1998, but as a percent of revenues declined substantially to 10.0%,
compared to 13.4% in the same period last year. This was the result of
controlling indirect expenses while revenues rose significantly.
Operating income for the first half of fiscal 1999 increased 66.9% to $4.3
million, or 5.7% of revenues, from $2.6 million, or 4.6% of revenues, for the
same period of fiscal 1998. The increase in operating income of approximately
$1.7 million is the result of the increase in revenues, control over operating
expenses, and $380 thousand of royalty income in the first quarter of fiscal
1999 and the favorable incurred cost audit adjustment of $150 thousand in the
second quarter of fiscal 1999.
Net Interest Expense
- --------------------
Net interest expense for the first half of fiscal 1999 decreased 32.6% to $692
thousand, or 0.9% of revenues, from $1.0 million, or 1.8% of revenues, for the
same period of fiscal 1998. The decrease in net interest expense of
approximately $335 thousand reflects a reduction in debt and lower interest
rates.
Income Tax Benefit
- ------------------
The tax benefit recognized in the first half of fiscal 1999 was $2.5 million.
This tax benefit was the result of changes in the estimate of the ultimate
recovery of the Company's net operating loss carryforwards. See Note 4 to the
Financial Statements.
Income from Continuing Operations
- ---------------------------------
Income from continuing operations for the first half of fiscal 1999 increased
93.8% to $6.1 million, or 8.1% of revenues, from $3.2 million, or 5.6% of
revenues, for the same period of fiscal 1998. The $3.0 million increase in
income from continuing operations is primarily a result of the increased
revenues over the same periods.
Discontinued Operations
- -----------------------
Income from discontinued operations for the first half of fiscal 1999, net of
tax, was $194 thousand, compared to income of $758 thousand during the same
period of fiscal 1998. The income from discontinued operations during the first
half of fiscal 1999 consisted of royalties from the Vindicator and OSU
businesses. The higher income in the prior period was attributable to the
favorable resolution of various liabilities associated with discontinued
operations.
13
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company had $3.0 million in cash and cash equivalents at December 31, 1998,
compared to $3.6 million at June 30, 1998.
Net cash provided by operations amounted to $1.4 million during the first half
of fiscal 1999, compared to cash provided by operations of $141 thousand for the
first half of fiscal 1998. The increased operating cash flow was the result of
higher net earnings, partially offset by growth in working capital to support
the Company's larger revenue base. Net cash provided by discontinued operations
amounted to $120 thousand during the first half of fiscal 1999, compared to $1.1
million used during the same period of fiscal year 1998. Capital expenditures
during the first half of fiscal 1999 increased to $1.0 million, compared to $.6
million during the same period for fiscal year 1998 to support the Company's
growing business base. The cash flow allowed the Company to pay down its debt by
$1.2 million in the first half of fiscal 1999.
The Company believes that its cash flow from operations, combined with the
remaining borrowing capacity available under its line of credit, are sufficient
to meet its funding needs. Further, the tax net operating loss carryforwards
available to the Company are available to substantially eliminate income taxes
that would otherwise be payable on future income, which will enhance future
operating cash flows.
Risk Factors
- ------------
The Company and its shareholders face a number of risks, including, but not
limited to:
* 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 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.
* Potential vulnerabilities of the Company related to the "Year 2000"
computer problem.
Year 2000 Issue
- ---------------
The Year 2000 (Y2K) problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Thus, the year
1998 is represented by the number "98" in many legacy software applications.
Consequently, on January 1, 2000, the year will jump back to "00", and to
systems that are non-Y2K compliant, the time will seem to have reverted back 100
years. So, when computing basic lengths of time, the Company's computer
programs, certain building infrastructure components (including elevators, alarm
systems, telephone networks, sprinkler systems, security access systems and
certain HVAC systems)
14
<PAGE>
and any additional time-sensitive software that are non-Y2K compliant may
recognize a date using "00" as the year 1900. This could result in system
failures or miscalculations which could cause personal injury, property damage,
disruption of operations, and/or delays in payments from the Company's
customers, any or all of which could materially adversely effect the Company's
business, financial condition, cash flows or results of operations.
During the fourth quarter of fiscal 1998, the Company implemented an internal
Y2K compliance task force. The goal of the task force is to minimize the
disruptions to the Company's business, which could result from the Y2K problem,
and to minimize other liabilities which the Company might incur in connection
with the Y2K problem. The task force consists of existing employees of the
Company, and no new employees have been hired specifically to address the
Company's internal Y2K issues.
The Company is in the process of conducting a company-wide assessment of its
computer systems and operations infrastructure, including systems being
developed to improve business functionality, to identify computer hardware,
software, and process control systems that are not Y2K compliant. The Company
presently believes that its business-critical computer systems which are not
presently Y2K-compliant will have been replaced, upgraded or modified in the
normal replacement cycle prior to 2000.
The Company's financial accounting software system is an old system, which was
built in the 1980's on a commercial database platform by Company employees. The
Company has modified this system to be Y2K compliant, with the exception of a
few small bugs which are being fixed. The system has also been tested for Y2K
compliance by the vendor of the platform on which the system resides, and the
vendor has concluded that the Y2K compliance risks associated with the system
are insignificant.
The Company's management systems, such as human resources/payroll, purchasing,
and classified document control, are separate off-the-shelf commercial systems,
which are certified as Y2K compliant by the vendors of the systems. The Company
is also performing some internal testing of the Y2K compliance of these systems.
The Company has also initiated communications with third parties whose computer
systems' functionality could impact GRCI. These communications will facilitate
coordination of Y2K solutions and will permit GRCI to determine the extent to
which the Company may be vulnerable to failures of third parties to address
their own Y2K issues. However, as to the systems of the third parties that are
linked to GRCI, in particular those of the U.S. Government, there can be no
guarantee that such systems that are not now Y2K compliant will be timely
converted to Y2K compliance.
The Company is also assessing any potential Y2K-related exposure it may have
with respect to software or hardware it has delivered to its customers.
The costs of the Company's Y2K compliance efforts are being funded with cash
flows from operations. As normal business costs, these costs are generally
reimbursible by the government under the Company's government contracts, under
present regulations. In total, these costs are not expected to be substantially
different from the normal, recurring costs that are incurred for systems
development, implementation and maintenance. As a result, these costs are not
expected to have a material adverse effect on GRCI's overall results of
operations or cash flows.
15
<PAGE>
Additionally, there can be no guarantee that third parties of business
importance to GRCI, in particular the U.S. Government, will successfully and
timely reprogram or replace, and test, all of their own computer hardware,
software and process control systems. Because the majority of the Company's
business is contracted with the U.S. Government, the failure of the U.S.
Government to achieve Y2K compliance by the year 2000 would have a significant
adverse effect on GRCI's business, financial position, results of operations and
cash flows. Furthermore, if the Company's government customers delay other work
in order to accelerate their own Y2K compliance efforts, it could have a
significant adverse effect on GRCI's business, financial position and results of
operations.
The Company has begun, but has not yet completed, its contingency planning with
respect to the Y2K problem. The Company intends to complete its contingency
planning by July 1999.
The foregoing assessment of the impact of the Y2K problem on GRCI is based on
management's best estimates at the present time, and could change substantially.
The assessment is based upon numerous assumptions as to future events. There can
be no guarantee that these estimates will prove accurate, and actual results
could differ from those estimated if these assumptions prove inaccurate.
16
<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.
- --------------------------
17
<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/ James P. Allen
-------------------------------------
James P. Allen
Senior Vice President, Chief Financial
Officer and Treasurer
February 16, 1999
18
<PAGE>
<TABLE>
<CAPTION>
GRC International, Inc.
Statement of Computation of Earnings Per Share
(in thousands, except for per share amounts)
QTR ENDING YTD ENDING
12/31/98 12/31/97 12/31/98 12/31/97
--------------------- ----------------------
BASIC
<S> <C> <C> <C> <C>
Weighted Average Number of Shares of Common
Stock Outstanding 10,222 9,777 10,218 9,704
Income (Loss) from Continuing Operations 3,100 2,027 6,130 3,163
Income (Loss) from Discontinued Operations 140 468 194 758
-------------------- ----------------------
Net Income (Loss) 3,240 2,495 6,324 3,921
===================== ======================
Per Share Amount:
Income (Loss) from Continuing Operations 0.31 0.21 0.60 0.32
Income (Loss) from Discontinued Operations 0.01 0.05 0.02 0.08
--------------------- ----------------------
Net Income (Loss) 0.32 0.26 0.62 0.40
===================== ======================
FULLY DILUTED
Weighted Average Number of Shares of Common
Stock Outstanding 10,222 9,777 10,218 9,704
Net Effect of Dilutive Stock Options Based on the Treasury
Stock Method Using Average Market Price 189 137 220 130
--------------------- ----------------------
Weighted Average Shares Outstanding 10,411 9,914 10,438 9,834
===================== ======================
Income (Loss) from Continuing Operations 3,100 2,027 6,130 3,163
Income (Loss) from Discontinuing Operations 140 468 194 758
--------------------- ----------------------
Adjusted Net Income (Loss) 3,240 2,495 6,324 3,921
===================== ======================
Per Share Amount:
Adjusted Income (Loss) from Continuing Operations 0.30 0.20 0.59 0.32
Income (Loss) from Discontinuing Operations 0.01 0.05 0.02 0.08
--------------------- ----------------------
Adjusted Net Income (Loss) 0.31 0.25 0.61 0.40
===================== ======================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,012
<SECURITIES> 0
<RECEIVABLES> 28,888
<ALLOWANCES> 40
<INVENTORY> 17
<CURRENT-ASSETS> 40,358
<PP&E> 21,222
<DEPRECIATION> 12,378
<TOTAL-ASSETS> 73,814
<CURRENT-LIABILITIES> 17,781
<BONDS> 0
0
0
<COMMON> 1,054
<OTHER-SE> 32,669
<TOTAL-LIABILITY-AND-EQUITY> 73,814
<SALES> 75,808
<TOTAL-REVENUES> 75,808
<CGS> 63,860
<TOTAL-COSTS> 63,860
<OTHER-EXPENSES> 7,601
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 692
<INCOME-PRETAX> 3,655
<INCOME-TAX> 2,475
<INCOME-CONTINUING> 6,130
<DISCONTINUED> 194
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,324
<EPS-PRIMARY> .62
<EPS-DILUTED> .61
</TABLE>
