UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...... to ......
Registrant, State of Incorporation,
Address and Telephone Number
GRC INTERNATIONAL, INC.
(a Delaware Corporation)
1900 Gallows Road
Vienna, Virginia 22182
(703) 506-5000
Commission I.R.S. Employer
File No. Identification No.
- ---------- ------------------
1-7517 95-2131929
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock October 31, 1997
- --------------------- ----------------
$.10 par value 9,777,378 shares
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 11
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.
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except for per share data)
(unaudited)
Three Months Ended
September 30,
-------------------
1997 1996
---- ----
Revenues $27,165 $28,469
Cost of revenues 22,160 23,267
Indirect & Other Costs 3,595 4,210
------- --------
Income from operations 1,410 992
Interest (expense) income, net (528) (136)
------- --------
Income from continuing operations
before provision for income taxes 882 856
Income tax benefit 254 ---
------- --------
Income from continuing operations 1,136 856
------- --------
Gain (Loss) from operations of discontinued
business segments 290 (3,466)
(net of tax of $182 and $0)
Loss on disposal of discontinued
business segments --- ---
-------- --------
Gain (Loss) from discontinued operations 290 (3,466)
-------- -------
Net Income $ 1,426 $ (2,610)
========= ==========
Per Share Amounts:
Income from continuing operations $ 0.12 $ 0.09
Gain (Loss) from discontinued operations $ 0.03 $ (0.37)
-------- ----------
Net Income (Loss) $ 0.15 $ (0.28)
======== ==========
Common Shares Used For EPS
Calculation 9,749 9,496
======== =========
Prior period amounts are restated to conform to the current period presentation
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
September 30, June 30,
1997 1997
------------- --------
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 4,975 $ 5,756
Accounts receivable, net 22,290 25,087
Unbilled reimbursable costs and fees, net 5,940 4,076
Other receivables 1,081 1,090
Prepaid expenses and other current assets 678 576
Deferred income taxes 2,686 2,686
---------- ---------
Total current assets 37,650 39,271
--------- --------
PROPERTY AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization of $10,066 and $9,414 10,005 10,553
--------- --------
OTHER ASSETS:
Goodwill and other intangible assets, net 2,344 2,409
Deferred software costs, net 433 461
Deferred Taxes 8,968 8,896
Deposits and other 4,412 4,374
---------- ---------
Total other assets 16,157 16,140
--------- --------
TOTAL ASSETS $ 63,812 $ 65,964
========= ========
Prior period amounts are restated to conform to the current period presentation
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
September 30, June 30,
1997 1997
--------------- ---------
(in thousands)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,739 $ 1,679
Accounts payable 1,110 2,610
Accrued compensation and benefits 10,880 12,210
Income taxes payable 389 384
Accrued expenses and other current liabilities 2,393 1,929
Net liabilities of discontinued operations 3,501 4,591
--------- ---------
Total current liabilities 20,012 23,403
-------- --------
LONG-TERM LIABILITIES
Long-term debt 26,785 28,153
Other long-term liabilities 1,290 1,332
--------- ---------
Total long-term liabilities 28,075 29,485
-------- --------
COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 10,075,000 shares
and 9,849,000 shares 1,007 985
Paid-in capital 78,155 76,954
Accumulated deficit (59,592) (61,018)
-------- --------
19,570 16,921
Less: Treasury stock, at cost; 300,000 shares (3,845) (3,845)
--------- ---------
Total stockholders' equity 15,725 13,076
-------- --------
$ 63,812 $ 65,964
======== ========
Prior period amounts are restated to conform to the current period presentation
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
September 30,
-------------------------
1997 1996
----- ----
(in thousands)
CASH FLOWS FROM CONTINUING OPERATIONS:
Income from continuing operations $ 1,136 $ 856
Reconciliation of income from continuing operations:
Depreciation and amortization 769 685
Loss provision on current assets 77 172
Income tax benefit (254) ---
Changes in assets and liabilities:
Accounts receivable and unbilled
reimbursable costs and fees 856 927
Prepaid expenses and other current assets (93) (731)
Accounts payable, accruals and
other current liabilities (2,361) (2,799)
Other (31) 34
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 99 (856)
--------- --------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Gain (Loss) from discontinued operations 290 (3,466)
Reconciliation of income from discontinued operations:
Non-cash charges and changes in working capital (1,308) (2,054)
Proceeds from sale of discontinued operations 400 ---
-------- --------
NET CASH USED BY DISCONTINUED OPERATIONS (618) (5,520)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (142) (716)
Deferred software costs --- (302)
Other (35) ---
--------- ----------
NET CASH USED BY INVESTING ACTIVITIES (177) (1,018)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital lease obligations (587) (246)
Bank borrowings 503 5,032
Issuance of common stock (2) 113
Other 1 (4)
--------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (85) 4,895
--------- -------
DECREASE IN CASH & CASH EQUIVALENTS (781) (2,499)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,756 2,790
-------- ---------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 4,975 $ 291
======== =========
Prior period amounts are restated to conform to the current period presentation
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
September 30,
-------------------
1997 1996
---- ----
(in thousands)
Supplemental disclosures:
Cash paid for
Interest $ 515 $ 378
Income taxes $ 12 $ ---
Other non-cash financing activities:
Conversion of debenture to common stock $ 1,225 $ ---
Prior period amounts are restated to conform to the current period presentation
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
(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, 1997.
(2) At September 30, 1997 the Company had a revolving credit agreement that
provides for secured borrowings of up to $22 million. 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 financing under term loans due September 1, 1999. Advances
under the revolving credit agreement and the term loans accrue interest
at the bank's prime rate which was 8.5% as of September 30, 1997. 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 is being
amortized over a five year period at an interest rate of 9%. 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.
Debt at September 30, 1997 and June 30, 1997 consisted of the
following:
September 30, 1997 June 30, 1997
------------------ -------------
Revolving Credit Agreement $ 19,770 $ 19,267
Term Loans 4,900 4,900
Convertible Debenture 1,582 2,758
Equipment Financing 2,238 2,871
Other 34 36
----------- -----------
Total Debt $ 28,524 $ 29,832
Less: Current Portion 1,739 1,679
--------- ---------
Long Term Debt $ 26,785 $ 28,153
======== ========
(3) Changes in Presentation. Certain amounts in the September 30, 1996
Consolidated Financial Statements have been reclassified to conform to
the September 30, 1997 presentation.
(4) Discontinued Operations. Since the Company adopted a plan to dispose of
the Company's Telecommunications and Advanced Products Divisions in
February of 1997, the Company has successfully sold the OSU, GRC
Instruments/Dyantup and Vindicator business units. The Company has also
ceased operations of the final two business units. The NetworkVUE
component of the Company's discontinued Telecommunications business
unit was shut down on September 30, 1997 and the Commercial Information
Systems ("CIS") component of the Company's discontinued Advanced
Products Division was shut down in October 1997. The income from
discontinued operations for the first quarter of fiscal 1998 is the
result 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. 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.
(5) Income taxes. The Company recognized an incremental deferred tax asset
of $72 thousand in the quarter ended September 30, 1997. With the
discontinuance of the Company's Telecom and Advanced Products
Divisions, the losses generated by those discontinued operations will
no longer offset the profits generated by the Company's service
operations. Accordingly, it is now more likely than not that the
Company will realize a substantial portion of its income tax
carryforwards in the future and the Company recognized the incremental
deferred tax asset.
(6) New Accounting pronouncements. Statement of Financial Accounting
Standard No. 128 ("SFAS"), Earnings Per Share", is effective for
periods ending after December 15, 1997 (early adoption is not
permitted) and requires the Company to present a basic and diluted
earnings per share.
Had the Company computed earnings per share in accordance with SFAS No.
128, the results would have been as follows:
September 30, 1997 September 30, 1996
------------------ ------------------
Basic EPS:
Continuing operations $ 0.12 $ 0.09
Discontinued operations $ 0.03 $(0.37)
Net income $ 0.15 $(0.28)
Diluted EPS:
Continuing operations $ 0.12 $ 0.09
Discontinued operations $ 0.03 $(0.36)
Net Income $ 0.15 $(0.27)
(7) Subsequent Events.
-----------------
During October 1997, the Company repriced the following number of stock
options:
Range of Range of
Number of Options Option Prices Number of Options Option Prices
Repriced Before Repricing After Repricing After Repricing
-------- ---------------- --------------- ---------------
333,040 $9.00 - $38.06 159,306 $6.50 - $7.13
Certain senior officers of the Company were ineligible for this
repricing of options.
On November 10, 1997, the Company increased its borrowing against its
revolving line of credit by $150,000 to pay down its term loan by the same
amount.
GRC INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED September 30, 1997
(unaudited)
Summary
The revenues and operating income and interest expense of the Company are
presented for the periods indicated:
Three Months Ended
--------------------
9/30/97 9/30/96
------- -------
Revenues $27,165 $ 28,469
======= ========
Income from operations 1,410 992
Interest income (expense), net (528) (136)
--------- -----------
Income from continuing operations
before income tax benefit 882 856
Income tax benefit 254 ---
Gain (loss) from discontinued
operations, net 290 (3,466)
--------- ----------
Net income (loss) $ 1,426 $ (2,610)
======== ==========
Results of Operations - Three Months ended September 30, 1997 and 1996
- ----------------------------------------------------------------------
Revenues
- --------
Revenues for the first quarter of fiscal 1998 decreased 4.6% to $27.2 million
from $28.5 million for the same quarter in fiscal 1997.
For the first quarter of fiscal 1998, revenues of $27.2 million consisted of
$26.8 million in services revenues and $.4 million in product revenues. For the
first quarter of fiscal 1997, revenues of $28.5 million consisted of $28.2
million in services revenue and $.3 million in product revenues. The total
revenue decrease of $1.3 million is primarily the result of U.S. government
delays in certain contract awards and a net reduction in technical staff during
the first quarter of fiscal 1998. With an increase in contract backlog and an
anticipated growth in current staffing, the Company hopes to reverse this trend
during the remainder of fiscal 1998.
Cost of Revenues and Gross Profit
- ---------------------------------
Cost of revenues for the first quarter of fiscal 1998 decreased 4.8% to $22.2
million from $23.3 million for the same quarter in fiscal 1997. The cost of
revenue decrease of $1.1 million is a direct result of reduced revenues.
Gross profit for the first quarter of fiscal 1998 decreased 3.8% to $5.0
million, or 18.4% of revenues, from $5.2 million, 18.3% of revenues, for the
same quarter in fiscal 1997. The gross profit decrease of $197 thousand is a
direct result of reduced revenues.
Operating Expenses and Operating Income
- ---------------------------------------
Operating expenses consist of selling, general and administrative, research and
development, and other costs. Operating expenses for the first quarter of fiscal
1998 decreased 12.5% to $3.7 million, or 13.6% of revenues, from $4.2 million,
14.8% of revenues, for the same quarter in fiscal 1997. The operating expenses
decrease of $526 thousand is primarily the result of reduced unrecoverable
overhead expenses allocated to discontinued operations.
Operating income from continuing operations for the first quarter of fiscal 1998
increased 42% to $1.4 million, or 5.2% of revenues, from $1.0 million, 3.5% of
revenues, for the same quarter of fiscal 1997. The operating income from
continuing operations increase of $418 thousand is the result of a combination
of increase in higher-margin product sales and reduction in operating expenses
discussed above.
Net Interest Income or Expense
- ------------------------------
Net interest expense of $ 528 thousand for the first quarter of fiscal 1998,
compared to net interest expense of $136 thousand for the first quarter of
fiscal 1997, reflects the significant increase in debt 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. This in turn is a function of the forecasts of the
Company's profitability in future years. 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 Product 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
September 30, 1997, the Company's total net deferred tax asset is $11.7 million
which is comprised of current deferred taxes of $2.7 million and long term
deferred taxes of $9.0 million.
Income or Loss from Continuing Operations
- -----------------------------------------
Income from continuing operations for the first quarter of fiscal 1998 increased
33% to $1.1 million from $.9 million for the first quarter of fiscal 1997. The
$280 thousand increase in income from continuing operations is a direct result
of the tax benefit of the Company's tax loss carryforwards.
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"). The Company expects that none of the final disposal
dates of the business units within the Discontinued Divisions will be later than
February 28, 1998.
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 pay down 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 Optical
Service Unit ("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 pay down the Company's
obligation under the Equipment Lease.
The operations of the NetworkVUE business unit within the Company's discontinued
Telecommunications Division were shut down as of September 30, 1997.
The operations of the Commercial Information Systems ("CIS") component of the
Company's discontinued Advanced Products Division were shut down in October
1997.
Income from discontinued operations for the first quarter of fiscal 1998 net of
tax, was $290 thousand, compared to a loss of $3.5 million during the first
quarter of fiscal 1997. The income from discontinued operations for the first
quarter of fiscal 1998 is the result 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. 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.
Net Income or Loss
- ------------------
Net income for the first quarter of fiscal 1998 amounted to $1.4 million,
comprised of a profit from Continuing Operations of $1.1 million and a gain from
Discontinued Operations of $0.3 million.
Net loss for the first quarter of fiscal year 1997 amounted to $2.6 million,
comprised of a gain of $0.9 million from Continuing Operations and a loss from
discontinued Operations of $3.5 million.
Financing
- ---------
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 beginning July 1, 1997.
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 was obligated to file 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
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, which have been
filed as Exhibits to the Company's report on Form 10-Q for the quarter ended
December 31, 1996 and are incorporated by reference as Exhibits to the present
report. As of October 31, 1997, the holder of the Convertible Debenture has
given the Company Conversion Notices converting $2 million of the $4 million
Debenture into 405,871 shares.
Under the Equity Line Agreement the investor may, but is not required to,
purchase up to $3 million of the Company's Common Stock during the 6 month
period beginning July 1, 1997. 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 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 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 was 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, 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 is now effective), (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 and are
incorporated by reference as Exhibits to the present report. The investor has
not yet purchased any shares under the Equity Line Agreement.
Liquidity and Capital Resources
- -------------------------------
The Company had $5.0 million in cash and cash equivalents at September 30, 1997,
compared to $291 thousand at September 30, 1996.
Net cash provided by operations amounted to $99 thousand for the first quarter
of fiscal 1998, compared to cash used by operations of $856 thousand for the
first quarter of fiscal 1997. Net cash used by discontinued operations amounted
to $618 thousand for the first quarter of fiscal 1998 compared to $5.5 million
for the first quarter of fiscal year 1997. Net cash used by investing activities
for the first quarter of fiscal 1998 amounted to $177 thousand, compared to $1.0
million during the same period for the prior year. Net cash used by financing
activities amounted to $85 thousand for the first quarter of fiscal 1998,
compared to net cash provided of $4.9 million provided in the first quarter of
fiscal 1997.
As a result of the decrease in funded debt and increase in operating income
during the first quarter of fiscal 1998, the Company's ratio of total funded
debt to total capitalization amounted to 61% at September 30, 1997, compared to
67% at June 30, 1997.
At September 30, 1997, the Company had $28.5 million of funded debt, $1.7
million of which was classified as short term, and $26.8 million of which was
classified as long term. The Company had $29.8 million of bank debt and
equipment lease financings at June 30, 1997.
The credit facilities with the Company's bank consist of an $8 million term loan
("Term Loan") of which $4.9 million was drawn down at September 30, 1997, a $22
million revolving line of credit ("Revolving Credit"), of which $19.8 million
was used at September 30, 1997, and a $2.2 million debt (as of September 30,
1997) 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 October 15, 1997, and, thus, the
Revolving Credit is repayable on January 15, 2000. The Revolving Credit has
typically been renewed, 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 the revised
payment schedule.
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, June 30, 1996, December 31, 1996, and 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 September 30, 1997, 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 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.
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 reduce substantially 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 manage within amounts accrued for, and to fund
residual net cash expenditures required by, its discontinued operations.
- 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 risk that the Equity Line Agreement will not remain available, either
because the investor does not make required purchases due to any future
securities registration problems, or otherwise.
- Dilution which may result from (i) conversion of the Debenture, (ii)
sales of stock by the Company under the Equity Line Agreement, (iii)
exercise of the Debenture and Equity Line Warrants, and (iv) exercise of
employee and director stock options.
PART II - OTHER INFORMATION
Items 1, 2, 3, and 5 are Inapplicable.
- ---------------------------------------
Item 4 - Results of Votes of Security Holders.
- ----------------------------------------------
On November 6, 1997, the Annual Meeting of Shareholders was held. The
shareholders reelected 4 current directors as follows:
Director For Against Abstain Broker Nonvotes
-------- --- ------- ------- ---------------
Peter A. Cohen 8,421,757 409,198 -0- -0-
Charles H.P. Duell 8,434,865 396,090 -0- -0-
George R. Packard 8,435,238 395,717 -0- -0-
Herbert Rabin 8,435,590 395,365 -0- -0-
The shareholders ratified the selection of Deloitte & Touche, L.L.P. as
independent public accountants for the fiscal year ending June 30, 1998 as
follows:
For Against Abstain Broker Nonvotes
--- ------- ------- ---------------
8,168,269 472,464 190,222 -0-
Item 6(a) Exhibits.
- -------------------
Exhibit No. Description
----------- -----------
11 Statement of Computation of Earnings Per Share
12 Financial Data Schedule
Item 6(b) is Inapplicable
- -------------------------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRC INTERNATIONAL, INC.
By: /s/ Ronald B. Alexander
------------------------
Ronald B. Alexander
Senior Vice President-Finance, Treasurer,
Chief Financial Officer & Chief Accounting
Officer
November 13, 1997