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, 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 January 31, 1998
- -------------------------- ----------------
$.10 par value 9,807,536 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 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.
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except for per share data)
(unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
1997 1996 1997 1996
---------- --------- -------- --------
Revenues $ 29,705 $ 28,568 $ 56,870 $ 57,037
Cost of revenues 24,479 23,501 46,639 46,768
Indirect costs and other costs 4,031 3,967 7,626 8,177
--------- --------- --------- ---------
Operating income 1,195 1,100 2,605 2,092
Interest expense, net (499) (340) (1,027) (476)
---------- ---------- --------- ----------
Income from continuing operations
before income tax benefit 696 760 1,578 1,616
Income tax benefit 1,331 --- 1,585 ---
--------- --------- --------- ----------
Income from continuing operations 2,027 760 3,163 1,616
Gain (loss) from discontinued operations
(net of tax) 468 (19,864) 758 (23,330)
---------- --------- --------- ---------
Net Income (loss) $ 2,495 $ (19,104) $ 3,921 $ (21,714)
========== ========= ========= =========
Income (loss) per common and
common equivalent share:
Basic
Continuing operations $ 0.21 $ 0.08 $ 0.32 $ 0.17
Discontinued operations $ 0.05 $ (2.13) $ 0.08 $ (2.50)
---------- --------- ---------- ---------
Net income (loss) $ 0.26 $ (2.05) $ 0.40 $ (2.33)
========== ========= ========== =========
Number of shares used in EPS
calculation 9,777 9,340 9,704 9,321
========= ======== ========= ========
Diluted
Continuing operations $ 0.20 $ 0.08 $ 0.32 $ 0.17
Discontinued operations $ 0.05 $ (2.11) $ 0.08 $ (2.47)
---------- --------- ---------- ---------
Net income (loss) $ 0.25 $ (2.03) $ 0.40 $ (2.30)
========== ========= ========== =========
Number of shares used in EPS
calculation 9,914 9,427 9,834 9,445
========== ========= ========== =========
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)
December 31, June 30,
1997 1997
------------- -------
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 3,407 $ 5,756
Accounts receivable, net 25,288 25,087
Unbilled reimbursable costs and fees, net 5,426 4,076
Other receivables 1,231 1,090
Prepaid expenses and other current assets 1,215 576
Deferred income taxes 2,686 2,686
-------- --------
Total current assets 39,253 39,271
-------- --------
PROPERTY AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization of $10,021 and $9,414 9,789 10,553
-------- --------
OTHER ASSETS:
Goodwill and other intangible assets, net 2,263 2,409
Deferred software costs, net 405 461
Deferred taxes 10,010 8,896
Deposits and other 4,421 4,374
-------- --------
Total other assets 17,099 16,140
-------- --------
TOTAL ASSETS $ 66,141 $ 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)
December 31, June 30,
1997 1997
------------ ---------
(in thousands)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,777 $ 1,679
Accounts payable 2,341 2,610
Accrued compensation and benefits 11,126 12,210
Income taxes payable 389 384
Accrued expenses and other current liabilities 2,636 1,929
Net liabilities of discontinued operations 2,255 4,591
-------- --------
Total current liabilities 20,524 23,403
-------- --------
LONG-TERM LIABILITIES:
Long-term debt 26,103 28,153
Other long-term liabilities 1,273 1,332
-------- --------
Total long-term liabilities 27,376 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 1,009 985
Paid-in capital 78,174 76,954
Accumulated deficit (57,097) (61,018)
-------- --------
22,086 16,921
Less: Treasury stock, at cost; 300,000 shares (3,845) (3,845)
-------- --------
Total stockholders' equity 18,241 13,076
-------- --------
$ 66,141 $ 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)
Six Months Ended
December 31,
----------------------
1997 1996
------ ------
(in thousands)
CASH FLOWS FROM CONTINUING OPERATIONS:
Income from continuing operations $ 3,163 $ 1,616
Reconciliation of income from continuing operations:
Depreciation and amortization 1,591 1,416
Loss provision on current assets 83 259
Income tax benefit (1,585) ---
Changes in assets and liabilities:
Accounts receivable and unbilled
reimbursable costs and fees (1,632) 359
Prepaid expenses and other current assets (782) (989)
Accounts payable, accruals and
other current liabilities (641) (2,127)
Other (56) 10
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 141 544
-------- --------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Gain (Loss) from discontinued operations 758 (23,330)
Reconciliation of income from discontinued operations:
Non-cash charges and changes in working capital (2,265) 13,777
Proceeds from sale of discontinued operations 400 ---
-------- --------
NET CASH USED BY DISCONTINUED OPERATIONS (1,107) (9,553)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (620) (1,489)
Deferred software costs --- (156)
Other (55) ---
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (675) (1,645)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital lease obligations (1,180) (638)
Bank borrowings 503 12,051
Issuance of common stock (31) 132
Other --- ---
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (708) 11,545
-------- --------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (2,349) 891
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,756 2,790
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 3,407 $ 3,681
======== ========
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)
Six Months Ended
December 31,
---------------------
1997 1996
------ ------
(in thousands)
Supplemental disclosures:
Cash paid for:
Interest $ 1,036 $ 595
Income taxes $ 30 $ 9
Other non-cash financing activities:
Conversion of debenture to common stock $ 1,275 $ ---
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 DECEMBER 31, 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 December 31, 1997, the Company had a revolving credit agreement that
provides for secured borrowings of up to $22 million, of which $19.7
million (or $16.3 million, net of cash) was utilized at December 31,
1997. 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 $4.8 million was utilized at December
31, 1997. Advances under the revolving credit agreement and the term
loans accrue interest at the bank's prime rate which was 8.5% as of
December 31, 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 was
originally 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 December 31, 1997, the outstanding balance on the
equipment financing was $1.8 million.
Debt at December 31, 1997 and June 30, 1997 consisted of the following:
December 31, 1997 June 30, 1997
----------------- -------------
Revolving Credit Agreement $ 19,696 $ 19,267
Term Loans 4,750 4,900
Convertible Debenture 1,584 2,758
Equipment Financing 1,822 2,871
Other 28 36
-------- --------
Total Debt $ 27,880 $ 29,832
Less: Current Portion 1,777 1,679
-------- --------
Long Term Debt $ 26,103 $ 28,153
======== ========
(3) Changes in Presentation. Certain amounts in the December 31, 1996
Consolidated Financial Statements have been reclassified to conform to
the December 31, 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 essentially all of
the business units comprising those divisions, i.e., the OSU(R) Network
Interface, GRC Instruments/Dynatup, Vindicator, NetworkVUE, and
Commercial Information Systems ("CIS") business units. The income from
discontinued operations for the first six 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
operation 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
reserves is a result of the Company selling off its final two
discontinued business units. The Company sold its 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.
(5) Income Taxes. The Company recognized an incremental deferred tax asset
of $1.1 million through the first six 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 offsets the profits generated by the Company's
service operations. Accordingly, the Company expects to realize a
substantial portion of its income tax carryforwards in the future.
GRC INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED December 31, 1997 and 1996
(unaudited)
Summary
The revenues and operating income and interest expense of the Company are
presented for the periods indicated:
Three Months Ended Six Months Ended
12/31/97 12/31/96 12/31/97 12/31/96
-------- -------- -------- --------
Revenues $ 29,705 $ 28,568 $ 56,870 $ 57,037
======== ======== ======== ========
Operating income 1,195 1,100 2,605 2,092
Interest expense, net (499) (340) (1,027) (477)
-------- -------- -------- --------
Income from continuing operations
before income tax benefit 696 760 1,578 1,615
Income tax benefit 1,331 --- 1,585 ---
Gain (loss) from discontinued
operations (net of tax) 468 (19,866) 758 (23,331)
--------- -------- --------- --------
Net income (loss) $ 2,495 $(19,106) $ 3,921 $(21,716)
========= ======== ========= ========
Results of Operations - Three Months ended December 31, 1997 and 1996
- ---------------------------------------------------------------------
Revenues
- --------
Revenues for the second quarter of fiscal 1998 increased 4.0% to $29.7 million
from $28.6 million for the same quarter in fiscal 1997.
For the second quarter of fiscal 1998, revenues of $29.7 million consisted of
$29.4 million in services revenues and $0.3 million in product revenues. For the
second quarter of fiscal 1997, revenues of $28.6 million consisted of $27.9
million in services revenue and $0.7 million in product revenues. The total
revenue increase of $1.1 million is primarily the result of increased U.S.
government contract funding during the second quarter of FY1998.
Cost of Revenues and Gross Profit
- ---------------------------------
Cost of revenues for the second quarter of fiscal 1998 increased 4.2% to $24.5
million, or 82.5% of revenues, from $23.5 million, or 82.2% of revenues, for the
same quarter in fiscal 1997. The cost of revenue increase of $1.0 million is a
direct result of the increase in revenues.
Gross profit for the second quarter of fiscal 1998 increased 3.0% to $5.2
million, or 17.5% of revenues, from $5.1 million, or 17.8% of revenues, for the
same quarter in fiscal 1997. The gross profit increase of $153 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 second quarter of
fiscal 1998 increased 1.5% to $4.03 million, or 13.6% of revenues, from $3.97
million, or 13.9% of revenues, for the same quarter in fiscal 1997. The
operating expenses increase of $58 thousand is primarily the result of
relocation and salary costs for new hires in the Finance Department.
Operating income from continuing operations for the second quarter of fiscal
1998 increased 8.6% to $1.2 million, or 4.0% of revenues, from $1.1 million , or
3.9% of revenues, for the same quarter of fiscal 1997. The operating income from
continuing operations increase of $95 thousand is a direct result of increased
revenues.
Net Interest Income or Expense
- ------------------------------
Net interest expense for the second quarter of fiscal 1998 increased 46.8% to
$499 thousand, or 1.7% of revenues, from $340 thousand, or 1.2% of revenues, for
the second quarter of fiscal 1997. This increase of $159 thousand 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. 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 December
31, 1997, the Company's total net deferred tax asset is $12.7 million, which is
comprised of current deferred taxes of $2.7 million and long term deferred taxes
of $10.0 million.
The tax benefit for the second quarter of fiscal 1998 was $1.3 million, compared
to $0 for the second quarter of fiscal 1997.
Income or Loss from Continuing Operations
- -----------------------------------------
Income from continuing operations for the second quarter of fiscal 1998
increased 167% to $2.0 million, or 6.8% of revenues, from $0.8 million, or 2.7%
of revenues, for the second quarter of fiscal 1997. The $1.3 million 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"). 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 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 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 pay down
the Company's obligation under the Equipment Lease.
On December 19, 1997, the Company sold the assets of its Commercial Information
Systems ("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 second quarter of fiscal 1998 net of
tax was $468 thousand, compared to a loss of $19.9 million during the same
quarter of fiscal 1997. The income from discontinued operations for the second
quarter of fiscal 1998 is the result of a reversal of $750 thousand of reserves
for discontinued operations, which is reported net of tax of $282 thousand. The
reduction in discontinued reserves is a result of the Company selling off its
final two discontinued business units. The Company sold its Commercial
Information Systems ("CIS") business unit on December 19, 1997 and its
NetworkVUE business unit on January 8, 1998.
Results of Operations - Six Months ended December 31, 1997 and 1996
- -------------------------------------------------------------------
Revenues
- --------
Revenues for the first half of fiscal 1998 decreased 0.3% to $56.9 million from
$57.0 million for the same period in fiscal 1997.
For the first half of fiscal 1998, revenues of $56.9 million consisted of $56.2
million in services revenues and $0.7 million in product revenues. For the first
half of fiscal 1997, revenues of $57.0 million consisted of $56.0 million in
services revenue and $1.0 million in product revenues.
Cost of Revenues and Gross Profit
- ---------------------------------
Cost of revenues for the first half of fiscal 1998 decreased 0.5% to $46.6
million, or 81.9% of revenues, from $46.8 million, or 82.0% of revenues, for the
same period in fiscal 1997. The cost of revenue decrease of $129 thousand is a
direct result of the decrease in revenues.
Gross profit for the first half of fiscal 1998 decreased 0.4% to $10.23 million,
or 18.0% of revenues, from $10.27 million, or 18.0% of revenues, for the same
period in fiscal 1997.
Operating Expenses and Operating Income
- ---------------------------------------
Operating expenses consist of selling, general and administrative, research and
development, and other costs. Operating expenses for the first half of fiscal
1998 decreased 5.7% to $7.7 million, or 13.6% of revenues, from $8.2 million, or
14.3% of revenues, for the same period in fiscal 1997. The operating expenses
decrease of $468 thousand is primarily the result of reduced marketing expenses.
Operating income from continuing operations for the first half of fiscal 1998
increased 24.5% to $2.6 million, or 4.6% of revenues, from $2.1 million, or 3.7%
of revenues, for the same period of fiscal 1997. The operating income from
continuing operations increase of $513 thousand is the result of a combination
of an increase in higher-margin product sales and a reduction in operating
expenses during the first quarter of fiscal 1998.
Net Interest Income or Expense
- ------------------------------
Net interest expense for the first half of fiscal 1998 increased 115.3% to $1.0
million, or 1.8% of revenues, from $477 thousand, or 0.8% of revenues, for the
same period of fiscal 1997. The net interest expense of $550 thousand reflects
the significant increase in debt incurred during the first half of fiscal 1998
in order to fund the Company's discontinued operations.
Income Tax Benefit
- ------------------
As disclosed above, the Company expects to realize a larger portion of 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 December 31, 1997, the
Company's total net deferred tax asset is $12.6 million which is comprised of
current deferred taxes of $2.6 million and long term deferred taxes of $10.0
million.
The tax benefit for the first half of fiscal 1998 is $1.6 million, compared to
$0 for the same period in fiscal 1997.
Income or Loss from Continuing Operations
- -----------------------------------------
Income from continuing operations for the first half of fiscal 1998 increased
95.9% to $3.2 million, or 5.6% of revenues, from $1.6 million, or 2.8% of
revenues, for the same period of fiscal 1997. The $1.5 million increase in
income from continuing operations is a direct result of the tax benefit of the
Company's tax loss carryforwards offset by the increase in interest expense.
Discontinued Operations
- -----------------------
As discussed above, as of January 8, 1998, the Company has sold all of its
business units within its Discontinued Divisions.
Income from discontinued operations for the first half of fiscal 1998 net of
tax, was $758 thousand, compared to a loss of $23.3 million during the same
period of fiscal 1997. The income from discontinued operations for the second
half 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 Solution Inc. ("QSI").
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 year period
currently expected to begin on April 1, 1998.
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 January 31, 1998, the holder of the
Convertible Debenture has given the Company Conversion Notices converting $2.125
million of the $4 million Debenture into 434,532 shares, leaving a remaining
principal balance of $1.875 million.
Under the Equity Line Agreement, for the 3 year period currently expected to
begin on April 1, 1998, 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 was obligated to file a registration statement
with the Securities and Exchange Commission (which registration has now become
effective) 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
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The Company had $3.4 million in cash and cash equivalents at December 31, 1997,
compared to $5.8 million at June 30, 1997.
Net cash provided by operations amounted to $141 thousand during the first half
of fiscal 1998, compared to cash provided by operations of $544 thousand for the
first half of fiscal 1997. Net cash used by discontinued operations amounted to
$1.1 million during the first half of fiscal 1998, compared to $9.6 million used
during the first half of fiscal year 1997. Net cash used by investing activities
during the first half of fiscal 1998 amounted to $675 thousand, compared to $1.6
million during the same period for fiscal year 1997. Net cash used by financing
activities amounted to $708 thousand during the first half of fiscal 1998,
compared to net cash provided of $11.5 million during the first half of fiscal
1997.
As a result of the decrease in funded debt and increase in operating income
during the first half of fiscal 1998, the Company's ratio of total funded debt
(net of cash) to total capitalization amounted to 59% at December 31, 1997,
compared to 67% at June 30, 1997.
At December 31, 1997, the carrying value of the Company's debt amounted to $27.9
million, $1.8 million of which was classified as short term, and $26.1 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 December
31, 1997, a $22 million revolving line of credit ("Revolving Credit"), of which
$19.7 million was used at December 31, 1997, and a $1.8 million debt (as of
December 31, 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 January 15, 1998, and, thus, the
Revolving Credit 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 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 December 31, 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 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) 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.
* 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.
PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are inapplicable.
- ----------------------------------------
Item 6(a) Exhibits.
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Exhibit No. Description
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11 Statement of Computation of Earnings Per Share
27 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, Treasurer, Chief
Financial Officer & Chief Accounting Officer
February 17, 1998