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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...... to ......
Registrant, State of Incorporation,
Address and Telephone Number
----------------------------
GRC INTERNATIONAL, INC.
(a Delaware Corporation)
1900 Gallows Road
Vienna, Virginia 22182
(703) 506-5000
Commission I.R.S. Employer
File No. Identification No.
- ---------- ------------------
1-7517 95-2131929
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock April 30, 1999
- --------------------- --------------
$.10 par value 10,245,571 shares
1
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 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
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated 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 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 although the Company believes that the disclosures are
adequate to make the information presented not misleading.
It is suggested that these condensed consolidated 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
GRC INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- -----------
Revenues $ 42,117 $ 35,307 $ 117,925 $ 92,177
Cost of revenues 35,539 29,547 99,399 76,186
Indirect costs and other costs 4,331 4,280 11,932 11,906
--------- --------- --------- ---------
Operating income 2,247 1,480 6,594 4,085
Interest expense, net (276) (425) (968) (1,452)
--------- --------- --------- ---------
Income from continuing operations
before income taxes 1,971 1,055 5,626 2,633
Income tax benefit (provision) (681) 2,493 1,794 4,078
--------- --------- --------- ---------
Income from continuing operations 1,290 3,548 7,420 6,711
Gain from discontinued operations
(net of tax) 26 --- 220 758
--------- --------- ---------- ---------
Net Income $ 1,316 $ 3,548 $ 7,640 $ 7,469
========= ========= ========== =========
Income per common and
potential common share:
Basic
Continuing operations $ 0.13 $ 0.36 $ 0.73 $ 0.69
Discontinued operations --- --- 0.02 0.08
--------- --------- ---------- ----------
Net income $ 0.13 $ 0.36 $ 0.75 $ 0.77
========= ========= ========== ==========
Number of shares used in EPS
calculation 10,238 9,803 10,225 9,737
========= ========= ========== ==========
Diluted
Continuing operations $ 0.12 $ 0.35 $ 0.71 $ 0.68
Discontinued operations --- --- 0.02 0.07
--------- --------- ---------- ----------
Net income $ 0.12 $ 0.35 $ 0.73 $ 0.75
========= ========= ========== ==========
Number of shares used in EPS
calculation 10,531 10,266 10,468 10,260
========= ========= ========== ==========
The accompanying notes are an integral part of these statements.
3
GRC INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, June 30,
1999 1998
--------------- -------------
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 2,890 $ 3,648
Accounts receivable, net 33,900 28,702
Unbilled reimbursable costs and fees, net 5,618 4,189
Other receivables 3,113 893
Prepaid expenses and other current assets 256 486
Deferred income taxes 1,239 1,239
-------- --------
Total current assets 47,016 39,157
-------- --------
PROPERTY AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization of $12,908 and $11,069 8,636 9,569
-------- --------
OTHER ASSETS:
Goodwill and other intangible assets, net 2,038 2,176
Deferred software costs, net --- 349
Deferred taxes 21,885 16,678
Deposits and other 1,544 3,334
-------- --------
Total other assets 25,467 22,537
-------- --------
TOTAL ASSETS $ 81,119 $ 71,263
======== ========
The accompanying notes are an integral part of these statements.
4
GRC INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, June 30,
1999 1998
---------- --------
(in thousands)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 11 $ 975
Accounts payable 4,501 3,897
Accrued compensation and benefits 13,015 13,268
Accrued expenses and other current liabilities 3,639 1,944
Net liabilities of discontinued operations 224 297
---------- ---------
Total current liabilities 21,390 20,381
---------- ---------
LONG-TERM LIABILITIES:
Long-term debt 21,264 23,264
Other long-term liabilities 145 258
---------- ---------
Total long-term liabilities 21,409 23,522
---------- ---------
COMMITMENTS AND CONTINGENCIES: --- ---
STOCKHOLDERS' EQUITY:
Commonstock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 10,538,187 shares
and 10,508,791 shares 1,054 1,051
Paid-in capital 83,029 79,712
Accumulated deficit (41,918) (49,558)
---------- ---------
42,165 31,205
Less: Treasury stock, at cost; 300,000 shares (3,845) (3,845)
--------- --------
Total stockholders' equity 38,320 27,360
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 81,119 $ 71,263
========== =========
The accompanying notes are an integral part of these statements.
5
GRC INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
March 31,
---------------------
1999 1998
---- ----
(in thousands)
CASH FLOWS FROM CONTINUING OPERATIONS:
Income from continuing operations $ 7,640 $ 6,711
Reconciliation of income from continuing operations:
Depreciation and amortization 2,107 2,384
Deferred income tax benefit (1,782) (4,112)
Changes in assets and liabilities:
Accounts receivable and unbilled
reimbursable costs and fees (6,627) (722)
Prepaid expenses and other current assets (90) (413)
Accounts payable, accruals and
other current liabilities 2,046 106
Other 126 (6)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,420 3,948
--------- --------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Gain from discontinued operations 220 758
Reconciliation of income from discontinued operations:
Non-cash charges and changes in working capital (293) (4,318)
Proceeds from sale of discontinued operations --- 400
---------- ---------
NET CASH USED IN DISCONTINUED OPERATIONS (73) (3,160)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (1,036) (1,017)
Other --- 17
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (1,036) (1,000)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital lease obligations (2,964) (4,984)
Bank borrowings --- 503
Issuance of common stock (105) (95)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (3,069) (4,576)
--------- ---------
NET DECREASE IN CASH & CASH EQUIVALENTS (758) (4,788)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,648 5,756
--------- ---------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 2,890 $ 968
========= =========
The accompanying notes are an integral part of these statements.
6
GRC INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
March 31,
-------------------------
1999 1998
------- -------
(in thousands)
Supplemental disclosures:
Cash paid for:
Interest $1,165 $1,578
Income taxes $ 41 $ 37
Other non-cash financing activities:
Conversion of debenture to common stock $ --- $1,375
The accompanying notes are an integral part of these statements.
7
GRC INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 1999
(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 historically engaged in transactions giving rise to
other comprehensive income, therefore management does not expect
adoption of SFAS 130 to have a material impact on its financial
statements. Management believes that adoption of SFAS 131 will have no
material impact on the Company's financial statements.
(3) Debt. The Company maintains 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 March 31, 1999 and June 30, 1998 consisted of the following:
March 31, 1999 June 30, 1998
-------------- -------------
Revolving Credit Agreement $ 16,514 $ 18,506
Term Loans 4,750 4,750
Equipment Financing --- 961
Other 11 22
-------- --------
Total Debt 21,275 24,239
Less: Current Portion (11) (975)
-------- --------
Long Term Debt $ 21,264 $ 23,264
======== ========
(4) Income Taxes. The Company entered fiscal 1999 with $64 million of tax
net operating loss carryforwards. Of these, $9 million expire in 1999,
$15 million expire between 2000 and 2010, $26 million expire in 2011,
and $14 million expire in 2012.
8
Statement of Financial Accounting Standards No. 109 ("SFAS 109")
requires the Company to recognize the value of these tax loss
carryforwards when it is more likely than not that they will be
realized by reducing the amount of income taxes payable in future
income tax returns. A significant portion of this tax benefit was
recognized in prior years, resulting in a net deferred tax asset of
$17.9 million at June 30, 1998.
In the first nine months of fiscal 1999, the Company recognized the
remaining benefit of the tax net operating loss carryforwards. The
recognition of this tax benefit resulted in the recording of a net tax
benefit in the income statement in the first six months of fiscal 1999
of $5.3 million. The remaining net operating loss benefit of $3.5
million was recognized in the quarter ending March 31, 1999. Of this
amount, $79 thousand was included in the tax provision in the third
quarter. The remainder was related to the portion of the tax net
operating loss carryforwards which resulted from the tax deductions
allowed the Company for the appreciation in non-qualified stock options
exercised in prior years. This portion of the tax benefit, $3.425
million, has been recorded as a direct credit to paid-in capital in
stockholder's equity.
The cumulative benefit of the tax net operating loss carryforwards is
now reflected in the Company's net deferred tax asset accounts, which
total $23.1 million at March 31, 1999. These benefits will allow the
company to offset most of its income tax liabilities over the next
several years.
With the final recognition of the tax net operating loss benefits, the
Company expects to report a normal tax provision going forward.
9
GRC INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1999 and 1998
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 largest 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 March 31, 1999, the Company's total contract backlog was $587 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
Summary
- -------
The revenues and operating income and interest expense of the Company are
presented for the periods indicated:
Three Months Ended Nine Months Ended
------------------------- -----------------------
3/31/99 3/31/98 3/31/99 3/31/98
------- ------- ------- -------
Revenues $ 42,117 $ 35,307 $ 117,925 $ 92,177
Operating income 2,247 1,480 6,594 4,085
Interest expense, net (276) (425) (968) (1,452)
-------- -------- --------- --------
Income from continuing operations
before income taxes 1,971 1,055 5,626 2,633
Income tax benefit (provision) (681) 2,493 1,794 4,078
Gain from discontinued
operations (net of tax) 26 --- 220 758
--------- --------- --------- ---------
Net income $ 1,316 $ 3,548 $ 7,640 $ 7,469
========= ========= ========= =========
Results of Operations - Three Months Ended March 31, 1999 and 1998
- ------------------------------------------------------------------
Revenues
- --------
Revenues for the third quarter of fiscal 1999 increased 19.3% to $42.1 million
from $35.3 million for the same quarter in fiscal 1998. The revenue increase of
$6.8 million during the third quarter of fiscal 1999 is primarily the result of
increased U.S. Government contract awards and additional subcontract revenue,
with 51% of the revenue growth being derived from the GCSS program.
Cost of Revenues
- ----------------
Cost of revenues for the third quarter of fiscal 1999 increased 20.3% to $35.5
million, or 84.4% of revenues, from $29.5 million, or 83.7% of revenues, for the
same quarter in fiscal 1998. The cost of revenue increase of $6.0 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 Operating Income
- --------------------------------------
Indirect expenses consist of selling, general and administrative, research and
development, and other costs. Indirect expenses for the third quarter of fiscal
1999 remained at $4.3 million, just 1.2% above the third quarter 1998. Indirect
expenses as a percentage of revenue were 10.3% for third quarter 1999, compared
to 12.1% for third quarter 1998. The flat level of indirect
11
expenses during this period of revenue growth reflects the Company's ability to
efficiently leverage its existing infrastructure to support increased business
volume.
Operating income for the third quarter of fiscal 1999 increased 51.8% to $2.2
million, or 5.3% of revenues, from $1.5 million, or 4.2% of revenues, for the
same quarter of fiscal 1998. The income increase of approximately $767 thousand
is the result of increased revenues and control over operating expenses.
Net Interest Expense
- --------------------
Net interest expense for the third quarter of fiscal 1999 decreased 35.1% to
$276 thousand, or 0.7% of revenues, from $425 thousand, or 1.2% of revenues, for
the third quarter of fiscal 1998. This decrease of $149 thousand reflects a
reduction in debt and lower interest rates.
Net Income Tax Provision
- ------------------------
The net tax provision recognized in the third quarter of fiscal 1999 was 34.6%
of pretax income. The tax rate reflects a $79 thousand benefit related to the
recognition of tax benefits for prior year tax net operating loss carryforwards.
See Note 4 to the Financial Statements.
Income from Continuing Operations
- ---------------------------------
Income from continuing operations for the third quarter of fiscal 1999 decreased
63.6% to $1.3 million, or 3.1% of revenues, from $3.5 million, or 10.0% of
revenues, for the third quarter of fiscal 1998. The $2.3 million decrease in
income from continuing operations is the result of the swing from a tax benefit
in fiscal 1998 to a tax provision in fiscal 1999, which more than offset the
large gain in pretax income.
Results of Operations - Nine Months Ended March 31, 1999 and 1998
- -----------------------------------------------------------------
Revenues
- --------
Revenues for the first three quarters of fiscal 1999 increased 27.9% to $117.9
million from $92.2 million for the same period in fiscal 1998. The revenue
increase of $25.7 during the first three quarters of fiscal 1999 is primarily
the result of additional U.S. Government contract awards and additional
subcontract revenues, with 54% of the revenue growth being derived from the GCSS
program.
Cost of Revenues
- ----------------
Cost of revenues for the first three quarters of fiscal 1999 increased 30.5% to
$99.4 million, or 84.3% of revenues, from $76.2 million, or 82.7% of revenues,
for the same period in fiscal 1998. The cost of revenue increase of $23.2
million is directly related to the increase in revenues during 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 Operating Income
- --------------------------------------
Indirect expenses consist of selling, general and administrative, research and
development, and other costs. Indirect expenses for the first three quarters of
fiscal 1999 was unchanged from
12
the $11.9 for the first three quarters of fiscal 1998. As a percent of revenues,
indirect expenses declined substantially to 10.1%, compared to 12.9% in the same
period last year. This was the result of controlling indirect expenses while
revenues rose significantly.
Operating income for the first three quarters of fiscal 1999 increased 61.4% to
$6.6 million, or 5.6% of revenues, from $4.1 million, or 4.4% of revenues, for
the same period of fiscal 1998. The increase in operating income of
approximately $2.5 million is the result of the increase in revenues, control
over operating expenses, $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 three quarters of fiscal 1999 decreased 33.3%
to $968 thousand, or 0.8% of revenues, from $1.5 million, or 1.6% of revenues,
for the same period of fiscal 1998. The decrease in net interest expense of
approximately $484 thousand reflects a reduction in debt and lower interest
rates.
Income Tax Benefit
- ------------------
The tax benefit recognized in the income statement in the first nine months of
fiscal 1999 was $1.8 million. This tax benefit was the result of the change in
the estimate of the ultimate recovery of the Company's net operating loss
carryforwards. See Note 4 to the Financial Statements. Since the benefits of the
net operating loss carryforwards have been fully recognized, the Company expects
to record a normal tax provision rate against pretax income going forward of
approximately 37% to 40%.
Income from Continuing Operations
- ---------------------------------
Income from continuing operations for the first three quarters of fiscal 1999
increased 10.6% to $7.4 million, or 6.3% of revenues, from $6.7 million, or 7.3%
of revenues, for the same period of fiscal 1998. The $709 thousand increase in
income from continuing operations is a result of the significant improvements in
revenues and operating margins, partially offset by the decline in tax benefits
between the periods.
Discontinued Operations
- -----------------------
Income from discontinued operations for the first three quarters of fiscal 1999,
net of tax, was $220 thousand, compared to income of $758 thousand during the
same period of fiscal 1998. The income from discontinued operations during the
first three quarters 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
Liquidity and Capital Resources
- -------------------------------
The Company had $2.9 million in cash and cash equivalents at March 31, 1999,
compared to $3.6 million at June 30, 1998.
Net cash provided by operations amounted to $3.4 million during the first three
quarters of fiscal 1999, compared to cash provided by operations of $3.9 million
for the first three quarters of fiscal 1998. The decreased operating cash flow
was the result of growth in working capital to support the Company's larger
revenue base, partially offset by higher net earnings. Net cash used in
discontinued operations amounted to $73 thousand during the first three quarters
of fiscal 1999, compared to $3.2 million used during the same period of fiscal
year 1998. Capital expenditures during the first three quarters of fiscal 1999
were unchanged from the same period of fiscal 1998 at $1.0 million. The cash
flow allowed the Company to pay down its debt by $3.1 million in the first three
quarters of fiscal 1999.
The Company believes that its cash flow from operations, combined with the
remaining borrowing capacity available under its line of credit and term loan
financing, 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.
* 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) 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
14
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.
Since 1998, the Company has been 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 was built in the 1980's on a
commercial database platform by Company employees. The Company has modified this
system to be Y2K compliant. 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.
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.
15
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.
During the most recent quarter, the Company completed its preliminary Y2K
contingency plan. The Company expects to modify this plan periodically prior to
January 1, 2000 as additional information is received. The Company believes
there are two significant areas of potential risk to its financial position as a
result of the Y2K issue. The first significant area of risk is the result of the
Company's dependence on the ability of the U.S. Government to meet its
obligation to pay all invoices in a timely manner. The Company has in place a
revolving credit line that will accommodate minor Y2K-related delays in payment
from the U.S. Government paying office. However, an extended delay in receiving
payment from the U.S. Government could result in a negative effect to GRCI's
financial position. The second significant area of risk is the delivery of
public utilities to its facilities. The Company has developed plans to
accommodate minor interruptions in these services, but will be unable to avoid
negative financial impact should such interruptions be extensive.
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.
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PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are inapplicable.
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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.
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17
SIGNATURES
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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
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James P. Allen
Senior Vice President, Chief Financial
Officer and Treasurer
May 17, 1999
18