UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) Annual Report Pursuant to Section 13 or 15(d)
[X] of the Securities Exchange Act of 1934
For Fiscal Year Ended June 30, 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)
Commission 1900 Gallows Road I.R.S. Employer
File No. Vienna, Virginia 22182 Identification No.
- ---------- ------------------
1-7517 (703) 506-5000 95-2131929
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -----------------------
Common Stock, $.10 par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of August 27, 1999, the aggregate market value of the Registrant's
voting common stock held by non-affiliates was $75,463,623. As of August 27,
1999, there were 10,308,626 shares of the Registrant's $.10 par value common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Corporation's 1999 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
report. The Proxy Statement shall be filed in accordance with the rules of the
Commission within 120 days after the close of the fiscal year to which this
report pertains.
TABLE OF CONTENTS
Page
----
PART I.
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38
PART III.
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and Management 38
Item 13. Certain Relationships and Related Transactions 39
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39
Signatures 40
2
In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements as defined in Section 21E of the Securities Exchange
Act of 1934. 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 "Forward Looking Statements" section of "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
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 Annual Report on Form 10-K and any Current
Reports on Form 8-K filed by the Company.
PART I
ITEM 1. BUSINESS
--------
General
GRC International, Inc. (the "Company") was organized in California in
1961. Since 1974, the Company has been a Delaware corporation. The Company is
headquartered in Vienna, Virginia.
Acquisition of Management Consulting and Research, Inc.
-------------------------------------------------------
The Company has a strategy to grow its business through selective
acquisitions of businesses to complement its internal growth. Generally, the
Company expects to acquire businesses which are closely aligned with its current
base of business in professional services. In pursuit of the strategy the
Company, on September 2, 1999, acquired all of the outstanding stock of
Management Consulting and Research, Inc. (MCR). MCR is a company that generates
approximately $30 million in annual revenues in professional services to the
U.S. Government. MCR provides budget analysis, cost estimating and program
management services primarily to the U.S. Government, with its largest customer
being the U.S. Air Force. MCR has been in business for 22 years and currently
employs 270 people. MCR will be operated as a wholly owned subsidiary of the
Company from the date of acquisition.
Discontinued Operations
-----------------------
On February 28, 1997, the Company committed itself to a formal plan of
disposition for two of its business segments, its Telecommunications and
Advanced Products Divisions. By January 1998, the Company had sold the
businesses comprising those Divisions.
3
Description of the Business
---------------------------
The Company provides a broad range of professional services to the
U.S. Government (96% of revenues) and information technology services to
commercial clients (4% of revenues). The Company's U.S. Government business is
primarily with the Department of Defense ("DoD") and its instrumentalities.
Approximately 17% of the business is performed under classified contracts which
require special security clearances of employees.
Almost all of the Company's revenues have been generated from the
Company's professional services business. The Company's capabilities focus on
information technology consulting services provided primarily to the U.S.
Government, but has recently expanded those service offerings to commercial
clients. Commercial sales now represent about 4% of total Company revenues. For
further financial information regarding these business segments see Note 12 to
the consolidated Financial Statements.
The areas of expertise encompassed by these services include: software
and system engineering; business decision support systems; analytical modeling
and simulation; database design and implementation; legacy migration
engineering; network design and integration; systems integration; post
deployment software support; operational support and management; virtual
manufacturing consulting; communications engineering; and test and evaluation;
among others.
These services are applied to such areas as: financial and personnel
management; automated acquisition systems; transportation planning and analysis;
manufacturing analysis; logistics planning; security clearance processing;
WAN/LAN analysis; training systems; as well as information warfare systems
relying on radar, optics, communication networks, electronics, navigation and
guidance, control, space, and surveillance systems.
As a professional service provider, the Company's revenues are
critically dependent upon the number and skill level of its employees. The
Company's ability to meet planned and expected revenue levels is a function,
among other things, of its ability to staff open positions with the personnel
required to satisfy its contractual backlog.
In 1997, the Company won a systems integration contract to modernize
the U.S. Army's retail logistics system. The contract is currently in the
development phase, which is expected to last approximately three more years at
which time additional operations and maintenance support efforts may be
available to the Company. This project is the largest source of revenue to the
Company generating revenues of $27.4 million in 1999, or 16% of total revenues.
No other individual project represents more that 10% of the Company's revenues.
For its commercial customers the Company performs information
technology consulting services of a similar nature to those services supplied to
its U.S. Government clients in software and website development, systems
integration and independent system testing. Most of the commercial business is
conducted under contracts with fixed hourly
4
billing rates. The skill requirements for the business are similar to those used
in the Government business, except that in the commercial business the Company
relies more heavily on temporary contract labor. Clients of this business
include the National Association of Securities Dealers, the George Washington
University and Lucent Technologies.
Contracts
---------
Government contract revenues from professional and technical services,
either as prime contractor or subcontractor, represented approximately 96%, 98%,
and 95% of the Company's total revenues for fiscal years ended June 30, 1999,
1998, and 1997, respectively. The Company's government contracts generally fall
into one of three categories: (1) cost reimbursable, (2) fixed price, or (3)
time and materials. Under a cost reimbursable contract, the government
reimburses the Company for its allowable costs and expenses, and pays a fee
which is either fixed in amount or awarded based on performance. Under a fixed
price contract, the government pays an agreed upon price for the Company's
services or products, and the Company bears the risk that increased or
unexpected costs may reduce its profits or cause it to incur a loss. Conversely,
to the extent the Company incurs actual costs below anticipated costs on these
contracts, the Company could realize greater profits. Under a time and materials
contract, the government pays the Company a fixed hourly rate intended to cover
salary costs and related indirect expenses plus a certain profit margin. The
Company has also received significant orders that are of the fixed price level
of effort type. This contract type most closely resembles the time and materials
contract in that it often calls for delivery of specified hours of various labor
categories, rather than project completion which is typical of fixed price
contracts. For fiscal years 1999, 1998, and 1997, approximately 34%, 49%, and
60%, respectively, of the Company's professional and technical services revenues
were from cost reimbursable contracts, while approximately 66%, 51%, and 40%,
respectively, were fixed price or time and materials type contracts, with fixed
price delivery contracts constituting approximately 5% of the total in each
year.
The Company's contracts are performed for a number of program offices
within various defense agencies, including each of the armed services. Customers
outside the field of defense and national security include other agencies of the
federal government and private industry. Any or all of the contracts with
agencies of the United States government may be subject to termination for the
convenience of the government. If a contract were to be terminated, the Company
would be reimbursed for its allowable costs up to the date of the termination,
and would be paid a proportionate amount of the fees attributable to the work
actually performed. In addition to the normal risks found in any business,
companies conducting research and analysis services for the United States
government are subject to changes in the defense budget, terminations of
contracts for cause or government convenience, and significant changes in
contract scheduling and funding.
Contracts are often awarded for periods of more than one year, with
five years being a common period of performance for a contract. Usually work on
the contracts is funded for periods of one year or less.
5
At June 30, 1999, the Company had a total contract backlog amounting to
$569 million, compared to $450 million at June 30, 1998. For this purpose, total
contract backlog reflects an estimate of the amount of revenues that the Company
expects to generate on each contract. This estimate generally assumes that all
government contract options for services in succeeding years will be exercised
and funded. The estimate of future revenues included in total backlog is
inherently subject to significant risk of error due to a number of factors
including the continuation and funding of current programs, changes in the
clients needs and the Company's ability to fill those needs. Funded contract
backlog at June 30, 1999, amounted to $68 million, compared to $58 million at
June 30, 1998. Funded contract backlog represents the portion of total contract
backlog for which contract awards have been made and funded. Most of the funded
contract backlog is deliverable within the next year as well as a portion of the
unfunded backlog included in total contract backlog.
Marketing and Competition
-------------------------
Competition for professional services business with the U.S. Government
is fierce. Companies compete on the basis of technical skills, management, past
performance and price. Prior experience with a client and functional knowledge
of his work requirements are critical factors in many awards. Many of the
Company's services develop into long-term relationships with clients that can
span a period of ten years or more. In the Company's classified business areas,
these client relationships, and the security clearances which are required to
perform the work, are particularly important in the competition for follow-on
business.
The Company markets it professional services along several fronts. The
Company is able to secure a substantial portion of its revenues through
follow-on task orders from existing clients, based primarily on the quality of
current work performed, with little or no direct competition after the initial
contract is awarded. This requires a continual focus on high quality service to
clients and attention by the Company's line management to secure follow-on
tasks. In addition, the Company maintains a central business development
activity to identify, track and bid on larger competitive contracts that
represent the primary source of growth to the Company. There is significant
competition for these contracts, with emphasis on the quality of the proposed
technical solution, past performance and price. The effort to prepare for and
bid these programs often spans a year or more, and may cost hundreds of
thousands of dollars to pursue an individual opportunity.
In recent years the U.S. Government has used a number of different
types of contract vehicles to procure professional services. Specifically,
government-wide contract vehicles have been awarded which allow contractors to
sell services to a wide range of customers. The use of these contract vehicles
has introduced a requirement to market at two levels; first to compete for and
win the contract and second to bid and win task orders under the contract. The
effect of the use of these contract vehicles has been to open up more new
customers to the Company, but at the expense of increased marketing costs. The
contract vehicle used most by the Company is the Federal Supply Services
contract
6
(the GSA Schedule) which is used to perform work with a number of clients. The
previously discussed GCSS Army project is performed under a Basic Purchasing
Agreement (BPA) on the GSA Schedule. Total revenues generated from task orders
under this contract vehicle in 1999 were $62.8 million.
It is a challenge to the Company to continually modify its marketing
approach to meet the changing procurement environment in its U.S. Government
marketplace.
The Company encounters substantial competition in the professional and
technical service area from a large number of entities, some of which are
significantly larger than the Company in size and financial resources. The
management of the Company believes that it has a relatively small percentage of
the total market. Competition comes principally from other companies and certain
non-profit organizations engaged in similar aspects of research and analysis.
The field of competitors is a complex one in which any company may be viewed as
a competitor, customer or teammate on any one opportunity. Some of the larger
competitors are Lockheed Martin, Litton Industries, TRW, Computer Sciences,
SAIC, Nichols Research and CACI. There are also many smaller competitors in the
market place, most of them privately-owned.
Seasonality of the Business
---------------------------
The Company's business does not have strong seasonal trends, though
revenues are generally lower during the first six months of the fiscal year
(July 1-December 31) due to the concentration of holidays and vacation time
which reduce the available direct contract labor of the Company's workforce.
Revenues can also change significantly period-to-period as a result of the
start-up or wind-down of significant contracts.
Research and Development
------------------------
The Company's business is not heavily dependent on expenditures for
research and development. Company-sponsored research and development costs were
$220,000, $308,000 and $476,000 in 1999, 1998 and 1997, respectively.
Patents, Trademarks, Licenses, Copyrights
-----------------------------------------
The Company has a number of patents, trademarks and trademark
applications, none of which is material to the operations of the Company.
Employees
---------
As of June 30, 1999, the Company employed 1,109 people. Effective with
the acquisition of MCR on September 2, 1999 the Company added approximately 270
more employees. None of the Company's employees are under collective bargaining
agreements.
7
ITEM 2. PROPERTIES
----------
All of the Company's operations are conducted in leased facilities. The
Company has approximately 32 offices in leased facilities within the United
States comprising approximately 319 thousand square feet. The minimum annual
rentals under non-cancelable operating leases are approximately $6.8 million.
The terms of Company leases range from monthly tenancies to multi-year leases,
and many of these leases may be renewed for additional periods at the option of
the Company. Major leased facilities are at locations in Virginia and
California. The Company believes that its facilities are adequate for its
purposes. The company currently owns no real property, but has the option to buy
a 3-acre parcel in California at a nominal price.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is involved in a number of legal proceedings arising in the
normal course of its business, none of which, individually or in aggregate, are,
in the opinion of management, material to the operations of the Company or are
likely to have a material adverse impact on the Company's liquidity or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter was submitted to a vote of holders of the Company's
stock in the fourth quarter of fiscal year 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
----------------------------------------------------------------
MATTERS
-------
Stock Prices and Dividends
--------------------------
The Company's common stock is traded on the New York and Pacific Stock
Exchanges. As of September 3, 1999, there were 1,250 holders of record of the
Company's common stock. Stock price information by quarter is presented in the
following table:
Fiscal Year
Market ---------------------------------------------
Price 1999 1998
-------- ------------------- -----------------
High Low High Low
---- --- ---- ---
1st Quarter 11.38 4.63 8.13 4.94
2nd Quarter 7.50 3.88 8.38 5.13
3rd Quarter 8.19 5.94 7.00 5.56
4th Quarter 8.50 6.50 11.25 4.94
On September 3, 1999, the closing price of the Company's common stock
was $9.31.
8
The Company did not declare or pay any dividend with respect to its
common stock during any of the years included in the financial data, and the
Board of Directors does not presently intend to commence the payment of such
dividends. See Note 8 to the Consolidated Financial Statements for a discussion
of the Company's Shareholder Rights Plan under which a dividend of one common
stock purchase right is automatically issued for each share of the Company's
common stock.
Recent Sales of Unregistered Securities
- ---------------------------------------
During May and June 1997, the Company issued a total of 5,008 shares of
common stock to The Parsons Consulting Group, Inc. ("TPCG") in fulfillment of a
contractual obligation to compensate TPCG for services rendered to the Company.
The offering was exempt from registration under Section 4(2) of the Securities
Act as a transaction by an issuer not involving any public offering.
On September 2, 1999, the Company completed its acquisition of
Management Consulting & Research, Inc. ("MCR"). As part of the purchase price
the Company issued 2,000,000 shares of common stock to Dr. Gerald R. McNichols,
principal shareholder of MCR. The offering was exempt from registration under
Section 4(2) of the Securities Act as a transaction by an issuer not involving
any public offering.
From July 1, 1999 through September 24, 1999, the Company contributed
9,339 shares of Common Stock to participants in its 401(k) profit sharing plan.
The offering was not subject to registration under the Securities Act because it
did not involve an offer or sale of a security.
9
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
FOR THE YEAR ENDED JUNE 30, .................................. 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands, except for per share data)
Revenue ...................................................... $ 164,602 $ 130,927 $ 117,599 $ 117,016 $ 132,812
Operating income (loss) ...................................... 9,258 5,402 4,622 (182) 6,800
Interest income (expense), net ............................... (1,215) (1,866) (1,343) (518) 270
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before taxes ........ 8,043 3,536 3,279 (700) 7,070
Income tax benefit ........................................... --------- --------- --------- --------- ---------
Income (loss) from continuing operations ..................... 8,906 10,702 13,861 (700) 7,070
Gain (loss) from discontinued operations ..................... 225 758 (31,611) (16,937) (2,040)
$ 9,131 $ 11,460 $ (17,750) $ (17,637) $ 5,030
========= ========= ========= ========= =========
Basic income (loss) per share from continuing operations ..... $ 0.87 $ 1.09 $ 1.48 $ (0.08) $ 0.79
Basic income (loss) per common share ......................... $ 0.89 $ 1.17 $ (1.91) $ (1.92) $ 0.56
Weighted average number of common shares ..................... 10,230 9,838 9,338 9,172 9,001
Diluted income (loss) per share from continuing operations ... $ 0.85 $ 1.07 $ 1.45 $ (0.08) $ 0.75
Diluted income (loss) per common share ....................... $ 0.87 $ 1.14 $ (1.76) $ (1.92) $ 0.53
Weighted average number of common shares and equivalents ..... 10,498 10,254 9,843 9,172 9,393
Working capital (excluding discontinued operations) .......... $ 25,267 $ 19,073 $ 20,459 $ 14,857 $ 19,688
Net assets (liabilities) of discontinued operations .......... $ (185) $ (297) $ (4,591) $ 14,742 $ 9,975
Total assets ................................................. $ 76,081 $ 71,263 $ 65,964 $ 67,070 $ 71,107
Long-term debt (less current maturities) ..................... $ 12,623 $ 23,264 $ 28,153 $ 16,527 $ --
Stockholders' equity ......................................... $ 40,059 $ 27,360 $ 13,076 $ 28,675 $ 48,268
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
---------------------------------------------------------------
AND FINANCIAL CONDITION
-----------------------
Summary
-------
The following analysis and discussion are intended to provide
additional information and provide the reader a better understanding of the
information presented in the Company's Financial Statements and Notes, and
should be read in conjunction with them. All years refer to the Company's fiscal
year, which ends on June 30.
Revenues
--------
Revenues in 1999 of $164.6 million were $33.7 million, or 26%, above
1998 revenues of $130.9 million. 1998 revenues were $12.9 million, or 11%, above
revenues in 1997 of $117.6 million. The largest contributor to revenue growth
over the three-year period was the GCSS Army contract, a systems integration
project to modernize the Army's retail logistics systems. This project generated
revenues of $27.4 million, $10.7 million and $1.3 million in 1999, 1998 and 1997
respectively. The Company's commercial information technology service business,
started in 1998, grew to $7.3 million in 1999 compared to $2.2 million in 1998.
Revenues in 1999 also grew as a result of increased demand for the Company's
information technology and engineering services from the U.S.
Government.
The following table sets forth for the periods indicated the percentage
that certain items of income and expense bear to revenues.
1999 1998 1997
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of revenues 84.3% 84.4% 81.8%
Indirect and other costs 10.1% 11.5% 14.3%
----- ----- -----
Operating income 5.6% 4.1% 3.9%
Interest expense, net 0.7% 1.4% 1.1%
---- ---- ----
Income from continuing operations
before income tax benefits 4.9% 2.7% 2.8%
Income tax benefit 0.5% 5.5% 9.0%
---- ---- ----
Income from continuing operations 5.4% 8.2% 11.8%
==== ==== =====
11
Cost of Revenues
----------------
The cost of revenues, which includes direct labor and related fringe
benefits, the management cost of operations, and other direct contract costs
such as subcontract costs, travel and equipment purchases, generally followed
the growth in demand for the Company's services over the past three years. Cost
of revenues as a percent of revenues rose significantly in 1999 and 1998
compared to 1997 due to the increase in the use of subcontractors to perform on
contracts.
Indirect and Other Costs
------------------------
Indirect and other costs consist of selling, general and
administrative, research and development and other costs. These expenses fell by
11% from $16.9 million in 1997 to $15.0 million in 1998 as a result of
management efforts to reduce administrative expenses after the Company exited
some commercial products businesses and focused on its core government
professional services business. From 1998 to 1999 these expenses grew by 10% to
$16.6 million, but the rate of growth in costs was kept well below the 26%
growth rate in revenues as the Company continued to improve operating
efficiencies by controlling administrative costs. The increase in cost in 1999
was primarily from staff salary increases and a non-recurring expense of
$300,000 to terminate the Company's Structured Equity Financing Line and
$130,000 related to the termination of the board of directors retirement plan.
These efforts to reduce administrative expenses have resulted in a significant
decline in indirect and other costs as a percent of revenues over this period
from 14.3% in 1997 to 10.1% in 1999.
Operating Income
----------------
Operating income has grown over the past three years at a faster pace
than revenues. The operating margins have increased from 3.9% in 1997 to 4.1% in
1998 to 5.6% in 1999. The most important source of improvement in operating
margins has been the reduction in indirect and other costs discussed above. The
cost reductions increasingly have had the effect of improving the Company's
margins as the proportion of the Company's business under cost reimbursable
contracts has fallen, from 60% in 1997 to 49% in 1998 to 34% in 1999. The cost
controls and improved project management have had the effect of significantly
improving margins in a contracting environment which now is dominated by fixed
labor rate pricing (fixed price and time and materials type contracts). The
declining proportion of cost reimbursable contracts has allowed the Company to
retain more of the benefits of its performance improvement efforts. The
commercial IT services business, while still only 4% of revenues, has also
helped to boost operating margins with operating income contributions of $1.6
million in 1999 compared to $.2 million in 1998. Included in operating income of
the commercial IT services business in 1999 is $380,000 of royalty income.
Net Interest Expense
--------------------
Interest expense is incurred primarily on the Company's bank
borrowings, which have recently been at the prime bank interest rate. Net
interest expense fell to $1.2 million in 1999 from $1.9 million in 1998 as a
result of a reduction in borrowings stemming from positive operating cash flows
in 1999. The increase in 1998 interest from the $1.3 million
12
level in 1997 reflects the increase in debt incurred in late 1997 in order to
fund what are now discontinued operations. In each of the three years the
interest expense was offset by approximately $.2 million of interest income on a
note receivable which was collected at the end of 1999.
Income Tax Benefit
------------------
As a result of losses incurred in discontinued operations, the Company
has substantial tax net operating loss carryforrwards. Starting in 1997, the
Company began recognizing the value of these tax loss carryforwards when it
became more likely than not that they would be realized by offsetting taxable
income in future years. By the end of 1999 the Company had fully recognized the
value of these loss carryforwards resulting in a net income tax benefit in the
income statement of $.9 million, $7.2 million and $10.6 million in 1999, 1998
and 1997, respectively. With the full recognition of the tax loss carryforwards,
the Company has begun reporting a more normal tax provision against income of
approximately 38.5%, starting in the third quarter of 1999. The benefit of the
tax loss carryforwards has been reflected in the $22.3 million deferred tax
asset on the balance sheet at the end of 1999.
Income (Loss) From Discontinued Operations
------------------------------------------
The loss from discontinued operations of $31.6 million in 1997 reflects
the results of the Company's plan in February 1997 to dispose of two of its
business units, its Telecommunications and Advanced Products Divisions. The 1997
loss included a substantial write down of capitalized software. The 1998 gain on
discontinued operations of $.8 million reflects the sale of NetworkVUE, the last
remaining business, and adjustments of estimated remaining liabilities related
to such business. The $.2 million gain in 1999 resulted from residual royalties
received on products of the discontinued businesses.
Effects of Inflation
--------------------
Approximately 34% of the Company's business is conducted under cost
reimbursable contracts with the U.S. Government which automatically adjust to
cover increased costs as a result of inflation. Most of the remainder of the
Company's business is on fixed labor hour and fixed price contracts that are
priced with labor rates that reflect an estimate of the effects of inflation.
Inflation has not been a significant factor in the result of operations of the
Company.
Liquidity and Capital Resources
-------------------------------
In 1999 the Company generated $8.2 million of cash flow from
operations, up from $5.6 million in 1998 and $5.7 million in 1997. The increase
came from improved operating income and the continuing deferral of tax liability
due to the existence of tax operating loss carryforwards. Discontinued
operations used only a small amount of cash in 1999 as the disposal of
discontinued businesses is substantially complete. Acquisitions of property and
equipment were $2.2 million in 1999, close to the three-year average of $2.5
million. Acquisitions were primarily for computer and network equipment to
modernize and support
13
the Company's growth. 1999 cash flow was also augmented by the collection of a
$2 million note receivable. The cash flows resulted in a reduction in
outstanding debt of $11.6 million. Outstanding debt at the end of 1999 was $12.6
million.
On August 27, 1999, subsequent to the fiscal year end, the Company
replaced its revolving credit and term loan with a new, 2-year revolving line of
credit with a total borrowing capacity of $35 million. The line of credit can be
used for working capital, acquisitions and for any surge in working capital
requirements from a slow down in customer payments which might arise as a result
of Year 2000 computer problems.
The Company believes that its cash flow from operations, particularly
with the availability of tax operating loss carryforwards to offset future tax
liabilities, and its line of credit are sufficient to meet its financing needs.
Acquisition of Management Consulting and Research, Inc.
-------------------------------------------------------
Effective September 2, 1999, the Company acquired all of the
outstanding stock of Management Consulting and Research, Inc. (MCR). The net
purchase price of approximately $23 million was paid with 2 million shares of
GRCI's common stock valued at approximately $16 million and the remainder of
approximately $7 million in net cash, financed through the new credit agreement.
MCR provides professional services to the U.S. Government primarily in the areas
of budget analysis, cost estimating and program management. MCR's revenues are
approximately $30 million per year. The acquisition will be accounted for using
the purchase method of accounting and will be consolidated with GRC from the
date of acquisition.
Forward Looking Statements
--------------------------
This filing may contain "forward-looking" statements which are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Factors which
could cause a material difference in results include, but are not limited to,
the following: significant changes in economic conditions or in national
priorities which result in changes in demands by the U.S. Government for the
Company's services; changes in government laws and regulations; changes in the
procurement practices of the U.S. Government which could negatively effect the
Company's ability to compete, or its profitability; the risk of termination of
any individual contract or the inability of the Company to capture the value in
its backlog because of failure of a customer to continue funding of a project;
the ability of the Company to fully staff to meet its contract requirements at
salary levels sufficient to maintain profitability; the uncertainties discussed
more fully in the section entitled "Year 2000 Issue"; and the ability of the
Company to generate sufficient taxable income in the future to fully capture the
benefit of its tax net operating loss carryforwards that are reflected in the
Company's deferred tax assets.
14
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 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 most of its business-critical
computer systems which were not Y2K-compliant have been replaced, upgraded or
modified.
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 has also completed certain 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.
15
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
assessment is almost complete with no indication of material liability or
exposure.
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
reimbursable 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.
Government to achieve Y2K compliance by the year 2000 could have a significant
adverse effect on GRCI's business, financial position, results of operations and
cash flows.
The Company has completed its 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 which currently
has approximately $15 million of additional borrowing capacity that is available
to cover the effect on working capital requirements of delays that may occur in
the processing of payments by U.S. Government paying offices. The Company
believes the borrowing capacity to be sufficient, but the interest cost related
to such payment delays would adversely effect the Company's earnings. 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.
16
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of June 30, 1999,
in particular, debt obligations. GRCI does not trade in these instruments or use
derivatives. The table represents principal cash flows and related weighted
average interest rates by expected maturity dates.
Financial Instruments by Expected Maturity Date
(in thousands)
There- Fair
2000 2001 2002 2003 2004 after Total Value
------------------------------------------------------------------------------------
Liabilities
Long-term debt:
Variable rate --- $12,623 --- --- --- --- $12,623 $12,623
Average interest
Rate 7.0% 7.0% --- --- --- ---
ITEM 8. FINANCIAL STATEMENTS
--------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
Independent Auditors' Report 18
Consolidated Statements of Operations for the years ended
June 30, 1999, 1998 and 1997 19
Consolidated Balance Sheets as of June 30, 1999 and 1998 20-21
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997 22-23
Consolidated Statements of Stockholders' Equity
for the years ended June 30, 1999, 1998 and 1997 24
Notes to Consolidated Financial Statements 25
17
INDEPENDENT AUDITORS' REPORT
To the Stockholders of GRC International, Inc.:
Vienna, Virginia
We have audited the accompanying consolidated balance sheets of GRC
International, Inc. and subsidiaries as of June 30, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1999. Our audits
also included the financial statement schedule listed in the Index at Item 14.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of GRC International, Inc. and
subsidiaries as of June 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
McLean, Virginia
August 11, 1999, except for Note 9 as to which the date is September 2, 1999.
18
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
1999 1998 1997
--------- --------- ---------
(in thousands, except for per share data)
............................................................................
Revenues .......................................................................$ 164,602 $ 130,927 $ 117,599
Cost of services ............................................................... 138,770 110,477 96,123
Indirect and other costs ....................................................... 16,574 15,048 16,854
--------- --------- ---------
Operating income ............................................................... 9,258 5,402 4,622
Interest expense, net .......................................................... (1,215) (1,866) (1,343)
--------- --------- ---------
Income from continuing operations
before income tax benefit .................................................... 8,043 3,536 3,279
Income tax benefit ............................................................. 863 7,166 10,582
--------- --------- ---------
Income from continuing operations .............................................. 8,906 10,702 13,861
--------- --------- ---------
Discontinued Operations:
Income (loss) from discontinued operations, .................................... 225 758 (25,220)
net of tax of $141 in 1999 and $471 in 1998
Loss on disposal of discontinued operations,
including provision of $2,775 for
operating losses during phase out ............................................ -- -- (6,391)
--------- --------- ---------
Income (loss) from discontinued operations ..................................... 225 758 (31,611)
--------- --------- ---------
Net income (loss) ..............................................................$ 9,131 $ 11,460 $ (17,750)
========= ========= =========
Earnings Per Share Amounts:
Basic income per share from
continuing operations ........................................................$ 0.87 $ 1.09 $ 1.48
Basic income (loss) per common share ...........................................$ 0.89 $ 1.17 $ (1.91)
Weighted average common shares ................................................. 10,230 9,838 9,338
Diluted income per share from
continuing operations ........................................................$ 0.85 $ 1.07 $ 1.45
Diluted income (loss) per common share .........................................$ 0.87 $ 1.14 $ (1.76)
Weighted average common shares and
equivalents .................................................................. 10,498 10,254 9,943
The accompanying notes are an integral part of these statements.
19
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
ASSETS
1999 1998
-------- --------
(in thousands)
................................................................................................
CURRENT ASSETS:
Cash and cash equivalents .......................................................................... $ 88 $ 3,648
Accounts receivable, net ........................................................................... 36,438 28,702
Unbilled reimbursable costs and fees ............................................................... 2,924 4,189
Other receivables .................................................................................. 1,339 893
Prepaid expenses and other current assets .......................................................... 522 486
Deferred income taxes .............................................................................. 6,871 1,239
-------- --------
Total current assets ...................................................................... 48,182 39,157
-------- --------
PROPERTY AND EQUIPMENT:
Land, buildings and leasehold improvements ......................................................... 5,298 5,121
Equipment, furniture and fixtures .................................................................. 17,294 15,517
Less accumulated depreciation and amortization ................................................... (13,497) (11,069)
-------- --------
Property and equipment, net ............................................................... 9,095 9,569
-------- --------
OTHER ASSETS:
Goodwill and other intangible assets, net .......................................................... 1,989 2,176
Deferred income taxes .............................................................................. 15,428 16,678
Deposits and other ................................................................................. 1,387 3,683
-------- --------
Total other assets ........................................................................ 18,804 22,537
-------- --------
TOTAL ASSETS ....................................................................................... $ 76,081 $ 71,263
======== ========
The accompanying notes are an integral part of these statements.
20
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
-------- --------
(in thousands, except share
and per share data)
........................................................................................................
CURRENT LIABILITIES:
Current maturities of long-term debt ....................................................................... $ 9 $ 975
Accounts payable ........................................................................................... 5,567 3,897
Accrued compensation and benefits .......................................................................... 14,461 13,268
Accrued expenses and other current liabilities ............................................................. 3,063 2,241
-------- --------
Total current liabilities ......................................................................... 23,100 20,381
-------- --------
LONG-TERM LIABILITIES:
Long-term debt ............................................................................................. 12,623 23,264
Other long-term liabilities ................................................................................ 299 258
-------- --------
Total long-term liabilities ....................................................................... 12,922 23,522
-------- --------
COMMITMENTS AND CONTINGENCIES .............................................................................. -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value -
300,000 shares authorized, none outstanding .............................................................. -- --
Common stock, $.10 par value -
Authorized - 30,000,000 shares,
issued - 10,549,003 shares in 1999
and 10,508,791 shares in 1998 ............................................................................ 1,055 1,051
Paid-in capital .......................................................................................... 83,277 79,712
Accumulated deficit ...................................................................................... (40,428) (49,558)
-------- --------
43,904 31,205
Less: Treasury stock, at cost; 300,000 shares .......................................................... (3,845) (3,845)
-------- --------
Total stockholders' equity ........................................................................ 40,059 27,360
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................................................. $ 76,081 $ 71,263
======== ========
The accompanying notes are an integral part of these statements.
21
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
1999 1998 1997
------- ------- -------
.........................................................................
(in thousands)
CASH FLOWS FROM CONTINUING OPERATIONS:
Income from continuing operations ...........................................$ 9,130 $ 10,702 $ 13,861
Reconciliation of income from continuing operations
Depreciation and amortization .......................................... 2,888 3,177 3,330
Deferred income tax benefit ............................................ (957) (6,806) (10,582)
Changes in assets and liabilities
Accounts receivable and unbilled
costs and fees ................................................... (6,471) (3,728) 947
Prepaid expenses and other current assets .......................... (598) 287 (37)
Accounts payable ................................................... 1,670 1,287 (2,197)
Accrued expenses and other current liabilities ..................... 2,127 689 227
Other .............................................................. 437 (44) 103
-------- -------- --------
Net cash provided by operating activities ................................... 8,226 5,564 5,652
-------- -------- --------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations .................................. 225 758 (31,611)
Reconciliation of income from discontinued operations
Non-cash charges and changes in net assets/liabilities ................. (337) (4,223) 9,429
Proceeds from sale of discontinued operations .......................... -- 400 3,366
Provision for loss on disposal of discontinued operations .............. -- -- 6,391
-------- -------- --------
Net cash used in discontinued operations .................................... (112) (3,065) (12,425)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment ................................. (2,227) (1,733) (3,468)
Collection of note receivable .......................................... 2,016 -- --
Other .................................................................. -- (32) (344)
-------- -------- --------
Net cash used in investing activities ....................................... (211) (1,765) (3,812)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital lease obligations ............... (11,607) (5,552) (4,443)
Bank borrowings ........................................................ -- 2,710 13,881
Proceeds from convertible debenture, warrants and other ................ -- -- 4,000
Deferred financing costs ............................................... -- -- (207)
Issuance of common stock ............................................... 144 -- 320
-------- -------- --------
Net cash (used in) provided by financing activities ......................... (11,463) (2,842) 13,551
-------- -------- --------
Net (decrease) increase in cash and equivalents ............................. (3,560) (2,108) 2,966
Cash and equivalents at beginning of year ................................... 3,648 5,756 2,790
-------- -------- --------
Cash and equivalents at end of year .........................................$ 88 $ 3,648 $ 5,756
======== ======== ========
The accompanying notes are an integral part of these statements.
22
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
1999 1998 1997
---- ---- ----
(in thousands)
Supplemental disclosures:
Cash paid for:
Interest $1,475 $2,239 $2,055
Taxes 201 28 80
Other non-cash financing activities:
Conversion of debentures to common stock --- 2,814 750
The accompanying notes are an integral part of these statements.
23
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Paid-in Accumulated Treasury
Shares Amount Capital Deficit Stock
------ ------ ------- ----------- --------
(in thousands)
Balances as of July 1, 1996 ...........................................9,586 $ 958 $ 74,830 $(43,268) $ (3,845)
Stock issued under employee and director plans .................. 77 8 310 -- --
Conversion of debenture to common stock ......................... 184 18 732 -- --
Proceeds from sale of warrants and other ......................... -- -- 882 -- --
Stock issued for consulting services .............................. 5 1 200 -- --
Net loss* ......................................................... -- -- -- (17,750) --
------ ------- ------- ------- -------
Balances as of June 30, 1997 ...........................................
Stock issued under employee and director plans .................... 35 3 7 -- --
Conversion of debenture to common stock ........................... 621 63 2,751 -- --
Net income* ....................................................... -- -- -- 11,460 --
------- ------- ------- ------- -------
Balances as of June 30, 1998 .........................................10,511 1,051 79,712 (49,558) (3,845)
Stock issued under employee and director plans .................. 41 4 140 -- --
Tax effect of prior year option exercises (see note 4) ........... -- -- 3,425 -- --
Net income* ..................................................... -- -- -- 9,130 --
------- ------- ------- ------- -------
Balances as of June 30, 1999 .........................................10,549 $1,055 $ 83,277 $(40,428) $ (3,845)
======= ======= ======= ======== ========
* The Company had no items of other comprehensive income (loss).
The accompanying notes are an integral part of these statements.
24
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
(1) ACCOUNTING POLICIES
Principles of consolidation - The consolidated financial statements
include the accounts of GRC International, Inc. and all subsidiaries (the
Company). All significant intercompany balances and transactions have been
eliminated.
Cash and cash equivalents - Cash and cash equivalents include cash on
hand, cash in banks and temporary investments purchased with an original
maturity of three months or less.
Property and equipment - Expenditures for betterments and major
renewals are capitalized, and ordinary maintenance and repairs are charged to
operations as incurred.
Depreciation is computed using the straight-line method based on the
estimated useful lives of assets, which range from 3 to 10 years. Amortization
of leasehold improvements is computed using the straight-line method based on
the remaining term of the related lease.
Intangible assets - Goodwill, representing the cost in excess of the
fair value of the net assets of businesses acquired, is being amortized to
operations on a straight-line basis over periods of up to 40 years. Other
intangible assets are being amortized to operations on a straight-line basis
over periods of up to 7 years. The Company periodically evaluates the goodwill
and other intangible assets in relation to the operating performance and future
contribution to the underlying businesses and makes adjustments, if necessary,
for any impairment of these assets. As of June 30, 1999 and 1998, accumulated
amortization of goodwill was $1,388,000 and $1,312,000, respectively, and of
other intangible assets was $1,475,000 and $1,392,000, respectively.
Revenue recognition - Service revenues result from contracts with
various government agencies and private industry. Revenues on cost plus fee and
fixed price contracts are recognized using the percentage of completion method
generally determined on the basis of cost incurred to date as a percentage of
estimated total cost. Revenues on time and materials contracts are recognized at
contractual rates as labor hours and materials are expended. Losses are
recognized in the period in which they become determinable.
Costs incurred in excess of current contract funding are deferred when
management believes they are realizable through subsequent additional funding.
No revenues are recognized related to such costs which are included in unbilled
reimbursable costs and fees in the accompanying consolidated balance sheets.
25
Retirement plans - The Company has a defined contribution deferred
income plan covering substantially all of its employees. The plan provides that
the Company may make pension and employee deferred matching contributions for
the benefit of employees. A portion of any such contributions is at the
discretion of the Board of Directors. The total expense under the deferred
income plan was approximately $3,688,000, $3,367,000 and $3,785,000 in 1999,
1998 and 1997, respectively.
During 1999, the Company terminated its defined benefit pension plan
for directors who are not employees of the Company. The total expense charged
for the plan during 1999, including the cost of termination, was $218,000. The
cost of the plan in 1998 and 1997 was $61,000 and $53,000, respectively.
Income taxes - The Company accounts for income taxes under the asset
and liability approach which requires the recognition of deferred tax assets and
liabilities for the differences between the financial reporting and tax bases of
assets and liabilities. A valuation allowance reduces deferred tax assets when
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
Earnings per share - Basic earnings per share are computed based upon
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share consider potential common stock outstanding
during the period. Potential common stock, for purposes of determining diluted
earnings per share, includes, where applicable, the effects of dilutive stock
options, warrants, and convertible securities computed using the treasury stock
method or the if-converted method.
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements and the reported amount of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
Reclassifications - Certain prior year amounts have been reclassified
to conform with the current year presentation.
New Accounting Pronouncement - For the year ending June 30, 2001, the
Company will be required to adopt SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. Management does not believe adoption of this
Standard will have a material impact on its financial statements.
26
(2) EARNINGS PER SHARE
The following table represents a reconciliation of the net income and
shares outstanding figures used in the basic and diluted earnings per share from
continuing operations computations. (Amounts in thousands, except per-share
amounts).
1999 1998 1997
--------------------- ----------------------- -----------------------
$ Per $ Per $ Per
Income Shares Share Income Shares Share Income Shares Share
--------------------- ----------------------- -----------------------
Basic earnings per share
Income available to common
stockholders .......................................$ 8,906 10,230 $0.87 $10,702 9,838 $1.09 $13,861 9,338 $1.48
Effect of dilutive securities
Stock options .......................................... -- 268 -- 146 -- 176
Convertible debenture .................................. -- -- 184 270 425 329
-------------- ----------------
Diluted earnings per share ............................$ 8,906 10,498 $0.85 $10,886 10,254 $1.07 $14,286 9,843 $1.45
============== ================ ================
27
(3) ACCOUNTS RECEIVABLE AND UNBILLED REIMBURSABLE COSTS AND FEES
A summary of U.S. government and non-U.S. government accounts
receivable and unbilled reimbursable costs and fees is as follows:
1999 1998
------- -------
(in thousands)
Accounts receivable, net of reserves of
$136 in 1999 and $41 in 1998 -
U.S. government $ 34,520 $ 27,616
Non-U.S. government 1,918 1,086
-------- --------
$ 36,438 $ 28,702
======== ========
Unbilled reimbursable costs and fees
U.S. government $ 2,388 $ 3,424
Non-U.S. government 536 765
-------- --------
$ 2,924 $ 4,189
======== ========
Invoices released in July that relate to June activity were $15,463,000
and $12,668,000 for 1999 and 1998, respectively, and are reflected in accounts
receivable in the accompanying financial statements.
The components of unbilled reimbursable costs and fees are as follows:
1999 1998
-------- --------
(in thousands)
Retainages billable upon completion of contract $ 2,336 $ 2,561
Unbilled direct costs, fee and indirect costs incurred
in excess of provisional billing rates 212 836
Costs incurred in excess of contractual authorization,
billable upon execution of a contract or contractual
amendment to increase funding 375 792
-------- --------
$ 2,923 $ 4,189
======== ========
At June 30, 1999, unbilled reimbursable costs and fees expected to be
collected after one year were approximately $838,000.
Costs incurred by the Company in the performance of U.S. government
contracts are subject to audit by the Defense Contract Audit Agency (DCAA). In
the opinion of management, the final settlement of these costs will not result
in significant adjustments to recorded amounts.
28
(4) INCOME TAXES
The differences between the tax provision related to continuing
operations calculated at the statutory federal income tax rate and the actual
tax benefit recorded for each year are as follows:
.................................................................
1999 1998 1997
-------- -------- --------
(in thousands)
Income tax provision at statutory federal rate ...................... $ 2,735 $ 1,202 $ 1,115
State income taxes, net of federal benefit .......................... 372 163 151
Change in valuation reserve ......................................... (4,105) (8,349) (11,848)
Other ............................................................... 135 (181) --
-------- -------- --------
Income tax benefit .................................................. $ (863) $ (7,166) $(10,582)
========= ======== ========
The primary components of the Company's net deferred tax asset are as
follows:
..................................................................................................
As of June 30,
--------------------
1999 1998
-------- --------
(in thousands)
Deferred tax assets:
Reserves and other nondeductible accruals ....................................................... $ 2,064 $ 2,167
Compensation not currently deductible ........................................................... 3,047 2,094
Net operating losses ............................................................................ 19,000 26,257
AMT and general business credits ................................................................ 992 816
Other ........................................................................................... -- 9
Valuation reserve ............................................................................... -- (9,150)
-------- --------
Total deferred tax assets ................................................................. 25,103 22,193
-------- --------
Deferred tax liabilities:
Unbilled reimbursable costs and fees ............................................................ (2,152) (2,945)
Prepaid expenses and rent ....................................................................... (383) (342)
Depreciation (tax over book) .................................................................... (269) (349)
Internally developed software ................................................................... -- (143)
Other .......................................................................................... -- (497)
-------- --------
Total deferred tax liabilities ............................................................ (2,804) (4,276)
-------- --------
Net deferred tax asset .................................................................... $ 22,299 $ 17,917
======== ========
29
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $50 million available to reduce future federal tax liabilities, of
which approximately $1.8 million expire in 2000, $9.2 million expire between
2001 and 2010, $26 million expire in 2011, and $13 million expire in 2012. The
benefit of the loss carryforwards has been fully recognized in the statements of
operations or as direct credits to stockholder's equity in fiscal 1999 for that
portion ($3,425,000) of the net operating losses related to tax benefits from
the exercise of employee stock options.
Realization of the net deferred tax asset of $22.3 million is dependent
primarily on generating sufficient taxable income prior to expiration of the
loss carryforwards. Although realization is not assured, management believes it
is more likely than not that all of the recorded net deferred tax asset will be
realized.
(5) DEBT
Long-term debt at June 30, consists of the following:
1999 1998
--------- ---------
(in thousands)
Revolving credit agreement $ 7,873 $ 18,506
Term loans 4,750 4,750
Equipment financing --- 961
Other 9 22
--------- --------
Total long-term debt $ 12,632 $ 24,239
Less current portion (9) (975)
-------- --------
$ 12,623 $ 23,264
======== ========
The fair market values of the Company's debt instruments approximate
the carrying values.
Equipment Financing - In June 1996, the Company completed a $7.5
million financing of substantially all of its furniture and equipment. The loan
was originally to be amortized over a five year period at an interest rate of
9%, but the loan was fully retired during 1999.
Revolving Credit Agreement and Term Loans - At June 30, 1998, the
Company was party to a revolving credit agreement with its bank that provided
for secured borrowings up to $22 million, and an additional $8 million of
financing under term loans. Both loans accrued interest at the bank's prime
rate, which was 8.0% as of June 30, 1999. See also Note 9 - Subsequent Events
for a discussion of a new line of credit.
30
Convertible Debenture - 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"). By April 1998, the Debenture had been fully
converted into 804,322 shares.
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"). The Debenture Warrant became exercisable on July 31, 1998. If the
Company sells substantially all of its assets or enters into a merger or
acquisition or other similar transaction, the Debenture Warrant is to be
repriced at the lesser of (i) $8.47 per share, or (ii) 80% of the Transaction
Value (as defined in the Debenture Warrant).
(6) COMMITMENTS AND CONTINGENCIES
Commitments - The Company leases all of its facilities and rents
certain equipment under operating lease agreements, some with inflation
escalator clauses. The minimum annual rentals due under non-cancelable operating
leases during each of the next five years and in total thereafter, are presented
in the table below.
Operating Sublease
Leases Rental Income
--------- -------------
(in thousands)
2000 $ 6,838 $ 1,185
2001 6,428 1,094
2002 6,157 648
2003 5,636 324
2004 5,108 132
Thereafter 25,851 ---
-------- --------
$ 56,018 $ 3,383
======== ========
Rent expense, net of sublease rental income, under operating leases was
$5,748,000, $6,115,000 and $6,787,000 in 1999, 1998 and 1997, respectively.
31
(7) STOCK-BASED COMPENSATION PLANS
At June 30, 1999, the Company sponsors several stock-based
compensation plans for employees and directors. Under these plans, 2,715,304
options are authorized, and 1,637,009 options are outstanding at June 30, 1999.
Options granted under employee plans vest over periods ranging from six
months to four years, and generally have a 10-year term. Under these plans,
options are issued at the fair market value on the date of grant, and therefore,
under the intrinsic value accounting method, no compensation is recorded in the
statement of operations.
The Company permits outside directors to receive stock and/or
non-qualified options in lieu of cash for director's fees. Options granted under
this plan are immediately exercisable, and remain exercisable for three years
after a participant ceases to be a director.
Under the Company's Cash Compensation Replacement Plan, officers may
elect to forego cash compensation (up to 25% of salary and up to 100% of bonus)
to purchase stock and/or non-qualified options at a 20% discount. The options
are immediately exercisable as to 80% of the shares, with the remainder becoming
exercisable in increments over a four-year period. Options remain exercisable
for three years after an officer's termination as an employee. Compensation cost
recognized under the Cash Compensation Replacement Plan for the years ended June
30,1999, June 30, 1998 and June 30, 1997 equaled $43,000, $8,000 and $25,000,
respectively.
The Company's current policy allows for the acceptance of mature shares
of the Company's stock at market value in lieu of cash for the proceeds due upon
exercise of the stock options and for tax withholdings due from the employee.
The shares received are retired and are reflected as reductions in common stock
and paid-in capital.
32
The Company uses the intrinsic value method and applies APB Opinion 25
and related interpretations in accounting for its plans. In accordance with FASB
Statement 123, the following pro forma net income and earnings per share
information is presented as if the Company accounted for stock-based
compensation cost using the fair value method. (These pro forma amounts may not
be indicative of such effects in future years.):
.........................................................
1999 1998 1997
------------------ ---------------- --------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
------------------ ------------------ ----------------------
Net income (loss) ....................................... $ 9,131 $ 8,089 $11,460 $ 9,702 $(17,750) $(19,444)
(in thousands)
Diluted earnings ........................................ $ 0.87 $ 0.77 $ 1.14 $ 0.96 $ (1.76) $ (1.93)
(loss) per share
The fair value of each option granted during each year is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions:
1999 1998 1997
------ ------ -----
(a) Dividends --- --- ---
(b) Expected volatility 40% 50% 50%
(c) Risk-free interest rate 6.0% 5.5% 6.5%
(d) Expected life in years 5 5 5
33
A summary of the status of the Company's stock options as of June 30,
1999, 1998 and 1997 and changes during those years is presented below (shares in
thousands):
Option Plan Summary
1999 1998 1997
--------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------------------- -------------------------- --------------------------
Outstanding @
beginning of year 1,487,241 $10.71 1,223,350 $16.38 915,585 $17.60
Granted 576,074 $ 5.53 837,230 $ 6.63 548,677 $12.98
Exercised (38,552) $ 2.63 (88,964) $ 5.59 (83,675) $ 6.02
Canceled (387,754) $18.35 (484,375) $18.85 (157,237) $17.15
--------- --------- ---------
Outstanding @
end of year 1,637,009 $ 7.22 1,487,241 $10.71 1,223,350 $16.38
========= ========= =========
Options exercisable
at year end 695,186 $ 7.99 706,294 $10.82 374,793 $13.30
========= ========= =========
Options available
for future grant 1,087,294 526,972 591,556
========= ========= =========
Weighted average
fair value of options
granted during the
year $ 2.84 $ 3.46 $ 6.73
========= ========= =========
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------------------------------------------------------------------------------------------------
$ .10 - $ 9.38 1,467,759 8.6 $ 5.85 541,874 $ 4.87
$14.00 - $ 37.69 169,250 6.3 $19.05 153,313 $19.00
--------- --- ------- ------- ------
$ .10 - $ 37.69 1,637,009 8.3 $ 7.22 695,186 $ 7.99
Employee Stock Purchase Plan - Employees may purchase stock at a
discount through payroll deduction under the Company's Employee Stock Purchase
Plan. The purchase price of the shares is the lower of 85% of the fair market
value of the stock on the first or the last day of the quarterly offering
period. The Company sold 62,302, 58,230 and 65,871 shares of common stock to its
employees during the years ended June 30, 1999, 1998 and 1997, respectively
34
(8) COMMON STOCK
Purchase Rights - The Company has a Shareholder Rights Plan under which
a dividend of one common stock purchase right (right) is automatically issued
for each share of the Company's common stock. The rights are not exercisable or
transferable apart from the common stock until ten business days after a person
has acquired beneficial ownership of 25% or more of the common stock, or
commences, or announces an intention to commence, a tender offer for 25% or more
of the common stock. Separate certificates for the rights will be mailed to
holders of the common stock as of such date, and each right will entitle the
holder thereof to buy one share of common stock at an exercise price of $100.
However, if any person or group becomes the beneficial owner of 25% or more of
the stock other than pursuant to an offer for all shares which the independent
Directors of the Company determine is fair to and otherwise in the best interest
of the Company and its shareholders, each right not owned by such person or
group will entitle the holder to purchase, at the exercise price of the rights,
that number of shares of common stock of the Company (or other consideration)
which would have a market value of two times the exercise price of the right.
Similarly, in the event that the Company is a party to a merger or other
business combination transaction, each right will entitle the holder to
purchase, at the exercise price of the rights, that number of shares of common
stock of the acquiring company which would have a market value of two times the
exercise price of the right. The rights are redeemable at $.05 per right prior
to the tenth business day following the public announcement that a person has
acquired beneficial ownership of 25% of the common stock. Upon redemption, the
rights will terminate. In 1999, the directors accelerated the termination of the
plan from its original date of December 31, 2005 to August 31, 2000.
Common Stock Purchase Warrants - In connection with issuance of the
Convertible Debenture in 1997 (see Note 5) and the Structured Equity Line
Financing (see Note 9) the Company issued and has outstanding warrants to
purchase 445,000 shares of the Company's common stock at a price of $8.47 per
share. The warrants are fully exercisable and expire on January 30, 2004. If the
Company sells substantially all of its assets or enters into a merger or
acquisition or other similar transaction, the warrants are to be repriced at the
lesser of (i) $8.47 per share, or (ii) 80% of the transaction value as defined
in the warrant agreements.
(9) SUBSEQUENT EVENTS
Structured Equity Line - On August 26, 1999, the Company terminated the
Structured Equity Line Financing. This agreement permitted the Company, under
certain conditions, to require an investor to purchase up to $18 million of
common stock. The Company accrued the specified liquidated damages of $300,000
for termination of the agreement in 1999.
Revolving Credit Agreement - Both the revolving credit agreement and
term loans discussed in Note 5 were terminated and replaced with a $35 million
Amended and Restated Revolving Credit Agreement (the "Credit Agreement")
effective August 27, 1999. The Company has both Prime and LIBOR (London
Interbank Offered Rate) based
35
borrowing options under the Credit Agreement. The interest accrued on LIBOR
loans is based on a ratio of debt to cash flow. The current premium is 1.10%
above the applicable LIBOR rate. The Company also pays a performance based
commitment fee, which is currently 0.30% of the line of credit.
The Credit Agreement is secured by substantially all of the Company's
assets, and contains customary covenants, including a requirement to maintain a
ratio of total debt to cash flow of less than 3 to 1. The Company is in
compliance with its covenants under this Agreement. The $35,000,000 Credit
Agreement, unless extended, matures August, 2001.
Acquisition of Management Consulting and Research, Inc. (MCR) -
Effective September 2, 1999, the Company acquired all of the outstanding stock
of Management Consulting and Research, Inc. (MCR). The gross purchase price for
MCR was approximately $27 million. After applying approximately $4 million of
MCR's cash available at closing, the net price of $23 million was paid with 2
million shares of GRCI's common stock valued at approximately $16 million and
approximately $7 million in cash financed through the new credit agreement. MCR
provides professional services to the U.S. Government primarily in the areas of
budget analysis, cost estimating and program management. MCR's revenues are
approximately $30 million per year. The acquisition will be accounted for using
the purchase method of accounting and will be consolidated with GRC from the
date of acquisition. The goodwill to be recognized in the transaction is
estimated at $21 million. The Company expects to amortize it over a period of 30
years.
(10) RELATED PARTY TRANSACTIONS
The chairman and chief executive officer of Mercantile Bankshares
Corporation (Mercantile) is a member of the Company's Board of Directors.
Mercantile has entered into a revolving credit and term loan agreement with the
Company (see Notes 5 and 9 for discussion).
(11) DISCONTINUED OPERATIONS
During the quarter ended March 31, 1997, the Company adopted a plan to
dispose of its Telecommunications and Advanced Products Divisions. As of January
8, 1998, all business units within those divisions had been sold. Consequently,
the Company has reported its results of operations for the Telecommunications
and Advanced Products Divisions as discontinued operations.
(12) SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" during fiscal 1999. SFAS No. 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
All of the Company's business relates to information technology
consulting services. The chief operating decision-maker is provided information
about the revenues generated
36
by operating segment and utilizes income before interest and taxes as a measure
of segment performance. The Company's services are delivered to clients
primarily in the United States, and the Company's long-lived assets are located
within the United States. Based on SFAS No. 131 criteria, the Company has two
reportable operating segments; U.S. Federal Government, and Commercial. Within
the U.S. Federal Government segment are sales to the Company's largest customer,
the Department of Defense ("DoD"). Revenues from the DoD represented 96%, 98%
and 94% of total U.S. Government revenues in 1999, 1998, and 1997 respectively.
The Commercial services segment was formed in fiscal 1998 from small
pieces of business that were being executed in what is now discontinued
operations and in the U.S. Federal Government services segment. It is
impractical to break out separate financial results for the segment in fiscal
1997.
.........................................................................
U.S. Federal
Government Commercial Corporate Total
------------ ---------- --------- -----
(In Thousands)
1999
Revenues ................................................................ $157,314 $ 7,288 $ -- $ 164,602
Income from continuing operations ....................................... 9,175 1,595 (1,512) 9,258
Depreciation and amortization ........................................... 1,508 84 1,083 2,675
Assets .................................................................. 67,165 3,406 5,510 76,081
Capital expenditures .................................................... 1,180 39 1,008 2,227
1998
Revenues ................................................................ $128,768 $ 2,159 $ -- $ 130,927
Income before interest and taxes ........................................ 6,644 159 (1,401) 5,402
Depreciation and amortization ........................................... 1,726 116 914 2,756
Assets .................................................................. 58,407 2,367 10,489 71,263
Capital expenditures .................................................... 1,447 -- 286 1,733
37
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands except per-share amounts)
Q1 Q2 Q3 Q4
------- ------- ------- --------
..............................................................
Year ended June 30,1999
Revenues .................................................... $ 36,756 $ 39,052 $ 42,117 $ 46,677
Income from continuing operations
before income taxes ...................................... 1,765 1,890 1,971 2,417
Income from continuing operations ........................... 3,030 3,100 1,290 1,486
Income from discontinued operations ......................... 54 140 26 5
Net income .................................................. 3,084 3,240 1,316 1,491
Diluted earnings per share .................................. 0.30 0.31 0.12 0.14
Year ended June 30,1998
Revenues .................................................... $ 27,165 $ 29,705 $ 35,307 $ 38,750
Income from continuing operations
before income taxes ..................................... 882 696 1,055 903
Income from continuing operations ........................... 1,136 2,027 3,548 3,991
Income from discontinued operations ......................... 290 468 -- --
Net income .................................................. 1,426 2,495 3,548 3,991
Diluted earnings per share .................................. 0.15 0.25 0.35 0.39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this item is hereby incorporated by
reference to the Proxy Statement (to be filed).
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this item is hereby incorporated by
reference to the Proxy Statement (to be filed).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this item is hereby incorporated by
reference to the Proxy Statement (to be filed).
38
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this item is hereby incorporated by
reference to the Proxy Statement (to be filed).
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) EXHIBITS
See "Index to Exhibits" hereinafter contained and
incorporated herein by reference.
(b) SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE
The following financial information is filed herewith
on the pages indicated:
Schedule II - Valuation and Qualifying Accounts (Page
45)
(c) REPORTS ON FORM 8-K
None.
39
SIGNATURES
----------
Pursuant to the requirements of section 13 or 15(d) of the Securities
and 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.
Date: September 23, 1999 By: /s/ Gary Denman
-------------------------
Gary Denman
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Timothy C. Halsey his attorney-in-fact,
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the Securities and Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
Date: September 23, 1999 By: /s/ Gary Denman
-------------------------------
Gary Denman
President and Chief Executive
Officer
Date: September 23, 1999 By: /s/ James P. Allen
------------------------------
James P. Allen
Senior Vice President, Chief
Financial Officer and Treasurer
(Chief Accounting Officer)
40
Date: September 23, 1999 By: /s/ Joseph R. Wright, Jr.
--------------------------------
Joseph R. Wright, Jr., Chairman
of the Board of Directors
Date: September 23, 1999 By: /s/ Peter A. Cohen
--------------------------------
Peter A. Cohen, Vice Chairman
of the Board of Directors
Date: September 23, 1999 By: /s/ H. Furlong Baldwin
--------------------------------
H. Furlong Baldwin, Director
Date: September 23, 1999 By: /s/ Frank J.A. Cilluffo
--------------------------------
Frank J.A. Cilluffo, Director
Date: September 23, 1999 By: /s/ Gary L. Denman
--------------------------------
Gary L. Denman, Director
Date: September 23, 1999 By: /s/ Leslie B. Disharoon
------------------ --------------------------------
Leslie B. Disharoon, Director
Date: September 23, 1999 By: /s/ Charles H.P. Duell
--------------------------------
Charles H.P. Duell, Director
Date: September 23, 1999 By: /s/ Leon E. Salomon
--------------------------------
Leon E. Salomon, Director
41
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 33-1046, 33-39512, 33-39513, 33-52536, 33-52538, 33-87981, 33-87982,
333-38445 and 333-66917 of GRC International, Inc. on Form S-8 and Registration
Statements Nos. 333-22087 and 333-22147 of GRC International, Inc. on Form S-3
of our report dated August 11, 1999, except for Note 9 as to which the date is
September 2, 1999, appearing in this Annual Report on Form 10-K of GRC
International, Inc. for the year ended June 30, 1999.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
McLean, Virginia
September 24, 1999
42
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
..........................................................
Additions
---------------------
Balance at Charged to Charged Deductions Balance
Beginning Costs and to Other from at End of
Description .................................................of Period Expenses Accounts (A) Reserves (B) Period
----------- --------- -------- -------- -------- ------
Year ended June 30, 1999
Reserves for uncollectible receivables -
Deducted from accounts receivable ........................ $ 41 $ 156 $ -- $ (61) $136
Year ended June 30, 1998
Reserves for uncollectible receivables -
Deducted from accounts receivable ........................ $ 41 $ -- $ -- $ -- $ 41
Year ended June 30, 1997
Reserves for uncollectible receivables -
Deducted from accounts receivable ........................ $ 5 $ 36 $ -- $ -- $ 41
(A) Reductions of revenue for potentially nonrecoverable costs.
(B) Write off of uncollectible accounts and cost against reserves, net of recoveries.
43
INDEX TO EXHIBITS
(Exhibit Numbers correspond to Exhibit Table,
Regulation S-K, Item 601)
Exhibit
Number Page
- ------ ----
2.1 Agreement and Plan of Merger dated August 5, 1999 by and among
GRC International, Inc., MAC Merger Corporation, Management
Consulting & Research, Inc. and Gerald R. McNichols (incorporated
by reference to Exhibit 2.1 to Form 8-K dated September 17, 1999)
2.2 Indemnity Agreement dated September 1, 1999 by and among GRC
International, Inc., MAC Merger Corporation, Management
Consulting & Research, Inc. and Gerald R. McNichols. -----
2.3 Noncompetition Agreement dated as of September 1, 1999 by and
among GRC International, Inc., Management Consulting & Research,
Inc. and Gerald R. McNichols. -----
3.1 Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 to the 1994 Form 10-K)
3.2 Bylaws -----
10.1* 1985 Employee Stock Option Plan (incorporated by reference to
Exhibit 10.1 to the 1996 Form 10-K)
10.2* 1994 Employee Option Plan (incorporated by reference to Exhibit
10.2 to the 1997 Form 10-K)
10.3* 1998 Option Plan
10.4* Cash Compensation Replacement Plan -----
10.5* Incentive Compensation Plan (incorporated by reference to Exhibit
10.7 to the 1995 Form 10-K)
10.6* Directors Fee Replacement Plan -----
10.7* Directors Phantom Stock Plan (incorporated by reference to
Exhibit 10.7 to the 1996 Form 10-K)
10.8* Directors Retirement Plan -----
10.9* Form of Directors' Deferred Stock Unit Agreement -----
10.10 Amended and Restated Revolving Credit and Term Loan Agreement
("Loan Agreement") with Mercantile-Safe Deposit & Trust Company
("Mercantile"), dated as of August 27, 1999 -----
10.11 Lease Agreement dated as of June 30, 1989, with Exhibits, between
the Company and Centennial III Limited Partnership (incorporated
by reference to Exhibit 10.17 to the 1989 Form 10-K)
10.12 Lease Amendment No. 1, with Exhibits, to Lease between the
Company and Centennial III Limited Partnership (incorporated by
reference to Exhibit 10.6 to the 1990 Form 10-K)
10.13 Lease Amendments Nos. 2, 3, 4 and 5 to Lease between the Company
and Richmond Land Corporation (as successor to Centennial III
Limited Partnership) (incorporated by referenced to Exhibit 10.12
to the 1994 Form 10-K)
10.14 Lease Amendment No. 6 to Lease between the Company and Richmond
Land Corporation (as successor to Centennial III Limited
Partnership) (incorporated by referenced to Exhibit 10.13 to the
1995 Form 10-K)
10.15 Amended and Restated Rights Agreement dated May 14, 1999 between
the Company and The American Stock Transfer & Trust Company -----
10.16* Employment Agreement between the Company and Jim Roth dated as of
July 1, 1995 (incorporated by reference to Exhibit 10.16 to the
1996 Form 10-K)
10.17* Amendment Number One to Employment Agreement between the Company
and Jim Roth dated as of June 30, 1998 (incorporated by reference
to Exhibit 21 to the 1998 Form 10-K)
10.18* Note dated July 9, 1992, and Deed of Trust dated as of August 11,
1993, by and between the Company and Jim Roth (incorporated by
reference to Exhibit 10.15 to the 1994 Form 10-K)
10.19* Amendment to Deed of Trust Note dated as of March 26, 1998
(incorporated by reference to Exhibit 10.23 to the 1998 Form
10-K)
10.20* Independent Contractor Agreement dated as of July 1, 1998 between
the Company and Jim Roth (incorporated by reference to Exhibit
10.24 to the 1998 Form 10-K)
10.21* Independent Contractor Agreement by and among GRC International,
Inc. and Jim Roth for the term of November 6, 1998 to November 5,
2001. -----
10.22* Fiscal 1999 Chairman's Agreement dated as of July 1, 1998 between
Joseph R. Wright, Jr. and the Company -----
10.23* Fiscal 2000 Chairman's Agreement dated as of July 1, 1999 between
Joseph R. Wright, Jr. and the Company -----
10.24* Vice Chairman's Agreement dated as of September 25, 1997 between
Peter A. Cohen and the Company -----
10.25* Employment Agreement between the Company and Gary L. Denman
(incorporated by reference to Exhibit 10.25 to the 1998 Form
10-K)
10.26* Form of Employment Agreement for Michael G. Stolarik, Thomas E.
McCabe and James P. Allen -----
10.27* Form of Employment Agreement for James L. Selsor -----
10.28* Separation and Release Agreement dated as of April 20, 1999
between James L. Selsor and the Company -----
10.29 Building Lease between the Company and Bermant Development
Company (incorporated by reference to Exhibit 10.21 to the 1995
Form 10-K)
10.30 First and Second Amendments to Building Lease between the Company
and Bermant Development Company (incorporated by reference to
Exhibit 10.23 to the 1997 Form 10-K)
10.31 320,000 Share Common Stock Purchase Warrant issued by the Company
on January 30, 1997 to Halifax Fund L.P. ("Halifax")
(incorporated by reference to Exhibit 10.4 to the Company's Form
10-Q for the quarter ended December 31, 1996)
10.32 Registration Rights Agreement dated as of January 30, 1997
between the Company and Halifax (incorporated by reference to
Exhibit 10.5 to the Company's Form 10-Q for the quarter ended
December 31, 1996)
10.33 125,000 Share Common Stock Purchase Warrant issued by the Company
to Cripple Creek in connection with the Equity Line Agreement
(incorporated by reference to Exhibit 10.7 to Form 10-Q for the
quarter ended December 31, 1996)
10.34 Registration Rights Agreement dated as of January 30, 1997
between the Company and Cripple Creek relating to the Equity Line
Agreement (incorporated by reference to Exhibit 10.8 to Form 10-Q
for the quarter ended December 31, 1996)
11 Statement of Computation of Earnings Per Share -----
21 Subsidiaries of the Registrant -----
23 Consent of Deloitte & Touche LLP (included on Page 43 of Form
10-K)
24 Powers of Attorney (included as a part of signature pages to the
Form 10-K)
27 Financial Data Schedule -----
* Indicates management contract or compensatory plan.