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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...... to ......
Registrant, State of Incorporation,
Address and Telephone Number
GRC INTERNATIONAL, INC.
(A DELAWARE CORPORATION)
1900 GALLOWS ROAD
VIENNA, VIRGINIA 22182
(703) 506-5000
Commission I.R.S. Employer
File No. Identification No.
1-7517 95-2131929
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
----- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock April 30, 1995
--------------------- --------------
$.10 PAR VALUE 9,000,711 SHARES
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CONTENTS
PAGE
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PART I - FINANCIAL INFORMATION
A. FINANCIAL STATEMENTS
Consolidated Condensed Statements of Income 3
Consolidated Condensed Balance Sheets 4-5
Consolidated Condensed Statements of Cash Flows 6-7
Notes to Consolidated Condensed Financial Statements 8
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-10
C. PART II - OTHER INFORMATION 11
NOTE: The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations although the Company believes that the disclosures are
adequate to make the information presented not misleading.
It is suggested that these consolidated condensed financial statements be
read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
2
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- -----------------
1995 1994 1995 1994
--------- --------- ---------- ---------
REVENUES $35,688 $30,883 $96,995 $93,208
Cost of revenues 29,110 24,718 78,230 74,782
------- ------- ------- -------
GROSS MARGIN 6,578 6,165 18,765 18,426
General, administrative, marketing,
research and development expenses 5,143 4,742 14,617 13,378
Provision for Losses 422 2 880 569
------- ------- ------- -------
OPERATING INCOME 1,013 1,421 3,268 4,479
Interest income (113) (109) (334) (398)
Interest expense 19 18 58 195
------- ------- ------- -------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 1,107 1,512 3,544 4,682
Provision for income taxes --- 37 --- 202
------- ------- ------- -------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 1,107 1,475 3,544 4,480
Cumulative effect of accounting change
(Note 3) --- --- --- 1,000
------- ------- ------- -------
NET INCOME $ 1,107 $ 1,475 $ 3,544 $ 5,480
======= ======= ======= =======
INCOME PER COMMON AND
COMMON EQUIVALENT SHARE:
Before cumulative effect of accounting
change $ .12 $ .16 $ .38 $ .48
From cumulative effect of accounting
change --- --- --- .11
------- ------- ------- -------
$ .12 $ .16 $ .38 $ .59
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES 9,378 9,454 9,399 9,394
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
3
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
MARCH 31, JUNE 30,
1995 1994
--------- --------
(IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents $ 1,213 $ 3,660
Accounts receivable 28,881 29,403
Unbilled reimbursable costs and fees 6,782 8,366
Inventories, at lower of cost or market 1,601 1,185
Prepaid expenses and other 3,883 4,950
------- -------
Total current assets 42,360 47,564
------- -------
PROPERTY AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization of $9,840 and $9,641 12,920 12,344
------- -------
OTHER ASSETS:
Goodwill and other intangible assets, net 2,602 2,799
Deferred software costs 6,228 1,714
Other 4,753 4,659
------- -------
Total other assets 13,583 9,172
------- -------
$68,863 $69,080
======= =======
The accompanying notes are an integral part of these balance sheets.
4
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
MARCH 31, JUNE 30,
1995 1994
---------- ---------
(IN THOUSANDS)
CURRENT LIABILITIES:
Current portion of long-term debt
and capital leases $ 46 $ 93
Accounts payable 4,860 5,042
Accrued wages and benefits 9,519 8,988
Accrued expenses and other 6,325 8,380
-------- --------
Total current liabilities 20,750 22,503
-------- --------
OTHER NON-CURRENT LIABILITIES 1,389 1,537
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 9,299,000 shares
and 9,152,000 shares 930 915
Paid-in capital 76,756 76,363
Accumulated deficit (27,117) (30,661)
-------- --------
50,569 46,617
Less: Treasury stock, at cost; 300,000
shares and 142,500 shares (3,845) (1,577)
-------- --------
Total stockholders' equity 46,724 45,040
-------- --------
$ 68,863 $ 69,080
======== ========
The accompanying notes are an integral part of these balance sheets.
5
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
CASH FLOWS FROM OPERATIONS:
Net income $ 3,544 $ 5,480
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,377 1,928
Provisions for losses on accounts
receivable, unbilled reimbursable costs
and fees 682 972
Cumulative effect of accounting change -- (1,000)
Changes in assets and liabilities:
Accounts receivable and unbilled
reimbursable costs and fees 1,674 (2,821)
Inventory (416) (209)
Other current assets 1,067 (500)
Accounts payable, accruals and
other current liabilities (1,153) (2,735)
Other, net (118) (193)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,657 922
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,556) (2,544)
Deferred software costs (4,745) (459)
Other, net (63) (210)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (7,364) (3,213)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (3,071) --
Payments on debt and capital lease obligations (77) (3,211)
Other, net 408 53
------- -------
NET CASH USED BY FINANCING ACTIVITIES (2,740) (3,158)
------- -------
DECREASE IN CASH & CASH EQUIVALENTS (2,447) (5,449)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,660 10,069
------- -------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 1,213 $ 4,620
======= =======
The accompanying notes are an integral part of these statements.
6
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
-----------------
1995 1994
------- ------
(IN THOUSANDS)
SUPPLEMENTAL DISCLOSURES:
Cash transactions:
Interest $ 58 $158
Income taxes 371 366
The accompanying notes are an integral part of these statements.
7
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1995 AND 1994
(UNAUDITED)
(1) The consolidated condensed financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The results of
operations presented herein are not necessarily indicative of the results
to be expected for a full year. Although the Company believes that all
material adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim periods presented are
included and that the disclosures are adequate to make the information
presented not misleading, these consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1994.
(2) In December 1994, the Company announced that it had completed the
previously authorized repurchase of 300,000 shares of its common stock, at
a cost of $3,845,000, and that its Board of Directors authorized the
repurchase of up to 200,000 additional shares of its common stock in the
open market or in private transactions.
The timing and number of shares of the repurchase of the
additional 200,000 shares of common stock will depend greatly on market
conditions and other factors. The shares will be purchased with
existing cash, short-term borrowings, future cash flows, or a
combination of these factors, and may be retired or used for general
corporate purposes. As of March 31, 1995, the Company has not purchased
any additional shares under its repurchase program.
(3) In October 1993, the Company was served with a lawsuit filed in the
Superior Court of Orange County, California by ICN Biomedicals, Inc.
(Biomedicals) and its parent company, ICN Pharmaceuticals, Inc.
(Pharmaceuticals). The suit alleges fraud, negligent misrepresentation,
violations of state and federal securities laws and other claims against
the Company in connection with the sale of its biomedical business to
Biomedicals in 1989, and seeks to recover all monies paid and damages for
out-of-pocket losses, court costs and interest. The Court ordered
Biomedicals to arbitrate its claims and stayed Court action pending
completion of the arbitration. As ordered by the Court, Biomedicals filed
for arbitration in New York in March 1994, claiming damages in the
approximate amount of $100 million plus unspecified punitive damages. In
September 1994, the arbiters dismissed Biomedicals' claims as time-barred.
In December 1994, the arbiters ordered Biomedicals' to pay the Company the
remaining amounts due under the 1989 sale agreement, with interest, and to
pay the Companys legal expenses incurred in the proceeding.
In January 1995, the Company received partial payment from Biomedicals
in the amount of approximately $.4 million. In March 1995, the California
court which ordered the arbitration converted the arbiters' award into a
court judgment, and awarded the Company additional attorneys fees and
interest for a total award of $2.7 million. Subsequent to March 31, 1995,
the remaining balance of this amount was paid, so that the Company has
now received, with interest and attorneys fees, all amounts due under the
1989 sale agreement. Accordingly, the Company reversed approximately
$.2 million of its reserves relating to this matter in the third quarter.
In April 1995, the Company filed a Motion to Dismiss the claims of
Pharmaceuticals, which were still pending even though the claims of
Biomedicals had been dismissed in the arbitration. A ruling is
anticipated during the fourth quarter.
Management does not believe that the remaining Pharmaceuticals claims
have any merit and is vigorously contesting them. As a result, management
does not believe that the ultimate outcome of this action will have a
material adverse effect on the consolidated financial condition or results
of operations of the Company.
8
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 1995
(UNAUDITED)
The revenues and operating income and interest expense of the Company are
presented for the periods indicated:
Percentage
Three Months Ended Nine Months Ended Increase (Decrease)
3/31/95 3/31/94 3/31/95 3/31/94 Three Months Nine Months
-------- -------- -------- -------- ------------ -----------
Revenues $ 35,688 $ 30,883 $ 96,995 $ 93,208 15.6% 4.1%
======== ======== ======== ======== ====== ======
Operating income $ 1,013 $ 1,421 $ 3,268 $ 4,479 (28.7)% (27.0)%
Interest (income) expense, net (94) (91) (276) (203) 3.3% 36.0%
-------- -------- -------- -------- ------ ------
Income before income taxes and
cumulative effect of accounting
change 1,107 1,512 3,544 4,682 (26.8)% (24.3)%
Provision for income taxes --- 37 --- 202 (100.0)% (100.0)%
-------- -------- -------- -------- ------ ------
Income before cumulative effect
of accounting change 1,107 1,475 3,544 4,480 (24.9)% (20.9)%
Cumulative effect of accounting
change --- --- --- 1,000 N/A (100.0)%
-------- -------- -------- -------- ------ ------
Net income $ 1,107 $ 1,475 $ 3,544 $ 5,480 (24.9)% (35.3)%
======== ======== ======== ======== ====== ======
RESULTS OF OPERATIONS
Revenues were $35.7 million for the third quarter, compared with $30.9
million for the same quarter last year. The revenue increase of $4.8 million,
or 15.6%, is attributable to both normal revenue increases (revenues originating
from the Company's service business) of approximately $1.6 million and increases
in subcontract work (work performed by other organizations and included in the
Companys revenues) of approximately $3.2 million. Revenues were $97.0 million
for the first nine months of fiscal 1995, compared with $93.2 million for the
same period last year. The year-to-date increase in revenues of $3.8 million,
or 4.1%, is attributable entirely to subcontract work, as the Companys normal
revenues were lower by $2.0 million over the same period last year.
The $1.6 million increase in the Company's normal revenues, for the third
quarter, is attributable to both increased revenues from the service business of
$1.3 million and increased product sales of $.3 million. Service revenues are
higher due primarily to the effect of obtaining government funding for contract
services work that was completed in the prior quarter. The year-to-date $2.0
million reduction in the Company's normal revenues is attributable to both a
reduction in service revenues of $1.3 million and lower product sales of $.7
million. Service revenues have been lower due to temporary delays in receiving
government funding and delays in the procurement process (i.e., awarding
contracts). Since funding delays are generally temporary, the Company expects to
report revenues on the contract work already completed in subsequent periods.
The shortfall in product sales is primarily attributable to the Company's
environmental
9
software group which has experienced lower than anticipated revenues from new
license sales of its health and environmental tracking software system. The
Company is evaluating its strategies regarding this unit, including the need to
reengineer some of its products to address changing market requirements.
A large percentage of the Company's revenues are derived from contracts
with the U.S. Department of Defense (DoD). Possible decreases or funding delays
in the DoD budget may negatively impact the Company's plans and ability to
achieve revenue growth. However, the Company believes that its contract base is
sufficiently diverse so that the cancellation of any one DoD program would not
have a material adverse effect on the Company. In addition, the Company also
believes that there are sufficient opportunities for other contract awards in
the DoD, NASA, other governmental agencies and the private sector to allow the
Company to sustain its revenue level or grow over time.
As of March 31, 1995, the value of the Company's backlog (without options)
approximates one year's revenues, and the value of the total backlog (with
options) exceeds two years' revenues. The backlog consists of approximately 165
active contracts which vary in the period of performance from a few months to
multi-year. The work to be performed on these contracts involves the following:
information technology; studies and analysis; modeling and simulation; testing
and evaluation; and proprietary products.
Operating income was $1.0 million (2.8% of revenues) for the third quarter,
compared with $1.4 million (4.6% of revenues) for the same quarter last year.
The $.4 million decrease in operating income is attributable primarily to
increased expenditures in marketing the Company's OSU(TM) network interface
(Optical Service Unit) and increases in its provision for losses that are
primarily due to indirect rate exposures associated with delays in government
contract work. Operating income was $3.3 million (3.4% of revenues) for the
first nine months of fiscal year 1995, compared with $4.5 million (4.8% of
revenues) for the same period last year. The $1.2 million decrease in year-to-
date operating income is attributable primarily to lower revenues (excluding
subcontract work) and increased marketing and R&D expenditures.
The Company's net interest income is not significantly different between
either the comparable third quarter periods or the comparable year-to-date
periods.
Income taxes continue to be insignificant to the operating results, since
the Company has utilized its net operating loss carryforwards to shelter its
income from tax.
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The new
statement superseded the Company's previous accounting practice of accounting
for income taxes under Statement of Financial Accounting Standards No. 96,
"Accounting for Income Taxes" (SFAS 96). As a result of adopting this change,
the Company recognized $1 million of income attributable to recording a net
deferred tax asset on its books during fiscal year 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been able to finance its operations from a combination of
internally generated working capital and borrowing against its available credit
facilities. Management believes that the Company has adequate resources to
finance its current and future operations from existing or internally generated
working capital and available credit. The Company has a revolving credit
agreement which entitles it to borrow up to a maximum of $10 million at the
prime rate (9.0% as of March 31, 1995). As of March 31, 1995, the Company has
$1.2 million of cash and cash equivalents and $10.0 million of the revolving
credit agreement available to support its working capital requirements.
During fiscal year 1995, the Company used $3.1 million in cash to complete
the repurchase of 300,000 shares of its common stock. In total, the Company used
$3.8 million in cash for the buyback program.
Subsequent to March 31,1995, the Company's revolving credit arrangement was
reaffirmed on an unsecured basis by Mercantile-Safe Deposit & Trust Company. The
revolving credit arrangement is based on a three year term with the lender
required to give 15 months prior written notice to terminate the facility.
Advances under the revolving credit arrangement will accrue interest at the
prime rate.
10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
In 1989, the Company sold its biomedical business to ICN Biomedicals, Inc.
("ICN Biomedicals") for $35.6 million in cash, $.5 million in an interest-
bearing note, and stock redeemable in 1994 for $2 million. In addition, the
Company was relieved of approximately $26 million of debt.
In October 1993, the Company was served with a lawsuit filed in the
Superior Court of Orange County, California by ICN Biomedicals, Inc.
("Biomedicals") and its parent company, ICN Pharmaceuticals, Inc.
("Pharmaceuticals"). The suit alleges fraud, negligent misrepresentation,
violations of state and federal securities laws and other claims against the
Company in connection with the sale of its biomedical business to Biomedicals in
1989, and seeks to recover all monies paid and damages for out-of-pocket losses,
court costs and interest. The Court ordered Biomedicals to arbitrate its claims
and stayed Court action pending completion of the arbitration. As ordered by the
Court, Biomedicals filed for arbitration in New York in March 1994, claiming
damages in the approximate amount of $100 million plus unspecified punitive
damages. In September 1994, the arbiters dismissed Biomedicals' claims as time-
barred. In December 1994, the arbiters ordered Biomedicals' to pay the Company
the remaining amounts due under the 1989 sale agreement, with interest, and to
pay the Company's legal expenses incurred in the proceeding.
In January 1995, the Company received partial payment from Biomedicals in
the amount of approximately $.4 million. In March 1995, the California court
which ordered the arbitration converted the arbiters' award into a court
judgment, and awarded the Company additional attorneys fees and interest for a
total award of $2.7 million. Subsequent to March 31, 1995, the remaining
balance of this amount was paid, so that the Company has now received, with
interest and attorneys fees, all amounts due under the 1989 sale agreement.
In April 1995, the Company filed a Motion to Dismiss the claims of
Pharmaceuticals, which were still pending even though the claims of Biomedicals
had been dismissed in the arbitration. A ruling is anticipated during the fourth
quarter.
Management does not believe that the remaining Pharmaceuticals claims have
any merit and is vigorously contesting them. As a result, management does not
believe that the ultimate outcome of this action will have a material adverse
effect on the consolidated financial condition or results of operations of the
Company.
Items 2, 3, 4 and 5 are Inapplicable.
Item 6(a) Exhibits.
None.
Item 6(b) - Reports on Form 8-K.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRC INTERNATIONAL, INC.
By: /s/ Jim Roth
-------------------------------
Jim Roth
President and Chief Executive Officer
By: /s/ Philip R. Pietras
--------------------------------
Philip R. Pietras
Treasurer and Chief Financial Officer
May 15, 1995
12