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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 December 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
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GRC INTERNATIONAL, INC.
(A DELAWARE CORPORATION)
1900 GALLOWS ROAD
VIENNA, VIRGINIA 22182
(703) 506-5000
Commission I.R.S. Employer
File No. Identification No.
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1-7517 95-2131929
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ______.
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock January 31, 1996
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$.10 PAR VALUE 9,209,893 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 9-11
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.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1995 1994 1995 1994
---- ---- ---- ----
REVENUES $28,268 $29,813 $60,954 $61,307
Cost of revenues 23,271 23,689 50,257 49,120
------- ------- ------- -------
GROSS MARGIN 4,997 6,124 10,697 12,187
General, administrative, marketing,
research and development expenses 4,879 4,938 9,747 9,474
Provision for losses 353 283 617 458
------- ------- ------- -------
OPERATING INCOME (LOSS) (235) 903 333 2,255
Interest income 86 61 162 221
Interest expense (169) (34) (182) (39)
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INCOME (LOSS) BEFORE INCOME TAXES (318) 930 313 2,437
Provision for income taxes --- --- --- ---
------- ------- ------- -------
NET INCOME (LOSS) $ (318) $ 930 $ 313 $ 2,437
======= ======= ======= =======
INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE $ (.03) $ .10 $ .03 $ .26
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES 9,150 9,401 9,327 9,410
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
3
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
1995 1995
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(IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents $ 1,014 $ 2,679
Accounts receivable 27,904 32,419
Unbilled reimbursable costs and fees 6,595 5,662
Inventories, at lower of cost or market 2,464 1,600
Other receivables 2,497 1,160
Prepaid expenses and other 2,082 918
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Total current assets 42,556 44,438
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PROPERTY AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization of $8,292 and $7,773 10,921 10,332
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OTHER ASSETS:
Goodwill and other intangible assets, net 2,450 2,555
Deferred software costs, net 17,898 8,344
Deferred income taxes 2,561 2,561
Notes receivable and other 4,187 5,479
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Total other assets 27,096 18,939
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$80,573 $73,709
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The accompanying notes are an integral part of these balance sheets.
4
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
1995 1995
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(IN THOUSANDS)
CURRENT LIABILITIES:
Accounts payable $ 3,550 $ 7,774
Accrued compensation and benefits 11,823 11,960
Deferred income taxes 1,561 1,561
Accrued expenses 1,804 2,564
Other current liabilities 870 201
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Total current liabilities 19,608 24,060
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LONG-TERM DEBT 10,300 ---
------- -------
OTHER NON-CURRENT LIABILITIES 2,534 1,381
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STOCKHOLDERS' EQUITY:
Common stock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 9,476,000 shares
and 9,325,000 shares 947 932
Paid-in capital 76,347 76,812
Accumulated deficit (25,318) (25,631)
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51,976 52,113
Less: Treasury stock, at cost; 300,000 shares (3,845) (3,845)
------- -------
Total stockholders' equity 48,131 48,268
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$80,573 $73,709
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The accompanying notes are an integral part of these balance sheets.
5
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
----------------
1995 1994
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(IN THOUSANDS)
CASH FLOWS FROM OPERATIONS:
Net income $ 313 $ 2,437
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,774 1,552
Provisions for losses on accounts
receivable, and unbilled reimbursable costs
and fees 722 222
Changes in assets and liabilities:
Accounts receivable and unbilled
reimbursable costs and fees 2,860 (4,303)
Inventory (864) (447)
Other current assets (1,164) 223
Accounts payable, accruals and
other current liabilities (5,016) (1,273)
Other, net 21 (19)
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NET CASH USED BY OPERATING ACTIVITIES (1,354) (1,608)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,065) (2,052)
Deferred software costs (including asset acquisition,
see Note 3) (8,010) (2,188)
Other, net (61) (261)
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NET CASH USED BY INVESTING ACTIVITIES (10,136) (4,501)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Treasury stock --- (3,071)
New financing 10,300 5,490
Other, net (475) 182
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NET CASH PROVIDED BY FINANCING ACTIVITIES 9,825 2,601
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DECREASE IN CASH & CASH EQUIVALENTS (1,665) (3,508)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,679 3,660
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CASH & CASH EQUIVALENTS AT END OF PERIOD $ 1,014 $ 152
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The accompanying notes are an integral part of these statements.
6
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
----------------
1995 1994
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(IN THOUSANDS)
SUPPLEMENTAL DISCLOSURES:
Cash transactions:
Interest $ 156 $ 12
Income taxes 25 43
The accompanying notes are an integral part of these statements.
7
GRC INTERNATIONAL, INC.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
DECEMBER 31, 1995 AND 1994
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(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, 1995.
(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 December 31, 1995,
the Company has not purchased any additional shares under its repurchase
program.
(3) In November 1995, the Company acquired the rights to the operating software
of Quintessential Solutions Inc. (QSI) at a cost of approximately $3.9
million. This software will be incorporated into the Company's
NetworkVUE(TM) product and as such it has been accounted for as deferred
software costs. In accordance with the purchase agreement, payments with a
net present value of $1.7 million have been deferred until future periods.
(4) The Company has a revolving credit and term loan agreement, secured by a
lien on all of the Company's assets. The revolving credit arrangement
entitles it to borrow up to a maximum of $15 million at the prime rate
(8.50% as of December 31, 1995). The revolving credit arrangement is based
on a three year term, but will automatically be renewed for successive,
one-year terms, unless the bank delivers written notice of non-renewal at
least fifteen months prior to the end of any subsequent renewal period. The
term loan arrangement enables the Company to borrow up to $5 million for
acquisitions and other special purposes, also at the prime rate.
8
GRC INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED)
The revenues and operating income and interest expense of the Company are
presented for the periods indicated:
Percentage
Three Months Ended Six Months Ended Increase (Decrease)
12/31/95 12/31/94 12/31/95 12/31/94 Three Months Six Months
-------- -------- -------- -------- ------------ ----------
Revenues $28,268 $29,813 $60,954 $61,307 (5.2)% (.6)%
======= ======= ======= =======
Operating income (loss) $ (235) $ 903 $ 333 $ 2,255 (126.0) (85.2)
Interest income (expense), net (83) 27 (20) 182 (407.4) (111.0)
------- ------- ------- -------
Income (loss) before income taxes (318) 930 313 2,437 (134.2) (87.2)
Provision for income taxes --- --- --- --- N.A. N.A.
------- ------- ------- -------
Net income (loss) $ (318) $ 930 $ 313 $ 2,437 (134.2) (87.2)
======= ======= ======= =======
RESULTS OF OPERATIONS
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Revenues were $28.3 million for the second quarter, compared with $29.8
million for the same quarter last fiscal year. The revenue decrease of $1.5
million or 5.2% is attributable primarily to the service revenues associated
with subcontract work (work performed by other organizations and included in the
Company's revenues). The Company typically does not earn a fee on subcontract
revenues. Product sales were higher by approximately $1.4 million between the
comparable periods. Revenues were $61 million for the first six months of fiscal
1996, compared with $61.3 million for the same period last year. The revenue
decrease of $.3 million or 0.6% is not significant. The revenues generated from
the Company's professional services business remained relatively flat between
the comparable periods.
Cost of revenues were $23.3 million for the second quarter, compared with
$23.7 million for the same quarter last year. The decrease of $.4 million or
1.8% is attributable to a decrease of $1.6 million from the professional
services business offset by an increase of $1.2 million from product sales. The
increase in the cost of product sales for the second quarter is the result of
higher product sales. Cost of revenues were $50.3 million for the first six
months of fiscal 1996, compared with $49.1 million for the same period last
year. The increase of $1.2 million or 2.3% is attributable to both the increase
in subcontract revenues and the increase in the cost of product sales. Gross
margin was $5 million or 17.7% of revenues for the second quarter, compared with
$6.1 million or 20.5% of revenues for the same quarter last year. Gross margin
was $10.7 million or 17.5% of revenues for the first six months of fiscal 1996,
compared with $12.2 million or 19.9% of revenues for the same period last year.
The decrease of $1.1 million for the quarter and $1.5 million for the first six
months is attributable to the change in the mix of revenues between comparable
periods. Subcontract revenues, for which the Company typically does not earn any
fee, were lower for the second quarter, but were
9
higher for the first six months. If subcontract work were excluded from the
Company's financial results, professional services revenues would have been
slightly lower for both the quarter and the first six months.
For the second quarter of fiscal 1996, the Company had an operating loss of
$0.2 million, compared with an operating income of $0.9 million for the same
period last year. Operating income was $0.3 million for the first six months of
fiscal 1996, compared with $2.3 million for the same period last year. Included
in the operating income for the first quarter of fiscal 1996, was a beneficial
$0.2 million reserve reversal, which was credited against the general,
administrative, marketing, research and development expenses. The $1.1 million
decrease in operating income for the quarter and the $2.0 million decrease for
the first six months is attributable to the impact of subcontract work,
increased sales and marketing expenses of approximately $0.6 million for the
quarter and $0.9 million for the first six months, and an increase in the loss
provision.
The Company's net interest expense for both quarters and the first six
months is the result of the borrowings used to support the commercial investment
activities.
Income taxes continue to be insignificant to the operating results, since
the Company can utilize its net operating loss carryforward to shelter its
income from tax.
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 December 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) approximates two years' revenues. The backlog consists of
approximately 160 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; and testing and evaluation.
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 revenues to
finance its current and future operations from existing or internally generated
working capital and available credit. The Company has a revolving credit
agreement and a term loan agreement, secured by a lien on all of the Company's
assets. The revolving credit arrangement entitles it to borrow up to a maximum
of $15 million at the prime rate (8.50% as of December 31, 1995). The agreement
is based on a three year term, but will automatically be renewed for successive,
one-year terms unless the bank delivers written notice of non-renewal at least
15 months prior to the end of any subsequent renewal period. There is $6.9
million available under the revolving credit arrangement as of December 31,
1995. The term loan arrangement enables the Company to borrow up to $5 million
for acquisitions or other special purposes, also at the prime rate. Under the
term loan arrangement, there is $2.8 million available as of December 31, 1995.
10
During the first half of fiscal year 1996, the Company increased its
deferred software costs by a net $9.6 million, resulting in a balance at
December 31, 1995 of approximately $17.9 million. The Company capitalizes
internal software costs incurred for products to be sold only after
technological feasibility has been established. The majority of the deferred
software costs relates to the Company's efforts associated with its OSU(TM)
Network Interface telecommunications product and its NetworkVUE(TM)
telecommunications software. In November 1995, the Company acquired the rights
to the operating software of Quintessential Solutions Inc. (QSI) at a cost of
approximately $3.9 million. This software will be incorporated into the
Company's NetworkVUE(TM) product and as such it has been accounted for as
deferred software costs. In accordance with the purchase agreement, payments
with a net present value of $1.7 million have been deferred until future
periods.
During fiscal year 1996, the Company will continue to increase its deferred
software costs associated with its OSU(TM) Network Interface telecommunications
product and its NetworkVUE(TM) telecommunications software. The Company intends
to finance the deferred software costs with internally generated working capital
and borrowings against its available credit facilities.
As of December 31, 1995, the Company has $1.0 million of cash and cash
equivalents available to support its working capital requirements.
PART II - OTHER INFORMATION
ITEMS 1, 2, 3, 4 AND 5 ARE INAPPLICABLE.
- ----------------------------------------
ITEM 6(A) EXHIBITS.
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None.
ITEM 6(B) - REPORTS ON FORM 8-K.
- --------------------------------
None.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRC INTERNATIONAL, INC.
By: /s/ Philip R. Pietras
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Philip R. Pietras
Vice President, Treasurer, Chief Financial
Officer & Chief Accounting Officer
February 14, 1996
12