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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...... to ......
Registrant, State of Incorporation,
Address and Telephone Number
----------------------------
GRC INTERNATIONAL, INC.
(A DELAWARE CORPORATION)
1900 GALLOWS ROAD
VIENNA, VIRGINIA 22182
(703) 506-5000
Commission I.R.S. Employer
File No. Identification No.
- ---------- ------------------
1-7517 95-2131929
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock April 30, 1997
- --------------------- ---------------
$.10 PAR VALUE 9,436,353 SHARES
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CONTENTS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-Q Quarterly Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section of this Form 10-Q captioned "Management's
Discussion and Analysis". The Company undertakes no obligation to publicly
revise these forward-looking statements, to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in the Company's Form 10-K Annual Report and other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q to be filed by the Company
subsequent to this Form 10-Q and any Current Reports on Form 8-K filed by the
Company.
PAGE
----
PART I - FINANCIAL INFORMATION
A. FINANCIAL STATEMENTS
Consolidated Condensed Statements of Income 3
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 8
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
C. PART II - OTHER INFORMATION 17
Note: The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations although the Company believes that the disclosures are
adequate to make the information presented not misleading.
It is suggested that these consolidated condensed financial statements be
read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except for per share data)
(unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ------------------
1997 1996 1997 1996
---------- --------- --------- --------
REVENUES $29,311 $27,645 $ 86,348 $85,780
Cost of revenues 24,336 23,443 71,105 73,340
Indirect & Other Costs 3,936 3,858 12,111 10,831
------- ------- -------- -------
Income from operations 1,039 344 3,132 1,609
Interest (expense) income, net (445) (195) (922) (215)
------- ------- -------- -------
Income from continuing operations
before provision for income taxes 594 149 2,210 1,394
Income tax benefit 8,200 --- 8,200 ---
------- ------- -------- -------
Income from continuing operations 8,794 149 10,410 1,394
------- ------- -------- -------
Loss from operations of discontinued
business segments (1,887) (1,449) (25,220) (2,381)
Loss on disposal of discontinued
business segments (6,391) --- (6,391) ---
------- ------- -------- -------
Loss from discontinued operations (8,278) (1,449) (31,611) (2,381)
------- ------- -------- -------
Net Income (Loss) $ 516 $(1,300) $(21,201) $ (987)
======= ======= ======== =======
Per Share Amounts:
Income from continuing operations $ 0.89 $ 0.02 $ 1.09 $ 0.15
Loss from discontinued operations $ (0.83) $ (0.15) $ (3.29) $ (0.25)
Net Income (Loss) $ 0.06 $ (0.13) $ (2.20) $ (0.10)
Common Share and Common
Share Equivalents 9,962 9,743 9,595 9,528
Prior period amounts are restated to conform to the current period presentation.
The accompanying notes are an integral part of these statements.
3
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
March 31, June 30,
1997 1996
--------- --------
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 4,718 $ 2,780
Accounts receivable, net 24,509 26,199
Unbilled reimbursable costs and fees 4,924 3,911
Inventories, at lower of cost or market 21 73
Other receivables 912 1,000
Prepaid expenses and other 1,559 1,164
------- -------
Total current assets 36,643 35,127
------- -------
PROPERTY AND EQUIPMENT,
at cost, net of accumulated depreciation
and amortization of $8,868 and $7,610 9,718 9,695
------- -------
OTHER ASSETS:
Net assets of discontinued operations --- 14,752
Goodwill and other intangible assets, net 2,314 2,274
Deferred software costs, net 488 467
Deferred taxes 10,825 2,625
Deposits and other 3,622 3,755
------- -------
Total other assets 17,249 23,873
------- -------
TOTAL ASSETS $63,610 $68,695
======= =======
Prior period amounts are restated to conform to the current period presentation.
The accompanying notes are an integral part of these statements.
4
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
March 31, June 30,
1997 1996
----------- ---------
(IN THOUSANDS)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,320 $ 1,243
Accounts payable 1,420 4,807
Accrued compensation and benefits 12,261 11,897
Deferred taxes 1,936 1,895
Accrued expenses 1,863 1,456
Other current liabilities 648 849
Net liabilities of discontinued operations 3,540 ---
-------- --------
Total current liabilities 22,988 22,147
-------- --------
LONG-TERM DEBT 30,992 16,528
-------- --------
OTHER NON-CURRENT LIABILITIES 1,248 1,345
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 9,643,000 shares
and 9,586,000 shares 964 958
Paid-in capital 75,732 74,830
Accumulated deficit (64,469) (43,268)
-------- --------
12,227 32,520
Less: Treasury stock, at cost; 300,000 shares (3,845) (3,845)
-------- --------
Total stockholders' equity 8,382 28,675
-------- --------
$ 63,610 $ 68,695
======== ========
Prior period amounts are restated to conform to the current period presentation.
The accompanying notes are an integral part of these statements.
5
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
March 31,
--------------------
1997 1996
-------- --------
(in thousands)
CASH FLOWS FROM CONTINUING OPERATIONS:
Income from continuing operations $ 10,410 $ 1,394
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,630 845
Deferred tax benefit (8,200) ---
Changes in assets and liabilities (2,357) 1,124
Other, net 201 (22)
-------- --------
NET CASH PROVIDED BY CONTINUING OPERATING
ACTIVITIES 1,684 3,341
-------- --------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Loss from discontinued operations (31,611) (2,381)
Non-cash charges and changes in working capital 11,902 (13,451)
Provision for loss on disposal of discontinued operations 6,391 ---
-------- --------
NET CASH USED IN DISCONTINUED OPERATIONS (13,318) (15,832)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,281) (709)
Deferred software costs (222) (113)
Other, net (100) (31)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,603) (853)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital lease obligations (951) ---
New borrowings 16,056 11,620
Other, net 70 (863)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,175 10,757
-------- --------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 1,938 (2,587)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,780 2,669
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 4,718 $ 82
======== ========
Prior period amounts are restated to conform to the current period presentation.
The accompanying notes are an integral part of these statements.
6
GRC INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
March 31,
------------------
1997 1996
------- ---------
(in thousands)
SUPPLEMENTAL DISCLOSURES:
Cash transactions:
Interest paid $1,027 $ 456
Income taxes paid 12 181
Prior period amounts are restated to conform to the current period presentation.
The accompanying notes are an integral part of these statements.
7
GRC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 1997
(unaudited)
(1) The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The results of
operations presented herein are not necessarily indicative of the results
to be expected for a full year. Although the Company believes that all
material adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim periods presented are
included and that the disclosures are adequate to make the information
presented not misleading, these consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996.
(2) 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 $22 million at the prime rate
(8.5% as of March 31, 1997). The revolving credit line is repayable on
January 15, 1998, 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 the initial term or any subsequent
renewal period. No notice of non-renewal was received by October 15, 1996,
and, thus, the Revolving Credit is repayable on January 15, 1999. As of
March 31, 1997, the Company had borrowed $17.3 million of the $22 million
revolving facility.
In June 1996, the Company completed a $7.5 million financing of
substantially all of its furniture and equipment. The loan is being
amortized over a five year period at an interest rate of 9%. On April 30,
1997, the Company applied the $2.1 million in proceeds from the sale of its
GRC Instruments/Dynatup business (see Note (5)) against its obligations
under the equipment financing.
Debt at March 31, 1997 and June 30, 1996 consisted of the following:
March 31, 1997 June 30, 1996
-------------- -------------
Revolving Credit Agreement $17,343 $ 5,425
Term Loans 5,000 5,000
Convertible Debenture 3,441 0
Equipment Financing 6,528 7,346
------- -------
Total Debt $32,312 $17,771
Less: Current Portion 1,320 1,243
------- -------
$30,992 $16,528
======= =======
8
At March 31, 1997, the Company was in default of certain covenants under
the Amended and Restated Revolving Credit and Term Loan Agreement, which
default was cured by an amendment to that Agreement dated May 13, 1997.
On January 21, 1997, the Company entered into a Convertible Securities
Subscription Agreement pursuant to which an investor purchased a $4 million
5% Convertible Debenture due January 2000. The Debenture bears interest at
a 5% rate per annum and is convertible into the Company's Common Stock at
the lesser of (i) $11 per share, or (ii) 94% of the low trade during the 3
trading days immediately preceding the date of conversion. The investor
also received a 7-year Warrant to purchase 320,000 shares of the Company's
Common Stock at a price of $8.47 per share. Other rights and obligations
related to the Debenture and Warrant are contained in the Convertible
Securities Subscription Agreement.
(3) Changes in Presentation. Certain amounts in the March 31, 1996 and June
-----------------------
30, 1996 Consolidated Condensed Financial Statements have been reclassified
to conform to the March 31, 1997 presentation.
(4) Discontinued Operations. During the quarter ended March 31, 1997, the
-----------------------
Company adopted a plan to dispose of the Company's Telecommunications and
Advanced Products Divisions ("Discontinued Divisions"). The Company expects
that none of the final disposal dates of the business units within the
Discontinued Divisions will be later than February 28, 1998. Disposition
will be by cessation of operations and sale of residual intellectual
property for the OSU, NetworkVUE, and Commercial Information Solutions
("CIS") business units and sale of the GRC Instruments/Dynatup and
Vindicator business units. The remaining assets and liabilities of the
Discontinued Divisions include operating and residual assets and
liabilities and accruals for costs of discontinuance of the Discontinued
Divisions. At March 31, 1997, the net liabilities of discontinued
operations on the Company's balance sheet amounted to $3.5 million. The
expected net loss from March 31, 1997 to the dates of disposition of the
business units within the Discontinued Divisions amounts to a loss of $5.3
million. The loss from the Discontinued Divisions between the measurement
date and March 31, 1997 was $1.1 million.
(5) Subsequent Events. On April 30, 1997, the Company sold the assets and
-----------------
liabilities of its GRC Instruments/Dynatup business unit for $2.1 million
(which approximates the unit's net book value at that date), subject to
adjustment pursuant to a final determination of the business unit's net
worth at April 30, 1997. The proceeds received were used to pay down the
Company's obligation under the Equipment Lease. As of May 13, 1997, the
holder of the Convertible Debenture have given notice to convert $650
thousand of the $4 million Convertible Debenture into 160,064 shares of the
Company's Common Stock.
9
(6) New Accounting Pronouncements. Statement of Financial Accounting Standard
-----------------------------
No. 128 ("SFAS 128"), "Earnings Per Share", is effective for periods ending
after December 15, 1997 (early adoption is not permitted) and requires the
Company to present a basic and diluted earnings per share. Had the Company
computed earnings per share in accordance with SFAS No. 128, the results
would have been as follows:
MARCH 31, 1997 MARCH 31, 1996
3 MOS. 9 MOS. 3 MOS. 9 MOS.
--------------- --------------
Basic EPS:
Continuing operations $ 0.94 $ 1.12 $ 0.02 $ 0.15
Discontinued operations $(0.89) $(3.39) $(0.16) $(0.26)
Net income (Loss) $ 0.06 $(0.14) $(2.30) $(0.11)
Diluted EPS:
Continuing operations $ 0.89 $ 1.09 $ 0.02 $ 0.15
Discontinued operations $(0.83) $(3.29) $(0.15) $(0.25)
Net income (Loss) $ 0.06 $(0.13) $(2.18) $(0.10)
(7) Income Taxes. The Company recognized an incremental deferred tax asset of
------------
$8.2 million in the quarter ended March 31, 1997. With the discontinuance
of the Company's Telecom and Advanced Products Divisions, the losses
generated by those discontinued operations will no longer offset the
profits generated by the Company's services operations. Accordingly, it is
now more likely than not that the Company will realize a substantial
portion of its income tax carryforwards in the future and the Company
recognized the incremental deferred tax asset.
10
GRC INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1997 AND1996
(UNAUDITED)
SUMMARY
The revenues, operating income, interest expense and discontinued operations
of the Company are presented for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- --------------------
3/31/97 3/31/96 3/31/97 3/31/96
-------- -------- -------- --------
Revenues $ 29,311 $ 27,645 $ 86,348 $ 85,780
======== ======== ======== ========
Income from operations 1,039 344 3,132 1,609
Interest income (expense), net (445) (195) (922) (215)
-------- -------- -------- --------
Income from continuing operations
before income tax benefit 594 149 2,210 1,394
Income tax benefit 8,200 --- 8,200 ---
Loss from discontinued
operations (8,278) (1,449) (31,611) (2,381)
-------- -------- -------- --------
Net income (loss) $ 516 $ (1,300) $(21,201) $ (987)
======== ======== ======== ========
OVERVIEW
- --------
On February 28, 1997, the Company committed itself to a formal plan of
disposition for two of its business segments, its Telecom and Advanced Products
Divisions. The plan of disposition for the OSU and NetworkVUE business units
within the Telecom Division and the Commercial Information Solutions business
unit within the Advanced Products Division is the cessation of on-going
operations and the sale of the residual intellectual property associated with
those business units. The plan of disposition of the GRC Instruments/Dynatup and
Advanced Security Technologies business units of the Advanced Products Division
is the sale of those businesses.
Consequently, the Company is reporting its results of operations for the
Telecom and Advanced Products Divisions on a discontinued operations basis. The
Company's information technology consulting services business (formerly known as
the Professional Services Organization) constitutes its continuing operations.
On April 30, 1997, the Company sold the assets and liabilities of its GRC
Instruments/Dynatup business for $2.1 million in cash, subject to adjustment
based on a final determination of the net book value of that business as of
April 30, 1997.
11
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED MARCH 31, 1997 AND 1996
- ---------------------------------------------------------------------------
The Company's revenues were $29.3 million for the third quarter of fiscal
1997, compared to $27.6 million for the same quarter last fiscal year, a 6%
increase. Revenues for the nine months ended March 31, 1997 were $86.3 million,
a 1% increase over the $85.8 million nine-month revenues for the prior year.
For the nine months 1996, excluding the minority-interest portion of a majority-
owned joint venture, the Company's revenues would have been $81.3 million. On
that basis of comparison, the increase in the Company's revenues for the nine
months 1997 would have been 6.2%.
Indirect and other costs consist of selling, general and administrative,
research and development, and other costs. For the three months ended March 31,
1997, indirect and other costs were $4.0 million, a 2% increase over $3.9
million for the quarter ended the prior year. For the nine months ended March
31, 1997, indirect and other costs were $12.1 million, a 12% increase over the
$10.8 million for the prior-year nine month period. The increase is due
primarily to a significant increase in bid and proposal costs incurred in the
first half of the current year, compared to the prior year period.
Income from continuing operations before taxes for the three month period
amounted to $1 million, or 3.5% of revenues, compared to $344 thousand, or 1.2%
of revenues, for the prior-year period. Income from continuing operations for
the nine month period amounted to $3.1 million, or 3.6% of revenues, compared to
$1.6 million, or 1.9% of revenues, for the prior-year period. The increased
profitability from continuing operations for the three and nine-month periods of
the current year, compared to the prior year, is due primarily to the
termination of prior-year loss activities related to a division of the services
organization which is no longer active.
Net interest expense for the three month period amounted to $445 thousand,
compared to $195 thousand for the prior-year period; and for the nine month
period amounted to a net expense of $922 thousand, compared to $215 thousand for
the prior-year period. For the three and nine-month periods, the increased net
interest expense is due to the increase in the Company's debt.
In the current fiscal quarter, the Company recognized an $8.2 million
deferred tax asset related to its net loss carryforwards for income tax
purposes, bringing to $9.2 million the total net deferred tax asset related to
its carryforwards, and to $10.8 million in a total deferred tax asset.
As a result of tax losses incurred in prior periods, the Company, at June 30,
1996, had tax loss carryforwards amounting to $53 million, and, with increased
losses during the current fiscal year, the Company estimates that its tax loss
carryforwards at March 31, 1997 amount to over $60 million. Under Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), the Company is required to
recognize the value of these tax loss carryforwards if it is more likely than
not that they will be realized by reducing the amount of income taxes payable in
future income tax returns. This in turn is a function of the forecasts of the
Company's profitability in future years. The Company's continuing operations
consist of its information technology services business. The Company has been
profitability engaged in this business for over 30 years and projects continued
profitability in the future. In recent years, the Company's losses have been
due to this profitability being more than offset by the losses generated from
its Telecom and Advanced Product Divisions. With those Divisions now having
been discontinued, the Company expects to report profits for income tax
12
purposes in the future. As a consequence, the Company has now recognized a
portion of the benefit available from its tax loss carryforwards.
With the decision on February 28, 1997, to dispose of the Telecom and
Advanced Product Divisions, the Company began reporting the results of
operations for these Divisions on a discontinued operations basis. Prior
periods have been restated to conform to the current period reporting format.
Accordingly, the Company reported a loss from discontinued operations of
$1.9 million for the three months ended March 31, 1997, and a loss of $1.4
million for the corresponding period of the prior year. For the nine months
ended March 31, 1997, the loss from discontinued operations amounted to $25.2
million and a loss of $2.4 million for the corresponding period of the prior
year. The loss on disposal of discontinued divisions, including estimated
operating losses during phase out until disposal, amounted to $6.4 million
reported in the quarter ended March 31, 1997.
Consequently, the Company reported total losses from discontinued
operations for the quarter ended March 31, 1997 of $8.3 million, compared to
$1.4 million for the prior-year period, and a loss of $31.6 million for the
nine-months ended March 31, 1997, compared to $2.4 million for the prior-year
period.
Net income for the quarter ended March 31, 1997 amounted to $516 thousand,
compared to a loss of $1.3 million for the prior-year period, and, for the nine-
months, the Company reported a net loss of $21.2 million, compared to a loss of
$987 thousand for the prior-year period.
Because the Company is reporting income from continuing operations,
pursuant to APB 15, the Company is required to compute the denominator for the
per-share amounts including common-stock equivalents. This includes the
weighted average number of shares outstanding during the period, the dilutive
effect of options and warrants, and the dilutive effect of the Convertible
Debenture issued by the Company in January 1997. In addition, in computing the
numerator in the per-share amount for income from continuing operations and for
net income, any interest paid and any original issue discount accrued on the
Convertible Debenture is eliminated on the assumption that the Debenture is
converted for purposes of the earnings per share calculation.
Accordingly, the net income of $0.06 per share for the three months ended
March 31, 1997, compared to a loss of $0.13 per share for the prior-year period,
and a loss of $2.20 per share for the nine months ended March 31, 1997, compared
to a loss of $0.10 per share for the prior-year period.
For balance sheet purposes, the business segments held for disposal are
reported on a net basis. Accordingly, the Company has restated its balance
sheet to report a net liability on assets held for disposition at March 31, 1997
of $3.5 million and a net asset of $14.8 million at June 30, 1996.
At March 31, 1997, the company has 192 openings within its services
organization, compared to 209 at June 30, 1996.
13
NEW YORK STOCK EXCHANGE CONTINUED LISTING REQUIREMENTS
- ------------------------------------------------------
The Company's shares of Common Stock are listed and traded primarily on the
New York Stock Exchange ("NYSE"), but also on the Pacific Stock Exchange. Rules
801.00 and 802.00 of the NYSE Listed Company Manual ("NYSE Manual") contain
standards for the potential de-listing from trading of a listed company's
securities. At March 31, 1997, the Company did not comply with the net tangible
asset requirement of Rule 802. If the NYSE were to consider de-listing the
Company's common shares, it would consider the Company's compliance with the
original listing requirements contained in Rule 102.01. If so, the Company may
have difficulty complying with the requirements for "aggregate market value of
publicly-held shares" and the requirement for "demonstrated earning power". The
Company has begun discussions with the NYSE on this matter and these discussions
are continuing.
FINANCING
- ---------
On January 21, 1997, the Company entered into a Convertible Securities
Subscription Agreement ("Subscription Agreement") pursuant to which an investor
purchased a $4 million 5% Convertible Debenture due January 2000 ("Debenture").
Also on January 21, 1997, the Company entered into a Structured Equity Line
Flexible Financing Agreement ("Equity Line Agreement") whereby an investor may
purchase up to $18 million in the Company's Common Stock over a 3 1/2 year
period beginning May 2, 1997.
The Debenture bears interest at a 5% rate per annum payable quarterly in
cash or, at the Company's option, the amount due may be added to the outstanding
principal due under the Debenture. The Debenture is convertible into the
Company's Common Stock at the lesser of (i) $11 per share, or (ii) 94% of the
low trade during the 3 trading days immediately preceding the date of
conversion. The investor also received a 7-year warrant to purchase 320,000
shares of the Company's Common Stock at a price of $8.47 per share ("Debenture
Warrant"). Under a related Registration Rights Agreement ("Registration Rights
Agreement"), the Company was obligated to file a registration statement with the
Securities and Exchange Commission (which registration statement has now become
effective) with respect to the Company's Common Stock into which the Debenture
is convertible and for which the Debenture Warrant is exercisable. If the
Company is in default under the Debenture, the investor may put the Debenture to
the Company at 120% of the amount outstanding. The Debenture Warrant is not
exercisable for 18 months, but becomes immediately exercisable if the Company
sells substantially all of its assets or enters into a merger or acquisition or
other similar transaction, and in such event the Debenture Warrant is repriced
at the lesser of (i) $8.47 per share, or (ii) 80% of the Transaction Value (as
defined in the Debenture Warrant), and the investor has the option to put the
Debenture to the Company at 115% of the amount outstanding. Other terms,
conditions, and limitations apply to the Subscription Agreement, the Debenture,
the Registration Rights Agreement and the Debenture Warrant.
As of May 13, 1997, the holder of the Convertible Debenture has given the
Company Conversion Notices converting $650 thousand of the $4 million Debenture
into 160,064 shares.
Under the Equity Line Agreement, the investor may, but is not required to,
purchase up to $3 million of the Company's Common Stock during the 6 month
period beginning May 2, 1997. For the 3 years after that initial 6-month
period, the Company can require the investor to purchase up to $3 million of the
Common Stock per quarter up to an aggregate maximum of $18 million under the
Equity
14
Line Agreement. The purchase price is equal to 94% of the low trade price during
the 3 trading days immediately preceding the notice of purchase by the investor.
The investor, however, may not purchase Common Stock if such low trade price is
less than $4 per share. If the Company issues less than $5 million of its Common
Stock under the Equity Line Agreement, it must pay the investor up to $300,000
as liquidated damages. The investor also received a 7-year Warrant to purchase
125,000 shares of the Company's Common Stock at a price of $8.47 per share
("Equity Line Warrant"). If the Company elects to issue more than $5 million,
the Company will issue an additional 7-year warrant for the purchase of 75,000
shares of the Company's Common Stock ("Additional Equity Line Warrant") at a
price equal to 140% of the price of the Common Stock at the time of the issuance
of the Additional Equity Line Warrant. Under a related Registration Rights
Agreement ("Registration Rights Agreement"), the Company was obligated to file a
registration statement with the Securities and Exchange Commission with respect
to the Company's Common Stock for which the Equity Line Warrant and the
Additional Line Warrant (collectively, the "Equity Line Warrants") are
exchangeable. The Equity Warrant is not exercisable for 18 months, but becomes
immediately exercisable if the Company sells substantially all of its assets or
enters into a merger or acquisition or other similar transaction, and in such
event is repriced at the lesser of (i) $8.47, or (ii) 80% of the Transaction
Value (as defined in the Equity Line Warrant). The Additional Equity Line
Warrant, when issued, will contain provisions similar to the Equity Line
Warrant. The investor's obligation to purchase under the Equity Line Agreement
is subject to various conditions, including (i) the effectiveness of a
registration statement with respect to the underlying shares (which registration
statement is now effective), (ii) limitations based on the price and volume of
the Company's Common Stock, and (iii) the percentage of the Common Stock
beneficially owned by the investor from time to time. Other terms, conditions,
and limitations apply to the Equity Line Agreement, the Registration Rights
Agreement and the Equity Line Warrant.
LIQUIDITY AND CAPITAL RESOURCES
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The Company had $4.7 million in cash and cash equivalents at March 31,
1997, compared to $2.8 million at June 30, 1996.
Net cash provided by continuing operations amounted to $1.7 million for the
first nine months of fiscal 1997, compared to $3.3 million for the first nine
months of fiscal 1996. Net cash used in discontinued operations amounted to
$13.3 million for the first nine months of fiscal 1997, compared to a use of
$15.8 million in the first nine months of fiscal 1996. Net cash used in
investing activities for the first nine months of fiscal 1997 amounted to $1.6
million, compared to $853 thousand for the prior year period. Net cash provided
by financing activities amounted to $15.2 million for the first nine months of
fiscal 1997, compared to $10.8 million provided in the first nine months of
fiscal 1996. The net increase in cash and cash equivalents for the first nine
months of fiscal 1997 amounted to $1.9 million, compared to a decrease of cash
and cash equivalents of $2.6 million in the prior-year period.
As a result of the increase in funded debt and operating losses during the
first nine months of fiscal 1997, the Company's ratio of total funded debt to
total capitalization amounted to 80% at March 31, 1997, compared to 41% at June
30, 1996.
Liquidity over the next year will be determined by (a) net cash flow from
continuing operations, (b) capital expenditure requirements for continuing
operations, (c) payments of interest on outstanding debt, (d) cash expenditures
required with respect to discontinued operations, (e) cash inflows, if any, from
the proceeds of the sale of discontinued operations, and (f) net proceeds
received from the issuance of equity pursuant to the Equity Line Agreement. The
Company expects
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to have positive cash flow from continuing operations, including capital
expenditures and payments on outstanding debt. Including cash expenditures
required for discontinued operations, the Company expects to be breakeven in net
cash flow, before the inclusion of any proceeds from the sale of discontinued
operations. After the inclusion of proceeds, if any, from the sale of
discontinued operations and with the proceeds, if any, from the Equity Line
Agreement, the Company expects to have positive net cash flows over the next
year. Given the number of factors which can influence this expectation, actual
results may differ materially from those expected.
At March 31, 1997, the Company had $32.3 million of debt, $1.3 million of
which was classified as short term, and $31.0 million of which was classified as
long term. The Company had $17.8 million of bank debt and equipment lease
financings at June 30, 1996.
The credit facilities with the Company's bank consist of an $8 million term
loan ("Term Loan") of which $5 million was used at March 31, 1997, a $22 million
revolving line of credit ("Revolving Credit"), of which $17.3 million was used
at March 31, 1997, and a $6.5 million debt arising from the equipment financing
("Equipment Lease") arranged with the bank's equipment leasing subsidiary. The
$2.1 million proceeds received on April 30, 1997 from the sale of GRC
Instruments/Dynatup were used to pay down the Company's obligation under the
Equipment Lease.
The Term Loan is due on September 1, 1998, and bears interest at the bank's
floating prime rate, currently 8.50% per annum. The Revolving Credit is due on
January 15, 1999, and, if the Company is not in default, is automatically
renewable for one-year renewal terms unless the bank, at its option, delivers
written notice of non-renewal to the Company at least 15 months prior to the end
of the initial term or any renewal term. No notice of non-renewal was received
by October 15, 1996, and, thus, the Revolving Credit is repayable on January 15,
1999. The Revolving Credit bears interest at the bank's floating prime rate,
currently 8.50% per annum. The Term Loan and Revolving Credit facilities are
collateralized by the Company's working capital and equipment. The Equipment
Lease is for a term of 60 months which commenced in June 1996.
The Amended and Restated Revolving Credit and Term Loan Agreement ("Loan
Agreement") containing the Term Loan and Revolving Credit was amended as of
March 31, 1996, and again as of June 30, 1996, to amend various financial ratio
covenants so as to bring the Company into compliance with those covenants as of
those dates. At September 30, 1996, the Company was in compliance with its
covenants under this Agreement. At December 31, 1996 and March 31, 1997, the
Company was in breach of financial covenants under the Loan Agreement. On
February 7, 1997 and May 13, 1997, the Loan Agreement was again amended as of
December 31, 1996 and March 31, 1997, respectively, to bring the Company into
compliance with the covenants thereunder.
Notwithstanding that the chairman of the board of the bank providing the
credit under the Loan Agreement and Equipment Lease is a member of the board of
directors of the Company, the Company believes that the terms of its credit
agreements with the bank are substantially similar to those that could have been
obtained from an unaffiliated third party.
OUTLOOK
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With the discontinuation of losses from the Company's Telecom and Advanced
Products Divisions, the Company has returned its focus to its information
technology services business. This business has been and is expected to remain
profitable with positive operating cash flows. With the positive free cash flow
expected from the services business and with the potential to raise additional
equity from the Company's Equity Line Agreement, the Company expects, over time,
to reduce substantially the outstanding principal amount of its bank debt
outstanding.
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RISK FACTORS
- ------------
The Company faces a number of risks, including, but not limited to:
. The Company's ability to grow its services business and generate the
positive free cash flow needed to support the debt service described
above.
. The Company's ability to manage within amounts accrued for, and to
fund residual net cash expenditures required by, its discontinued
operations.
. The Company's ability to keep and attract the personnel required to
service its current and future contract portfolio.
. A dependence upon government contracting in general, and particularly
a high concentration of the Company's business with the U.S.
Government, Department of Defense, and its instrumentalities.
. The high degree of financial leverage under which the Company will
continue to operate until its current debt levels are reduced and its
equity levels increased.
. The dilution to current holders of the Company's Common Stock through
the issuance of additional equity to assist in paying down the debt.
. The availability of funds, as required, from the Equity Line
Agreement.
PART II - OTHER INFORMATION
Items 1, 2, 3, 4, and 5 are Inapplicable.
- -----------------------------------------
Item 6(a) Exhibits.
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Exhibit No. Description
----------- -----------
10.1 Fifth Confirmation and Amendment dated April 30, 1997, and
effective as of April 30, 1997, to Amended and Restated
Revolving Credit and Term Loan Agreement between the Company and
Mercantile-Safe Deposit and Trust Company.
10.2 Sixth Confirmation and Amendment dated May 13, 1997, and
effective as of March 31, 1997, to Amended and Restated
Revolving Credit and Term Loan Agreement between the Company and
Mercantile-Safe Deposit and Trust Company
11 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
Item 6(b) Reports on Form 8-K.
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On March 12, 1997, the Company filed a report on Form 8-K relating to the
election on March 10, 1997 of Joseph R. Wright, Jr. as Chairman of the Board of
Directors.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRC INTERNATIONAL, INC.
By: /s/ Ronald B. Alexander
----------------------------------------------
Ronald B. Alexander
Senior Vice President, Treasurer, Chief
Financial Officer & Chief Accounting Officer
May 15, 1997
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