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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, 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)
Commission 1900 Gallows Road I.R.S. Employer
File No. Vienna, Virginia 22182 Identification No.
---------- (703) 506-5000 ------------------
1-7517 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 July 31, 1997, the aggregate market value of the Registrant's voting
common stock held by non-affiliates was $42,391,690. As of July 31, 1997, there
were 9,552,652 shares of the Registrant's $.10 par value common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Corporation's 1997 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.
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TABLE OF CONTENTS
Page
----
PART I.
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 40
PART III.
Item 10. Directors and Executive Officers of the Registrant 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41
Signatures 42
Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K 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 "Risk Factors" section of "Management's Discussion and
Analysis". Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. 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.
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 Department of Defense
("DoD") and its instrumentalities. The number of active contracts at year-end
1997, 1996 and 1995 were 144, 149 and 175, respectively, substantially all of
which were with the DoD.
The areas of expertise provided 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.
3
The Company also develops software and products for commercial
telecommunications equipment providers, ranging from embedded communications
software to graphical user interfaces and resource managers. The Company's
primary commercial telecommunications customer is Lucent Technologies, Inc.
("Lucent"). The major task completed is the development of embedded software
applications and capabilities for the Lucent Digital Access Cross-Connect
Systems ("DACS"), particularly the development of embedded software for a Hybrid
DS3 Multiplexor for DACS II CEF product. The Company also provides graphical
user interfaces for a craftsperson to manage the DACS II ISX equipment and
development of a digital multi-point bridge application for DACSII ISX product.
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. The plan of disposition for the OSU and NetworkVUE
business units within the Telecommunications Division and the Commercial
Information Solutions business unit within the Advanced Products Division
involved 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 Vindicator(TM) business units of
the Advanced Products Division involved the sale of those businesses.
Consequently, the Company has reported its results of operations for the
Telecommunications and Advanced Products Divisions on a discontinued operations
basis. The Company's information technology and professional services business
(formerly known as the Professional Services Operations) constitutes its
continuing operations.
On April 30, 1997, the Company sold the assets and liabilities of its GRC
Instruments/Dynatup business for $2.0 million in cash.
On June 5, 1997, the Company sold the assets of its Vindicator business
unit within its discontinued Advanced Products Division. The sale was for book
value of approximately $700 thousand, with payment of $100 thousand at closing
and $150 thousand 90 days thereafter, both of which payments have been received
by the Company. The remainder of the purchase price is payable at a rate of 6%
of sales through 1998, but in all events, any remaining balance is payable in a
lump sum at December 31, 1998.
On June 27, 1997, the Company sold the assets and liabilities of its
Optical Service Unit ("OSU") business unit within its discontinued
Telecommunications Division. The sale was for a cash payment of $1.5 million
payable in part at, and the remainder shortly after, closing, both of which
payments have been received by the company, and a royalty schedule on sales of
the OSU unit or derivatives over the next 10 years.
The operations of the NetworkVUE business unit within the Company's
discontinued Telecommunications Division have been substantially curtailed, with
only maintenance of the NetSolve component of NetworkVUE being continued through
September 30, 1997, after which the remaining business may be shut down.
4
The operations of the Commercial Information Systems ("CIS") component of
the Company's discontinued Advanced Products Division have been substantially
curtailed and are planned to be shut down in October 1997.
Patents, Trademarks, Licenses, Copyrights
-----------------------------------------
The Company has a variety of U.S. and foreign patents, patent applications,
trademarks and trademark applications, none of which are material.
Contracts
---------
Government contract revenues from professional and technical services,
either as prime contractor or subcontractor, represented approximately 95%, 93%,
and 96% of the Company's total revenues from the fiscal years ended June 30,
1997, 1996, and 1995, 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 negotiated and fixed 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. For
fiscal years 1997, 1996, and 1995, approximately 60%, 62%, and 62%,
respectively, of the Company's professional and technical services revenues were
from cost reimbursable contracts, while approximately 40%, 38%, and 38%,
respectively, were fixed price or time and materials type contracts, with fixed
price 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.
At June 30, 1997, the Company had a maximum contract backlog amounting to
$372 million, compared to $326.8 million, and $235.3 million for 1996 and 1995,
respectively. For this purpose, maximum contract backlog generally assumes that
all government contract options for services in succeeding years will be
exercised and funded. Only a portion of the maximum contract backlog would
generally relate to the upcoming year. Funded contract backlog at June 30, 1997,
amounted to $44 million, compared to $48.5 million and $38.7 million for 1996
and 1995, respectively. Funded contract backlog represents the expected contract
5
revenues for which contract awards have been made and funded, and, thus,
primarily represent the year-end backlog of firm orders for which revenues may
be expected in the following year.
Competition
-----------
The Company encounters substantial competition in the professional and
technical services 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.
Competitors include BDM, CACI, Computer Sciences Corporation, SAIC, and others.
Research and Development
------------------------
The Company performs R&D on its own behalf and on behalf of the U.S.
government under various government contracts. The Company's strategy, where
feasible and permissible, is to expand upon the government R&D work so as to
exploit it commercially.
Employees
---------
As of June 30, 1997, the Company employed 1,162 full-time or special full
time and 14 part-time people, a decrease of 173 people, or 13%, from the 1,335
people employed at June 30, 1996, comprised of 1,225 full-time and 110 part-time
people. The decrease is due primarily to the reductions in employment related to
discontinued operations. At June 30, 1997, the Company had approximately 210
openings for full-time employees, compared to approximately 222 openings at June
30, 1996.
ITEM 2. PROPERTIES
----------
All of the Company's operations are conducted in leased facilities. The
Company has approximately 27 leased facilities for continuing operations within
the United States comprising approximately 348 thousand square feet. The minimum
annual rentals for fiscal year 1998 under non-cancelable operating leases are
approximately $6.6 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 California and Virginia. The Company owns no real property and has
no plans to purchase any in the foreseeable future. The Company believes that
its facilities are adequate for its purposes.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is involved in a number of legal proceedings arising out of
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. The Company has a disputed $2.0 million obligation to
Quintessential Solutions Inc. (QSI) incurred with the acquisition of the rights
to QSI's operating software. Payments of $600,000 and $1,400,000 are due in
November 1996 and November 1997, respectively. Because of a dispute with QSI,
the Company did not make the November 1996 payment.
6
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 1997.
PART II
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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 July 31, 1997, there were 1,380 holders of record of the
Company's common stock. Stock price information by quarter is presented in the
following table:
Fiscal Year
Market ---------------------------------------------
Price 1997 1996
-------- ----------------- ---------------
High Low High Low
---- --- ---- ---
1st Quarter 38 5/8 13 3/4 26 3/8 15 7/8
2nd Quarter 18 1/4 6 39 5/8 21 7/8
3rd Quarter 8 3/8 3 3/4 38 1/2 30 3/8
4th Quarter 6 1/4 4 1/4 44 5/8 31 1/4
On September 19, 1997, the closing price of the Company's common stock
was $7 1/2.
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 10 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.
7
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
GRC International, Inc. and Subsidiaries
FOR THE YEAR ENDED JUNE 30, 1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(in thousands, except for per share data)
Revenue $117,599 $117,016 $132,812 $122,872 $123,821
Operating income (loss) 4,622 (182)* 6,800* 6,468 5,758
Interest income (expense), net (1,343) (518) 270 319 139
Income tax (provision) benefit 10,582 --- --- (299) (308)
Cumulative effect of accounting change --- --- --- 1,000 ---
--------- --------- ---------- ----------- ----------
Income (loss) from continuing operations 13,861 (700) 7,070 7,488 5,589
Loss on discontinued operations (31,611) (16,937) (2,040) (375) (80)
--------- --------- ---------- ----------- ----------
Net income (loss) $ (17,750) $ (17,637) $ 5,030 $ 7,113 $ 5,509
========= ========= ========== =========== =========
Income (loss) per common share from continuing operations $ 1.46 $ (0.08) $ 0.75 $ 0.79 $ 0.61
Net income (loss) per common share $ (1.87) $ (1.92) $ 0.54 $ 0.76 $ 0.60
Weighted average number of common and common shares
equivalents 9,514 9,172 9,393 9,426 9,211
Working capital (excluding discontinued operations) $ 20,459 $ 14,857 $ 19,688 $ 24,683 $ 24,959
Net assets (liabilities) (discontinued operations) (4,591) 14,742 9,975 3,449 2,564
Total assets $ 65,964 $ 67,070 $ 71,107 $ 67,230 $ 64,202
Long-term debt (less current maturities) $ 28,153** $ 16,527** --- --- $ 3,051
Stockholders' equity $ 13,076 $ 28,675 $ 48,268 $ 45,040 $ 39,310
* The operating loss for 1996 includes a write-off of $3.3 million in deferred
software and related costs, and the operating income for 1995 includes
write-off of $0.5 million for deferred software and a gain of approximately
$0.9 million from the sale of a facility.
** Excludes the QSI debt of $2 million in 1997 and $1.2 million in 1996. See
Note 11 to the Financial Statements.
Prior year balances have been restated to conform to 1997 presentation.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION
-------------------
Summary
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The following table sets forth for the years indicated the percentage of
total revenues for each item in the Consolidated Statements of Income and the
percentage change of those items as compared to the prior year:
Period to
Relationship to Total Revenues Period Change
------------------------------ ----------------------
FY97 FY96 FY95 97 vs. 96 96 vs. 95
---- ---- ---- --------- ---------
Revenues 100% 100% 100% 0.5% -11.9%
Cost of revenues 82% 85% 83% -3.3% -10.0%
---- ---- ----
Gross Margin 18% 15% 17% 21.6% -21.2%
G&A, marketing, R&D expenses 14% 12% 12% 15.8% -6.7%
Write-Down 0% 3% 0% NM NM
-- -- --
Operating income 4% 0% 5% NM -102.7%
Net interest expense 1% 0% 0% 159.3% -291.9%
-- -- --
Income (loss) from continuing operations,
before income taxes 3% -1% 5% NM -109.9%
Provision (benefit) for income taxes -9% 0% 0% NM NM
--- -- --
Income from continuing operations 12% -1% 5% NM -109.9%
--- --- --
Loss from discontinued operations -21% -14% -2% NM -730.2%
Loss on disposal of discontinued
operations -5% 0% 0% NM NM
--- -- --
Net income (loss) -15% -15% 4% NM -450.6%
"NM" indicates the percentage change is not meaningful.
Fiscal Year 1997 Compared to Fiscal Year 1996
- ---------------------------------------------
Continuing Operations
- ---------------------
Revenues
--------
Fiscal year 1997 revenues of $117.6 million were $583 thousand, or 1%,
higher than fiscal year 1996 revenues of $117.0 million.
For 1997, revenues of $117.6 million consisted of $115.9 million in
services revenues and $1.7 million in product revenues. For 1996, revenues of
$117.0 million consisted of $110.1 million in service revenues, $2.4 million in
product revenues, and $4.5 in revenues from the minority-interest portion of a
majority-owned joint venture, which was accounted for on a consolidated basis
through the first quarter of 1996. Excluding this $4.5 million in
minority-interest revenues, FY 1997 revenues increased by 4.4% over FY 1996,
9
from $112.5 million to $117.6 million. The same change in revenues is the net
effect of a variety of factors, none significant, over the Company's
approximately 150 active contracts.
Cost of Revenues and Gross Profit
---------------------------------
Cost of revenues for 1997 amounted to $96.1 million, or 82% of revenues,
compared to $99.3 million, or 85% of revenues for 1996. Gross profit for 1997
amounted to $21.5 million, or 18% of revenues, compared to $17.7 million, or 15%
of revenues for 1996, an increase of 21%.
Operating Expenses and Operating Income
---------------------------------------
Fiscal year 1997 total operating expenses of $16.9 million, or 14% of
revenues, were $1.0 million less than the $17.9 million in operating expenses
for 1996. However, excluding a $3.3 million write off of capitalized software
and related items in FY 1996, operating expenses were $14.6 million in FY 1996.
The $2.3 million increase in adjusted operating expenses was attributable
primarily to bid and proposal and other general and administrative expense
increases during fiscal year 1997.
Operating profit from continuing operations for 1997 amounted to $4.6
million compared to a loss of $182 thousand for FY 1996.
Net Interest Income or Expense
------------------------------
Net interest expense of $1.3 million for 1997, compared to net interest
expense of $518 thousand for 1996, reflects the significant increase in debt
incurred during 1997 in order to fund what are now Discontinued Operations.
Income Tax Benefit
------------------
In fiscal year 1997, the Company recognized a $10.6 million deferred tax
asset related to its net loss carryforwards for income tax purposes, bringing to
$11.6 million the total net deferred tax asset.
As a result of tax losses incurred in prior periods, the Company, at June
30, 1997, had tax loss carryforwards amounting to $64 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
Telecommunications and Advanced Product Divisions. With those Divisions now
having been discontinued, the Company expects to report profits for income tax
purposes in the future. As a consequence, the Company has now recognized a
portion of the benefit available from its tax loss carryforwards.
10
Income or Loss from Continuing Operations
-----------------------------------------
Income from continuing operations for 1997 amounted to $13.9 million,
compared to a loss of $700 thousand for 1996.
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.
On April 30, 1997, the Company sold the assets and liabilities of its GRC
Instruments/Dynatup business unit for $2.0 million. The proceeds received were
used to pay down the Company's obligation under the Equipment Lease.
On June 5, 1997, the Company sold the assets of its Vindicator security
business unit within its discontinued Advanced Products Division. The sale was
for book value of approximately $700 thousand, with payment of $100 thousand at
closing and $150 thousand 90 days thereafter, both of which payments have been
received by the Company. The remainder of the purchase price is payable at a
rate of 6% of sales, but in all events, any remaining balance is payable in a
lump sum at December 31, 1998.
On June 27, 1997, the Company sold the assets and liabilities of its
Optical Service Unit ("OSU") business unit within its discontinued
Telecommunications Division. The sale was for a cash payment of $1.5 million
payable in part at, and the remainder shortly after, closing, both of which
payments have been received by the Company, and a royalty schedule on sales of
the OSU unit or derivatives over the next 10 years.
The operations of the NetworkVUE business unit within the Company's
discontinued Telecommunications Division have been substantially curtailed, with
only maintenance of the NetSolve component of NetworkVUE being continued through
September 30, 1997, after which the remaining business may be shut down.
The operations of the Commercial Information Systems ("CIS") component of
the Company's discontinued Advanced Products Division have been substantially
curtailed and are planned to be shut down in October 1997.
For fiscal year 1997, the loss from Discontinued Operations amounted to
$31.6 million, comprised of a loss of $25.2 million from operations of
Discontinued Divisions and a loss of $6.4 million on estimated disposal of
Discontinued Operations, including operating losses during the phase out.
For fiscal year 1996, the loss from Discontinued Operations amounted to
$16.9 million, comprised entirely of losses from operations of Discontinued
Divisions.
11
Net Income or Loss
------------------
Net loss for fiscal year 1997 amounted $17.8 million, comprised of a profit
from Continuing Operations of $13.8 million and a loss from Discontinued
Operations of $31.6 million.
Net loss for fiscal year 1996 amounted to $17.6 million, comprised of loss
of $700 thousand from Continuing Operations and a loss from Discontinued
Operations of $16.9 million.
Fiscal Year 1996 Compared to Fiscal Year 1995
- ---------------------------------------------
Continuing Operations
- ---------------------
Revenues
--------
Fiscal year 1996 revenues of $117.0 million were $15.8 million, or 13.5%,
lower than fiscal year 1995 revenues of $132.8 million.
For 1996, revenues of $117.0 million consisted of $110.1 million from
service revenues, $2.4 million from product sales, and $4.5 million from the
minority-interest portion of the majority-owned joint venture. For 1995,
revenues of $132.8 million consisted of $116.7 million in service revenues and
$1.5 million in product revenues, and $14.6 million from the minority-interest
portion of a majority-owned joint venture.
Excluding the minority-interest portion of the majority-owned joint
venture, revenues for FY 1996 decreased $5.7 million, or 5%, from FY 1995
revenues of $118.2 million. The same change in revenues is the net effect of a
variety of factors, none significant, over the Company's approximately 150
active contracts.
Cost of Revenues and Operating Profit
-------------------------------------
Cost of revenues for 1996 amounted to $99.3 million, or 85% of revenues,
compared to $110.4 million, or 83% of revenues for 1995. Operating loss for 1996
amounted to $182 thousand, compared to $6.8 million, or 4% of revenues for 1995.
Operating Expenses and Operating Income
---------------------------------------
Fiscal year 1996 total operating expenses of $17.9 million, or 15% of
revenues, were $2.3 million more than the $15.6 million, or 12% of revenues, in
operating expenses for 1995. However, excluding a $3.3 million write off of
capitalized software and related items in FY 1996, operating expenses were $14.6
million in FY 1996. The $1.0 million decrease in adjusted operating expenses was
attributable primarily to reduced bid and proposal net of other general and
administrative expense increases during fiscal year 1996.
The operating loss from continuing operations of $182 thousand for 1996
contrasts with an operating profit of $6.8 million for 1995.
12
Net Interest Income or Expense
------------------------------
Net interest expense for 1996 of $518 thousand contrasts with net interest
income of $270 thousand for 1995. Increased expense of $788 thousand was due to
the Company's increased debt.
Net Income or Loss from Continuing Operations
---------------------------------------------
The net loss from Continuing Operations for 1996 of $700 thousand contrasts
with net income from Continuing Operations of $7.1 million for 1995.
Discontinued Operations
-----------------------
The net loss from Discontinued Operations for fiscal year 1996 amounted to
$16.9 million, compared to a loss of $2.1 million for 1995. The 1996 loss
included a substantial write down of capitalized software.
Net Income or Loss
------------------
The net loss for fiscal year 1996 amounted to $17.6 million, comprised of
net loss from Continuing Operations of $700 thousand and a net loss from
Discontinued Operations of $16.9 million, compared to a net income for fiscal
year 1995 of $5.0 million, comprised of net income of $7.1 million from
Continuing Operations and a net loss of $2.1 million from Discontinued
Operations.
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 July 1, 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
13
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, which have been filed as Exhibits to the Company's report on
Form 10-Q for the quarter ended December 3, 1996, and are incorporated by
reference as Exhibits to the present report. As of September 17, 1997, the
holder of the Convertible Debenture has given the Company Conversion Notices
converting $2.0 million of the $4 million Debenture into 405,817 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 July 1, 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 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, if and when issued, would 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, which have been filed as Exhibits to the
Company's report on Form 10-Q for the quarter ended December 3, 1996, and are
incorporated by reference as Exhibits to the present report. The investor has
not yet purchased any shares under the Equity Line Agreement.
14
Liquidity and Capital Resources
-------------------------------
The Company had $5.8 million in cash and cash equivalents at June 30, 1997,
compared to $2.8 million at June 30, 1996.
Net cash provided by continuing operations amounted to $5.7 million for
fiscal 1997, compared to $10.6 million for fiscal 1996. Net cash used in
discontinued operations amounted to $12.4 million for fiscal 1997, compared to
$21.7 million in fiscal 1996. Net cash used in investing activities for fiscal
1997 amounted to $3.8 million, compared to $4.7 million for the prior year. Net
cash provided by financing activities amounted to $13.6 million for fiscal 1997,
compared to $15.8 million provided in fiscal 1996. The net increase in cash and
cash equivalents for fiscal 1997 amounted to $3.0 million, compared to an
increase of cash and cash equivalents of $111 thousand in the prior year.
As a result of the increase in funded debt (interest bearing current and
long term debt) and operating losses during fiscal year 1997, the Company's
ratio of total funded debt (net of cash) to total capitalization (with equity on
a book value basis) amounted to 67% at June 30, 1997, compared to 37% 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, and any related royalties from discontinued
operations, and (f) net proceeds received from the issuance of equity pursuant
to the Equity Line Agreement. For fiscal 1998, the Company expects 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, some of which cannot be foreseen, which can influence this
expectation, actual results may differ materially from those expected.
At June 30, 1997, the Company had $29.8 million of debt, $1.7 million of
which was classified as short term, and $28.1 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 the following: an
$8 million term loan ("Term Loan") available on an approval basis, of which $4.9
million was drawn down at June 30, 1997; a $22 million revolving line of credit
("Revolving Credit"), of which $19.3 million was used at June 30, 1997; and a
$2.9 million debt (as of June 30, 1997) arising from the equipment financing
("Equipment Lease") arranged with the bank's equipment leasing subsidiary. Of
the proceeds received from the sale of discontinued business units, $3.3 million
were used to pay down a portion of the Company's obligation under the Equipment
Lease and $100 thousand was used to pay down a portion of the term loan during
the fourth quarter of fiscal 1997.
15
The Term Loan is due on September 1, 1998, and bears interest at the bank's
floating prime rate, currently 8.50% per annum. If the Company is unable to
obtain an extension of the Term Loan, it intends to pay it out of a combination
of (i) operating cash flows, (ii) the Revolving Credit, and/or (iii) the Equity
Line Agreement. 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 has
typically been renewed in the past, and the Company anticipates that it will
continue to be renewed, although there is no guarantee of renewal. 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 was originally for
a term of 60 months which commenced in June 1996 and bears interest at 9%. It is
now expected to be paid in full by the end of fiscal 1999, under the revised
payment schedule.
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. At June 30, 1997, the Company was in
compliance with its covenants under this Agreement.
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
-------
With the discontinuation of the Telecommunications and Advanced Products
Divisions, the Company is now focused on its information technology and
professional 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.
16
Risk Factors
------------
The Company and its shareholders face a number of risks, including, but not
limited to:
. The Company's ability to sufficiently grow its services business to
generate the needed positive free cash flow 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. 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 risk that the Equity Line Agreement will not remain available, either
because the investor does not make required purchases due to any future
securities registration problems, or otherwise.
ITEM 8. FINANCIAL STATEMENTS
--------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
Independent Auditors' Report 18
Report of Management 19
Consolidated Statements of Income for the years ended
June 30, 1997, 1996 and 1995 20
Consolidated Balance Sheets as of June 30, 1997 and 1996 21-22
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1996 and 1995 23-24
Consolidated Statements of Stockholders' Equity
for the years ended June 30, 1997, 1996 and 1995 25
Notes to Consolidated Financial Statements 26
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, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997 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 13, 1997
18
REPORT OF MANAGEMENT
The management of GRC International, Inc. is responsible for all information and
representations contained in the annual report. The consolidated financial
statements, which include amounts based on estimates and judgments of
management, have been prepared in conformity with generally accepted accounting
principles. Other financial information in the annual report is consistent with
the consolidated financial statements.
The Company maintains a system of internal financial controls which provides
management with reasonable assurance that transactions are recorded and executed
in accordance with its authorizations, that assets are properly safeguarded and
accounted for, and that records are maintained so as to permit preparation of
financial statements in accordance with generally accepted accounting
principles. This system includes written policies and an organizational
structure that segregates duties. The Company also has instituted policies and
guidelines which require all employees to conduct business according to the
highest standards of integrity.
In addition, the Audit Committee of the Board of Directors, consisting solely of
outside directors, meets periodically with management and the independent
auditors to discuss auditing, internal accounting controls and financial
reporting matters and to ensure that each is properly discharging its
responsibilities. The independent auditors periodically meet alone with the
Audit Committee and have full and unrestricted access to the Committee at any
time.
GRC INTERNATIONAL, INC.
/s/ Jim Roth /s/ Ronald B. Alexander
- ------------------------------------- -------------------------------------
Jim Roth Ronald B. Alexander
President and Chief Executive Officer Senior Vice President-Finance,
Treasurer and Chief Financial Officer
19
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED JUNE 30,
----------------------------
1997 1996 1995
-------- -------- --------
(in thousands, except for per share data)
Revenues $117,599 $117,016 $132,812
Cost of services 96,123 99,344 110,414
Write down of deferred software
and other related costs --- 3,283 ---
Indirect and other costs 16,854 14,571 15,598
-------- -------- --------
Operating income (loss) 4,622 (182) 6,800
Interest (expense) income, net (1,343) (518) 270
-------- -------- --------
Income (loss) from continuing operations
before benefit for income taxes 3,279 (700) 7,070
Benefit for income taxes 10,582 --- ---
-------- -------- --------
Income (loss) from continuing operations 13,861 (700) 7,070
-------- -------- --------
Discontinued Operations:
- -----------------------
Loss from discontinued operations (25,220) (16,937) (2,040)
Loss on disposal of discontinued operations,
including provision of $2,775 for
operating losses during phase out (6,391) --- ---
-------- -------- --------
Loss from discontinued operations (31,611) (16,937) (2,040)
-------- -------- --------
Net income (loss) $(17,750) $(17,637) $ 5,030
======== ======== ========
Earnings Per Share Amounts:
- --------------------------
Income (loss) from continuing operations $ 1.46 $ (0.08) $ .75
Net income (loss) $ (1.87) $ (1.92) $ .54
Common shares and equivalents 9,514 9,172 9,393
The accompanying notes are an integral part of these statements.
20
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF JUNE 30,
--------------
ASSETS
------
1997 1996
--------- ---------
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 5,756 $ 2,790
Accounts receivable, net 25,087 26,096
Unbilled reimbursable costs and fees, net 4,076 4,014
Other receivables 1,090 1,000
Prepaid expenses and other current assets 576 629
Deferred income taxes 2,686 760
Net assets related to discontinued operations --- 2,604
------- -------
Total current assets 39,271 37,893
------- -------
PROPERTY AND EQUIPMENT, at cost:
Land, buildings and leasehold improvements 4,874 4,451
Equipment, furniture and fixtures 15,093 12,854
Less - Accumulated depreciation and amortization (9,414) (7,610)
------- -------
10,553 9,695
------- -------
OTHER ASSETS:
Goodwill and other intangible assets, net 2,409 2,274
Software development costs, net 461 467
Deferred income taxes 8,896 240
Deposits and other 4,374 4,363
Net assets related to discontinued operations --- 12,138
------- -------
16,140 19,482
------- -------
$65,964 $67,070
======= =======
The accompanying notes are an integral part of these statements.
21
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF JUNE 30,
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1997 1996
--------- ---------
(in thousands)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,679 $ 1,243
Accounts payable 2,610 4,807
Accrued compensation and benefits 12,210 11,897
Income taxes payable 384 270
Accrued expenses and other current liabilities 1,929 2,215
Net liabilities related to discontinued operations 4,591 ---
--------- ---------
Total current liabilities 23,403 20,432
--------- ---------
LONG-TERM LIABILITIES
Long-term debt 28,153 16,527
Other long-term liabilities 1,332 1,436
--------- ---------
Total long-term liabilities 29,485 17,963
--------- ---------
COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value -
Authorized - 300,000 shares,
issued and outstanding - 0 shares
in 1997 and 1996 --- ---
Common stock, $.10 par value -
Authorized - 30,000,000 shares,
issued - 9,849,000 shares in 1997
and 9,586,000 shares in 1996 985 958
Paid-in capital 76,954 74,830
Accumulated deficit (61,018) (43,268)
--------- ---------
16,921 32,520
Less: Treasury stock, at cost; 300,000 shares
in 1997 and 1996 (3,845) (3,845)
--------- ---------
Total stockholders' equity 13,076 28,675
--------- ---------
$ 65,964 $ 67,070
========= ========
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,
----------------------------
1997 1996 1995
---------- ---------- ----------
(in thousands)
CASH FLOWS FROM CONTINUING OPERATIONS:
Income (loss) from continuing operations $ 13,861 $ (700) $ 7,070
Reconciliation of income from continuing operations
Depreciation and amortization 3,330 3,509 2,483
Loss provision on current assets 1,067 956 857
Gain on disposal of property and equipment --- --- (900)
Income tax benefit (10,582) --- ---
Write-down of deferred software and related costs --- 3,283 ---
Changes in assets and liabilities
Accounts receivable (120) 5,414 (952)
Prepaid expenses and other current assets (37) 239 1,092
Accounts payable (2,197) (2,472) 2,593
Accrued expenses and other current liabilities 227 467 (399)
Income taxes payable 114 (176) (500)
Other (11) 129 (46)
---------- ---------- ----------
Net cash provided by operating activities 5,652 10,649 11,298
---------- ---------- ----------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Reconciliation of income from discontinued operations
Loss from discontinued operations (31,611) (16,937) (2,040)
Non-cash charges and changes in net assets 9,429 (4,767) (6,526)
Proceeds from sale of discontinued operations 3,366 --- ---
Provision for loss on disposal of discontinued operations 6,391 --- ---
---------- ---------- ----------
Net cash used by discontinued operations (12,425) (21,704) (8,566)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (3,468) (3,141) (3,206)
Proceeds from sale of property and equipment --- --- 880
Deferred software costs (97) (2,919) (1,405)
Proceeds from notes receivable --- 1,440 2,750
Other (247) (35) (9)
---------- ---------- ----------
Net cash used by investing activities (3,812) (4,655) (990)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital lease obligations (4,443) (148) (118)
Bank borrowings 13,881 17,925 ---
Proceeds from convertible debenture, warrants and other 4,000 --- ---
Deferred financing costs (207) --- ---
Issuance of common stock 320 --- 466
Taxes related to exercises of employee stock options --- (1,956) ---
Purchases of treasury stock --- --- (3,071)
---------- ---------- ----------
Net cash provided (used) by financing activities 13,551 15,821 (2,723)
---------- ---------- ----------
Net increase (decrease) in cash and equivalents 2,966 111 (981)
Cash and equivalents at beginning of period 2,790 2,679 3,660
---------- ---------- ----------
Cash and equivalents at end of period $ 5,756 $ 2,790 $ 2,679
========== ========== ==========
The accompanying notes are an integral part of these statements.
23
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
FOR THE YEARS ENDED JUNE 30,
----------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Supplemental disclosures:
Cash paid for:
Interest $2,055 $754 $371
Taxes 80 84 111
Other non-cash financing activities:
Conversion of debenture to common stock 750 --- ---
24
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED JUNE 30,
----------------------------
Common Stock Paid-in Accumulated Treasury
Shares Amount Capital Deficit Stock
------ ------ ------- ----------- --------
(in thousands)
Balances as of June 30, 1994 9,152 $ 915 $ 76,363 $ (30,661) $ (1,577)
Proceeds from stock options exercised 173 17 449 --- ---
Net Income --- --- --- 5,030 ---
Purchase of 157,500 shares of Treasury Stock --- --- --- --- (2,268)
------ ------- -------- --------- ---------
Balances as of June 30, 1995 9,325 932 76,812 (25,631) (3,845)
Stock options exercised net of shares retained
for exercise price and taxes 261 26 (1,869) --- ---
Compensation on officers' stock options --- --- 88 --- ---
Discount on Employee Stock Purchase Plan --- --- (201) --- ---
Net loss --- --- --- (17,637) ---
------ ------- -------- --------- ---------
Balances as of June 30, 1996 9,586 958 74,830 (43,268) (3,845)
Stock options exercised net of shares retained
for exercise price and taxes 73 8 365 --- ---
Compensation on officers' stock options 4 --- 31 --- ---
Discount on Employee Stock Purchase Plan --- --- (86) --- ---
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 9,852 $ 985 $ 76,954 $ (61,018) $ (3,845)
====== ======= ======== ========= =========
The accompanying notes are an integral part of these statements.
----------------------------------------------------------------
25
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 1997, 1996 and 1995
----------------------------
(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.
Major customer - 94%, 91% and 92% of the Company's revenues were derived
--------------
from contracts with the U.S. Department of Defense (DoD) and 4%, 9% and 17% of
revenues were derived from one contract for fiscal years 1997, 1996 and 1995,
respectively.
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.
Inventories - Inventory costs include materials, labor and manufacturing
-----------
overhead. Inventories are priced using the average unit cost method and are
included in prepaid and other current assets.
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.
Upon sale or retirement of property and equipment, the difference between
the proceeds and the net book value of the assets is charged or credited to
income.
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
15 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. Accumulated amortization as of June 30, 1997 and 1996, of goodwill
was $1,235,000 and $1,160,000, respectively, and of other intangible assets was
$1,272,000 and $1,132,000, respectively.
Software development costs - Software development costs incurred for
--------------------------
products to be sold are capitalized only after establishing technological
feasibility. Capitalized software is amortized over the greater of straight-line
method over the estimated economic life of the product, ranging between three
and five years, or the ratio that current revenues
26
bear to the total of current and estimated future revenue stream on an
individual product basis. At the end of each quarter, the Company re-evaluates
the estimates of future revenues and remaining economic life of products for
which software costs have been capitalized, and, if required under SFAS 86,
writes-down the carrying values to net realizable value. Accumulated
amortization as of June 30, 1997 and 1996, was $103,000 and $0, 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.
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. The amount of any such contributions is at the
discretion of the Board of Directors. The total expense under the deferred
income plan was approximately $3,785,000, $3,842,000 and $3,694,000 in 1997,
1996 and 1995, respectively.
The Company has an unfunded defined benefit pension plan for directors who
are not employees of the Company. After termination as a director for any
reason, a director will receive the then-current directors' retainer fee for the
lesser of 15 years or life. Directors may also elect to receive a lump sum or
other actuarial equivalent of the foregoing benefit. Directors achieve 50%
vesting after five years of service, with annual increases of 10%, until full
vesting is achieved after 10 years of service. However, in the event of a change
in control, directors immediately become fully vested. The total expense charged
under the defined benefit pension plan was approximately $53,000, $50,000 and
$50,000 in 1997, 1996 and 1995, respectively. The present value of the projected
benefit obligation is approximately $144,500 and $191,800 at June 30, 1997 and
1996, respectively.
Income taxes - The Company accounts for income taxes under an asset and
------------
liability approach that requires the recognition of deferred tax assets and
liabilities for the difference between the financial reporting and tax basis 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 - Earnings per common share in 1995 and 1997 were
------------------
computed based upon the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Loss per common share in 1996
did not include common equivalent shares, as the effect would be anti-dilutive.
Dilutive common
27
equivalent shares consist of stock options calculated using the treasury stock
method. Primary and fully diluted earnings per share in each year are
approximately the same.
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 date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
New accounting pronouncements - SFAS No. 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. The basic calculation is based on the weighted average number of shares
outstanding. The diluted calculation will include consideration of stock-based
compensation and the effect of the convertible debenture.
Had the Company computed earnings per share in accordance with SFAS No.
128, the results would have been as follows:
1997 1996 1995
---- ---- ----
Basic EPS:
Continuing operations 1.48 (0.08) 0.79
Net income (loss) (1.90) (1.92) 0.56
Diluted EPS:
Continuing operations 1.45 (0.08) 0.75
Net income (loss) (1.76) (1.92) 0.54
Changes in presentation - Certain amounts in the 1996 and 1995 Consolidated
-----------------------
Financial Statements have been reclassified to conform to the 1997 presentation.
(2) SALE OF REAL PROPERTY
In June 1995, the Company sold approximately 13.1 acres, including all
buildings, structures, parking areas and other improvements, located in Santa
Barbara, California for $4,300,000. The Company received 20% of the proceeds in
cash at closing and took back a promissory note, secured by a Deed of Trust, for
the remaining balance of approximately $3,400,000. The note has a maturity of
not more than 5 years, accrues interest at the rate of 7% per annum, provides
for the annual payment of both interest and principal, and has a remaining
balance of $2.0 million at June 30, 1997. The Company has included the note in
Deposits and other assets in the accompanying Consolidated Balance Sheets. The
transaction resulted in the Company recognizing a gain of approximately $900,000
in 1995 from the sale, reported in the "Indirect and Other" line item of the
1995 Consolidated Statement of Income.
28
In addition to the sale of the property, the Company entered into a 15 year
lease for a portion of a new building that was built on the property site.
(3) DEBT
Long-term debt at June 30, consists of the following:
1997 1996
-------- --------
(in thousands)
Revolving credit agreement $ 19,267 $ 5,425
Term loans 4,900 5,000
Equipment financing 2,871 7,345
Convertible debenture 2,758 ---
Other 36 ---
-------- --------
Total long-term debt $ 29,832 $ 17,770
Less current portion 1,679 1,243
-------- --------
$ 28,153 $ 16,527
======== ========
The fair market value of the Company's debt instruments approximate the
carrying value.
Equipment Financing - 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%.
Revolving Credit Agreement and Term Loans - At June 30, 1997, the Company
-----------------------------------------
had a revolving credit agreement with its bank that provides for secured
borrowings up to $22 million. The agreement extends to January 1999, with the
bank required to provide 15 months prior written notice to terminate the
facility (absent any defaults under the agreement). The bank has provided an
additional $5 million financing under term loans due September 1, 1999. Advances
under the revolving credit agreement and the term loans accrue interest at the
bank's prime rate which was 8.5% as of June 30, 1997. The collateral under the
Amended and Restated Revolving Credit and Term Loan Agreement includes all of
the Company's assets, except for property and equipment.
The revolving credit agreement contains certain covenants, including a
material adverse change clause, which require the Company to maintain certain
minimums for earnings, tangible net worth working capital and debt ratios. The
Amended and Restated Revolving Credit and Term Loan Agreement containing the
term loan and the revolving line of credit was amended as of March 31, 1996, and
again as of June 30, 1996, to reduce various financial ratio covenant levels so
as to bring the Company into compliance with those covenants as of those dates.
29
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").
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. A portion of the
proceeds from the Debenture were allocated to the conversion feature and the
detachable warrants.
Annual maturities for long-term debt, including the QSI note payable, which
is included in Net liabilities resulting from Discontinued Operations in the
accompanying Consolidated Balance Sheets (see Note 11 to the Financial
Statements), for the next five years (unless extended) are as follows: 1998,
$3,661,000; 1999, $25,383,000; 2000, $2,770,000; and nothing thereafter.
(4) INCOME TAXES
The differences between the tax provision calculated at the statutory
federal income tax rate and the actual tax provision for each year are as
follows:
1997 1996 1995
-------- -------- ------
(in thousands)
Tax (benefit) at statutory federal rate $ 1,115 $ (238) $ 2,404
State income taxes 151 (28) 282
Utilization of loss carryforwards --- --- (1,100)
Change in valuation reserve (11,848) 230 (1,618)
Other --- 36 32
-------- -------- --------
Benefit from income taxes $(10,582) $ --- $ ---
========= ======== ========
30
The primary components of temporary differences which give rise to the
Company's net deferred tax asset are as follows:
As of June 30,
-------------------------------
1997 1996
-------- -------
(in thousands)
Deferred tax assets:
Reserves and other nondeductible accruals $ 4,266 $ 1,887
Compensation not currently deductible 2,207 2,159
Net operating loss 26,195 20,231
AMT and general business credits 800 1,178
Other 141
Valuation reserve (17,500) (15,443)
-------- --------
Total deferred tax assets 15,968 10,153
-------- --------
Deferred tax liabilities:
Reimbursable costs and fees (3,555) (2,985)
Prepaid expenses and rent (232) (500)
Depreciation (tax over book) (410) (1,410)
Internally developed software (189) (4,258)
------- --------
Total deferred tax liabilities (4,386) (9,153)
------- --------
Net deferred tax asset $ 11,582 $ 1,000
======== ========
At June 30, 1997, the Company had net operating loss carryforwards of
approximately $64 million to reduce future federal tax liabilities of which $10
million expire in 1999, $15 million expire between 2000 and 2010, $27 million
expire in 2011, and $12 million expire in 2012.
The Company has recorded a net deferred tax asset of $11.6 million
reflecting the benefit of $26.2 million in loss carryforwards, which expire in
varying amounts between 1999 and 2012. Realization is dependent 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 deferred tax asset will be realized. The amount of
the deferred tax asset considered realizable, however, could be reduced in the
near term if estimates of future taxable income during the carryforward period
are reduced.
31
(5) COMMITMENTS AND CONTINGENCIES
Commitments - The Company leases all of its facilities and rents certain
-----------
equipment under lease agreements, some with inflation escalator clauses. The
minimum annual rentals due under non-cancelable 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)
1998 $ 6,623 $ 435
1999 6,194 435
2000 5,672 429
2001 4,999 288
2002 4,675 187
2003 and thereafter 32,752 --
------- -------
$60,915 $ 1,774
======= =======
Rent expense under operating leases was $ 7,367,000, $6,643,000 and
$6,181,000 net of sublease income of $555,000, $477,000 and $395,000, in 1997,
1996 and 1995, respectively.
As of June 30, 1997, the Company had employment agreements with 13
employees providing for severance payments if employment terminates after a
change of control, and the maximum amount payable under these arrangements was
approximately $2,266,080. Subsequent to June 30, 1997, the number of employees
and the maximum change of control severance payments were increased to 15 and
$3,394,922, respectively.
(6) 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:
1997 1996
-------- --------
(in thousands)
Accounts receivable, net of reserves of
$41 in 1997 and $0 in 1996 -
U.S. government $ 23,420 $ 24,057
Non-U.S. government 1,667 2,039
-------- --------
$ 25,087 $ 26,096
======== ========
Unbilled reimbursable costs and fees,
net of reserves of $4,594 in 1997
and $3,691 in 1996 -
U.S. government $ 3,646 $ 3,805
Non-U.S. government 430 209
-------- --------
$ 4,076 $ 4,014
======== ========
32
Invoices released in July that relate to June activity were $10,736,000 and
$9,863,000 for 1997 and 1996, respectively, and are reflected in accounts
receivable in the accompanying financial statements.
The components of unbilled reimbursable costs and fees are as follows:
1997 1996
-------- ------
(in thousands)
Retainages billable upon completion of contract $ 2,301 $ 1,901
Unbilled direct costs, fee and indirect costs incurred
in excess of provisional billing rates 501 215
Costs incurred in excess of contractual authorization,
billable upon execution of a contract or contractual
amendment to increase funding 1,274 1,898
-------- --------
$ 4,076 $ 4,014
======= ========
At June 30, 1997, unbilled reimbursable costs and fees expected to be
collected after one year were approximately $2,278,000.
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.
(7) RELATED PARTY TRANSACTIONS
Through December 31, 1995, one of the Company's directors was of
counsel to a law firm which serves as counsel for the Company. Fees for legal
services rendered by the law firm to the Company aggregated $52,000 and $83,000
in 1996 and 1995, respectively.
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 agreement with the Company (see
Note 3 for discussion).
In January 1997, the Company arranged for up to $22 million in financing,
consisting of a $4 million convertible debenture with the Halifax Fund, L.P.
("Halifax") and an $18 million equity line with Cripple Creek Securities, LLC
("Cripple Creek"). The investment manager for Halifax and the sole member of
Cripple Creek is The Palladin Group, L.P. ("Palladin"), of which one of the
Company's directors was a special limited partner until June 30, 1997. In
addition, the same director is the general partner of Ramius Capital Group,
L.P., which until June 30, 1997 was an affiliate of Palladin.
33
(8) STOCK-BASED COMPENSATION PLANS
At June 30, 1997, the Company has seven stock-based compensation plans, as
follows (and more fully described below): 1985 Employee Stock Option Plan; 1994
Employee Stock Option Plan; 1996 Employee Stock Option Plan; 1996 Officers Stock
Option Plan; Cash Compensation Replacement Plan; Directors Fee Replacement Plan;
and Employee Stock Purchase Plan. The Company uses the intrinsic value method
and applies APB Opinion 25 and related interpretations in accounting for its
plans. Had compensation cost for the Company's seven stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of FASB Statement 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below. (These pro forma amounts may not be indicative of
such effects in future years.):
1997 1996
--------------------- ---------------------
As Pro As Pro
Reported Forma Reported Forma
-------- ----- -------- -----
Net income (loss) (in thousands) $(17,750) $(19,562) $(17,637) $(18,579)
Earnings Per Share Amounts
- --------------------------
Net income (loss) $ (1.87) $ (2.06) $ (1.92) $ (2.03)
Under the 1985 Employee Stock Option Plan ("1985 Plan"), no further options
may be granted, but 136,263 options remain outstanding as of June 30, 1997.
Under the 1994 Employee Stock Option Plan ("1994 Plan"), up to 750,000
shares may be issued pursuant to exercise of options. Of that amount, 550,000
shares may be issued to officers of the Company. As of June 30, 1997, a total of
5,095 shares have been issued under the 1994 Plan (all of them to officers), and
726,902 options are outstanding, of which 541,854 are held by officers.
Under the 1996 Employee Stock Option Plan ("1996 Employee Plan"), up to
140,000 shares may be issued to non-officer employees pursuant to exercise of
options. As of June 30, 1997, no shares have been issued under the 1996 Employee
Plan, and 81,750 options are outstanding.
Under the 1996 Officers Stock Option Plan ("1996 Officers Plan"), up to
300,000 shares may be issued to officers pursuant to exercise of options. As of
June 30, 1997, no shares have been issued under the 1996 Officers Plan, and
111,375 options are outstanding. (The 1996 Employee Plan and the 1996 Officers
Plan are sometimes referred to collectively as the "1996 Plans".)
Under the Employee Stock Purchase Plan, participating employees during a
quarter have a "look back" option to purchase shares at 85% of the lower of the
stock price on the first trading day or the last trading day of the quarter.
Under the 1985, 1994 and 1996 Plans, options vest ratably over a four year
period, although options issued to the CEO, Chairman and Vice Chairman vest in 6
months, and options issued to the Chairman and Vice Chairman are immediately
exercisable in the event of a change in control. Options have a 10-year term and
are issued at the fair market value
34
on the date of grant, and therefore, under the intrinsic value method, no
compensation is recorded in the Statement of Income.
Under the Company's Directors Fee Replacement Plan, outside directors may
elect to receive stock and/or non-qualified options in lieu of annual fees
and/or other compensation. Options are immediately exercisable. Options remain
exercisable for 3 years after a participant ceases to be a director. As of June
30, 1997, options for 49,985 shares are exercisable. A separate plan permits
outside directors to receive their fees in the form of phantom stock, but to
date, no phantom stock has been awarded. Compensation cost recognized under the
Directors Fee Replacement Plan for the years ended June 30, 1997, June 30, 1996
and June 30, 1995 equaled $112,395, $117,900 and $82,033, respectively.
Participants in the Company's Cash Compensation Replacement Plan are
limited to officers of the Company. Under the Plan, participating officers
forego cash compensation (up to 25% of salary and up to 100% of bonus) to
purchase 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 3 years after
an officer's termination as an employee. As of June 30, 1997, options for 35,639
shares are exercisable. Compensation cost recognized under the Cash Compensation
Replacement plan for the years ended June 30,1997, June 30, 1996 and June 30,
1995 equaled $103,029, $359,432 and $122,781, respectively.
A summary of the status of the Company's stock options as of June 30, 1997,
1996 and 1995 and changes during the year ended on those dates is presented
below (shares in thousands):
1985, 1994 and 1996 Employee and Officer Stock Option Plans
1997 1996 1995
--------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------------------------------------------------------------------
Outstanding @
beginning of year 855,661 $18.58 829,745 $9.04 701,688 $ 4.95
Granted 518,771 $13.59 415,011 $25.20 312,040 $15.32
Exercised (83,655) $ 6.02 (373,595) $4.89 (161,795) $ 3.58
Canceled (157,237) $17.15 (15,500) $15.35 (22,188) $ 7.68
--------- --------- --------
Outstanding @
end of year 1,133,540 $17.42 855,661 $18.58 829,745 $ 9.04
========= ========= ========
Options exercisable
at year end 292,165 $16.20 166,286 $18.90 340,946 $ 5.44
========= ========= ========
Options available
for future grant 172,053 95,337 304,848
========= ========= ========
Weighted Average
fair value of options
granted during the
year $ 6.66 $ 9.16
========= =========
35
Directors Fee Replacement Plan & Officers Cash Compensation Replacement Plan
1997 1996 1995
-------------------------- ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------------------------------------------------------------------
Outstanding @
beginning of year 59,924 $3.59 41,503 $1.96 47,726 $0.74
Granted 29,906 $2.40 22,982 $6.92 18,932 $3.61
Exercised (20) $9.43 (4,561) $5.53 (25,155) $1.46
Canceled --- --- --- --- --- ---
------- ------- -------
Outstanding @
end of year 89,810 $3.20 59,924 $3.59 41,503 $1.96
======= ======= =======
Options exercisable
at year end 82,628 $3.05 54,117 $3.38 39,246 $1.94
======= ======= =======
Options available
for future grant 419,503 459,858 482,980
======= ======= =======
Weighted Average fair
value of options
granted during the
year $ 7.98 $ 22.78
======= =======
Under the Directors Fee Replacement Plan, options expire 3 years after the
optionee ceases to be a director. Under the Cash Compensation Replacement Plan,
options expire 3 years after the optionee ceases to be an employee. As of June
30, 1997, 2,041 and 10,560 of the outstanding shares expire in FY 1999 and FY
2000, respectively. As of June 30, 1997, 1,543 and 9,522 of the exercisable
shares expire in FY 1999 and FY 2000, respectively.
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 for fiscal 1997 and 1996, respectively, (a) no expected dividends
(b) expected volatility of 50% and 44%, (c) risk free interest rate of 6.5% and
6.25%, and (d) expected life of 5 and 3 years.
The following table summarizes information about stock options outstanding
at June 30, 1997 (shares in thousands):
1985, 1994 and 1996 Employee and Officer Stock Option Plans
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------------------------------
$ 4.13 - $ 7.31 201,375 8.3 $ 4.77 23,875 $ 7.15
$ 9.00 - $11.25 20,500 1.6 $ 9.68 11,500 $ 9.65
$12.38 - $15.44 201,000 7.2 $15.30 124,250 $14.71
$16.00 - $41.06 710,665 8.7 $21.84 132,540 $19.81
--------- --- ------ ------- ------
$ 4.13 - $41.06 1,133,540 8.2 $17.42 292,165 $16.20
36
Directors Fee Replacement Plan & Officers Cash Compensation Replacement Plan
Options Outstanding Options Exercisable
------------------------------ -------------------------------
Weighted Weighted
Range of Number Average Number Average
Exercise Outstanding Exercise Exercisable Exercise
Prices at 6/30/97 Price at 6/30/97 Price
- ----------------------------------------------------------------------------------------------
$ .10 - $ 3.77 64,725 $1.87 61,727 $1.88
$ 5.07 - $ 7.24 18,838 $5.86 15,506 $5.85
$ 8.57 - $ 9.43 6,246 $8.88 5,395 $8.89
------ ----- ------ -----
$ .10 - $ 9.43 89,809 $3.20 82,628 $3.05
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 65,871, 25,304 and 7,395 shares of common stock to its employees during the
years ended June 30, 1997, June 30, 1996 and June 30, 1995, respectively. The
weighted average fair value of those purchase rights granted in 1997 and 1996
was approximately $1.89 and $5.82 per share.
During the first quarter of FY98, the Board of Directors approved a plan to
allow certain employees to reprice their options at the then current fair value
in exchange for a reduced number of options. Employee elections under this
program are scheduled to be made during the second quarter of fiscal year 1998.
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.
Furthermore, the Company accepts shares issuable upon exercise at their fair
market value in lieu of cash for the tax withholdings. The shares received are
retired and are reflected as reductions in common stock and paid-in capital.
(9) ACQUISITION
In the second quarter of fiscal 1996, the Company acquired substantially
all of the assets of Quintessential Solutions, Inc. (QSI) for a purchase price
of approximately $3.9 million. The purchase price consists of the initial cash
payments of $2,190,000 and deferred payments of $600,000 due November 1996 and
$1,400,000 due November 1997. The purchase price was allocated primarily to
software development cost. If the purchase had occurred at the beginning of
fiscal 1996 or fiscal 1995, there would have been no material impact on the
Company's results of operations. Because of a dispute with QSI, the Company did
not make the November 1996 payment.
(10) 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
37
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 right to exercise the
rights will terminate. The rights expire on December 31, 2005.
Structured Equity Line Financing - 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 July 1, 1997. 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 July
1, 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 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
38
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.
(11) DISCONTINUED OPERATIONS
On February 28, 1997, the Company committed itself to a formal plan of
disposition for two prior business segments, its Telecommunications and Advanced
Products Divisions. The plan of disposition for the OSU and NetworkVUE business
units within the Telecommunications Division and the Commercial Information
Solutions business unit within the Advanced Products Division was 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 Vindicator business units of the Advanced Products
Division was the sale of those businesses.
Consequently, the Company has reported its results of operations for the
Telecommunications and Advanced Products Divisions as discontinued operations.
The Company's information technology and professional services business
(formerly known as the Professional Services Operations) constitutes its
continuing operations.
Revenues generated from discontinued operations amounted to $5.7 million,
$7.5 million and $5.0 million for the fiscal years ended 1997, 1996 and 1995,
respectively. The revenue was primarily derived from the Advanced Products
Division and the Telecommunications Division as follows: $4.6 million and $1.1
million in 1997; $5.5 million and $2.0 million in 1996; and $4.8 million and
$200 thousand in 1995, respectively. Loss from operations from the measurement
dates to June 30, 1997 were $1.7 million for the Telecommunications Division and
$1.5 million for the Advanced Products Division.
On April 30, 1997, the Company sold the assets and liabilities of its GRC
Instruments/Dynatup business for $2.0 million in cash.
On June 5, 1997, the Company sold the assets of its Vindicator security
business unit within its discontinued Advanced Products Division. The sale was
for book value of approximately $700 thousand, with payment of $100 thousand at
closing and $150 thousand 90 days thereafter, both of which payments have been
received by the Company. The remainder of the purchase price is payable at a
rate of 6% of sales, but in all events, any remaining balance is payable in a
lump sum on December 31, 1998.
On June 27, 1997, the Company sold the assets and liabilities of its
Optical Service Unit ("OSU") business unit within its discontinued
Telecommunications Division. The sale was for a cash payment of $1.5 million
payable in part at, and the remainder shortly after, closing, both of which
payments have been received by the company, and a royalty schedule on sales of
the OSU unit or derivatives over the next 10 years.
The operations of the NetworkVUE business unit within the Company's
discontinued Telecommunications Division have been substantially curtailed, with
only maintenance of the NetSolve component of NetworkVUE being continued through
September 30, 1997, at which time the remaining business is expected to be shut
down.
39
The operations of the Commercial Information Systems ("CIS") component of
the Company's discontinued Advanced Products Division have been substantially
curtailed and are planned to be shut down in October 1997.
Summarized balance sheet data related to the discontinued operations is as
follows:
1997 1996
---- ----
(in thousands)
Net assets to be disposed of:
Current assets $ 417 $ 6,767
Property, plant & equipment, net 1,035 2,572
Deferred software, net --- 10,749
Other 44 60
--------- --------
1,496 20,148
--------- --------
Current liabilities 622 3,584
--------- --------
Net assets to be disposed of 874 16,564
Proceeds receivable from sale of divisions 400 ---
Provision for losses through disposition (3,883) ---
QSI obligation (1,982) (1,822)
--------- --------
Net assets (liabilities) related to discontinued
operations $ (4,591) $ 14,742
========= ========
The net present value of the Company's $2.0 million obligation to
Quintessential Solutions Inc. (QSI) was incurred with the acquisition of the
rights to QSI's operating software. Payments of $600,000 and $1,400,000 are due
in November 1996 and November 1997, respectively. Because of a dispute with QSI,
the Company did not make the November 1996 payment.
Discontinued operations include management's best estimates of the net
amounts expected to be incurred to dispose of its Telecommunications and
Advanced Products businesses. The amounts the Company will ultimately incur
could differ significantly in the near term from the amounts assumed in arriving
at the loss on disposal of the discontinued operations.
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
41
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).
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.
42
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 25, 1997 By: /s/ Jim Roth
------------------ -------------------------------
Jim Roth
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ronald B. Alexander 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 25, 1997 By: /s/ Jim Roth
------------------ -------------------------------
Jim Roth
President and Chief Executive
Officer
Date: September 25, 1997 By: /s/ Ronald B. Alexander
------------------ -------------------------------
Ronald B. Alexander
Senior Vice President-Finance,
Chief Financial Officer and
Treasurer
Date: September 25, 1997 By: /s/ Joseph R. Wright, Jr.
------------------ -------------------------------
Joseph R. Wright, Jr., Chairman
of the Board of Directors
43
Date: September 25, 1997 By: /s/ H. Furlong Baldwin
------------------ -------------------------------
H. Furlong Baldwin, Director
Date: September 25, 1997 By: /s/ Frank J.A. Cilluffo
------------------ -------------------------------
Frank J.A. Cilluffo, Director
Date: September 25, 1997 By: /s/ Peter A. Cohen
------------------ -------------------------------
Peter A. Cohen, Vice Chairman
of the Board of Directors
Date: September 25, 1997 By: /s/ Leslie B. Disharoon
------------------ -------------------------------
Leslie B. Disharoon, Director
Date: September 25, 1997 By: /s/ Charles H.P. Duell
------------------ -------------------------------
Charles H.P. Duell, Director
Date: September 25, 1997 By: /s/ Edward C. Meyer
------------------ -------------------------------
Edward C. Meyer, Director
Date: September 25, 1997 By: /s/ George R. Packard
------------------ -------------------------------
George R. Packard, Director
Date: September 25, 1997 By: /s/ Herbert Rabin
------------------ -------------------------------
Herbert Rabin, Director
Date: September 25, 1997 By: /s/ E. Kirby Warren
------------------ -------------------------------
E. Kirby Warren, Director
44
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 and 33-87982 of
GRC International, Inc. on Form S-8 of our report dated August 13, 1997,
appearing in this Annual Report on Form 10-K of GRC International, Inc. for the
year ended June 30, 1997.
DELOITTE & TOUCHE LLP
McLean, Virginia
September 25, 1997
45
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, 1997
Reserves for uncollectible receivables -
Deducted from accounts receivable $ 5 $ 36 $ --- $ --- $ 41
Deducted from unbilled reimbursable
costs and fees 3,691 855 176 (128) 4,594
-------- --------- --------- --------- --------
$ 3,696 $ 891 $ 176 $ (128) $ 4,635
======== ========= ========= ========= ========
Year ended June 30, 1996
Reserves for uncollectible receivables -
Deducted from accounts receivable $ --- $ 5 $ --- $ --- $ 5/(c)/
Deducted from unbilled reimbursable
costs and fees 3,821 496 455 (1,081) 3,691
-------- --------- --------- --------- --------
$ 3,821 $ 501 $ 455 $ (1,081) $ 3,696
======== ========= ========= ========= ========
Year ended June 30, 1995
Reserves for uncollectible receivables -
Deducted from accounts receivable $ 48 $ 3 $ --- $ (51) $ ---
Deducted from unbilled reimbursable
costs and fees 3,606 1,051 (197) (639) 3,821
-------- --------- --------- --------- --------
$ 3,654 $ 1,054 $ (197) $ (690) $ 3,821
======== ========= ========= ========= ========
/(A)/Reductions of revenue for potentially nonrecoverable costs.
/(B)/Write off of uncollectible accounts and cost against reserves,
net of recoveries.
/(c)/Relates to receivable from discontinued operations.
46
INDEX TO EXHIBITS
(Exhibit Numbers correspond to Exhibit Table,
Regulation S-K, Item 601)
Exhibit
Number Page
- ------- ----
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
10.3* 1996 Officers Stock 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 Amended and Restated Revolving Credit and Term Loan Agreement ("Loan
Agreement"), with Exhibits, with Mercantile-Safe Deposit & Trust
Company ("Mercantile"), dated as of February 12, 1996, First
Confirmation and Amendment thereto dated May 15, 1996, Second
Confirmation and Amendment thereto dated July 18, 1996, and Third
Confirmation and Amendment thereto dated September 24, 1996
(incorporated by reference to Exhibit 10.9 to the 1996 Form 10-K)
10.10 Fourth Confirmation and Amendment dated February 7, 1997 to Loan
Agreement between the Company and Mercantile (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended December 31, 1996)
10.11 Fifth Confirmation and Amendment dated April 30, 1997 to Loan
Agreement between the Company and Mercantile (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended March 31, 1997)
10.12 Sixth Confirmation and Amendment dated May 13, 1997 to Loan Agreement
between the Company and Mercantile (incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March
31, 1997)
10.13 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)
10.14 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)
10.15 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)
10.16 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)
10.17 Amended and Restated Rights Agreement dated June 30, 1995 between the
Company and the American Stock Transfer & Trust Company (incorporated
by referenced to Exhibit 10.14 to the 1995 Form 10-K)
10.18* Employment Agreement between the Company and Jim Roth (incorporated
by reference to Exhibit 10.16 to the 1996 Form 10-K)
10.19* 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)
10.20* Form of Employment Agreement for Gary L. Denman, Thomas E. McCabe and
Ronald B. Alexander
10.21* Form of Employment Agreement for James P. McCoy
10.22 Building Lease between the Company and Bermant Development Company
(incorporated by reference to Exhibit 10.21 to the 1995 Form 10-K)
10.23 First and Second Amendments to Building Lease between the Company and
Bermant Development Company
10.24 Convertible Securities Subscription Agreement dated as of January 21,
1997 between the Company and Halifax Fund, L.P. ("Halifax")
(incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q
for the quarter ended December 31, 1996)
10.25 $4,000,000 5% Convertible Debenture Due January 30, 2000 (the
"Debenture") issued by the Company to Halifax (incorporated by
reference to Exhibit 10.3 to the Company's Form 10-Q for the quarter
ended December 31, 1996)
10.26 320,000 Share Common Stock Purchase Warrant issued by the Company to
Halifax in connection with the Debenture (incorporated by reference
to Exhibit 10.4 to the Company's Form 10-Q for the quarter ended
December 31, 1996)
10.27 Registration Rights Agreement dated as of January 30, 1997 between
the Company and Halifax relating to the Debenture (incorporated by
reference to Exhibit 10.5 to the Company's Form 10-Q for the quarter
ended December 31, 1996)
10.28 Structured Equity Line Flexible Financing Agreement ("Equity Line
Agreement") dated as of January 21, 1997 between the Company and
Cripple Creek Securities, LLC ("Cripple Creek") (incorporated by
reference to Exhibit 10.6 to the Company's Form 10-Q for the quarter
ended December 31, 1996)
10.29 125,000 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 the Company's Form 10-Q
for the quarter ended December 31, 1996)
10.30 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 the Company's 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 44 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.