EXHIBIT 13
SELECTED FINANCIAL DATA
- -----------------------
GRC International, Inc. and Subsidiaries
FOR THE YEAR 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
REVENUES $137,808 $129,922 $130,644 $114,107 $108,573
======== ======== ======== ======== ========
OPERATING INCOME * $ 4,760 $ 6,093 $ 5,683 $ 4,092 $ 4,205
======== ======== ======== ======== ========
Income from continuing operations before
cumulative effect of accounting change $ 5,030 $ 6,113 $ 5,509 $ 3,805 $ 3,072
Loss from discontinued operations - - - - (6,000)
Income from cumulative effect of
accounting change - 1,000 - - -
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 5,030 $ 7,113 $ 5,509 $ 3,805 $ (2,928)
======== ======== ======== ======== ========
INCOME (LOSS) PER COMMON
SHARE:
Continuing operations before cumulative
effect of accounting change $ .54 $ .65 $ .60 $ .43 $ .34
Discontinued operations - 0 - - (.67)
From cumulative effect of accounting
change - .11 - - -
-------- -------- -------- -------- --------
$ .54 $ .76 $ .60 $ .43 $ (.33)
======== ======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES 9,393 9,426 9,211 8,893 8,875
YEAR-END DATA
Working capital $ 20,768 $ 25,061 $ 26,286 $ 24,055 $ 20,731
Total assets 73,709 69,080 65,082 55,670 52,527
Long-term debt (less
current maturities) 0 0 3,051 4,098 4,154
Stockholders'equity 48,268 45,040 39,310 33,889 30,109
* Operating income for fiscal 1995 includes the gain of approximately $.9
million from the sale a facility.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
SUMMARY
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:
RELATIONSHIP TO PERIOD TO
TOTAL REVENUES PERIOD CHANGE
-------------------- -----------------------
1995 1994 1993 95 VS. 94 94 VS. 93
---- ---- ---- --------- ---------
Revenues 100% 100% 100% 6% (1)%
Cost of revenues 81 80 81 8 (2)
Gross Margin 19 20 19 (1) 6
General, administrative, marketing, __ __ __
research and development expenses 15 15 15 8 3
Provision for losses 1 __ __ 32 95
Gain on sale of asset __ __ __ 100 __
Operating income 3 5 4 (22) 7
Interest income, net __ __ __ (15) 138
Income before cumulative effect of
accounting change and before income 3 5 4 (22) 10
taxes
Provision for income taxes __ __ __ (100) (3)
Income before cumulative effect of 3 5 4 (18) 11
accounting change
Cumulative effect of accounting change __ __ __ (100) 100
Net income 3 5 4 (29) 29
FISCAL YEAR 1995 COMPARED WITH FISCAL YEAR 1994
- -----------------------------------------------
Revenues were $137.8 million for 1995, compared with $129.9 million for
1994. The revenue increase of $7.9 million or 6.1% is attributable to a $8.9
million increase in subcontract work (work performed by other organizations and
included in the Company's revenues) offset by a slight decrease of $1.0 million
in the Company's service revenues and product sales. The Company typically does
not earn a fee on subcontract revenues. The revenues generated from the
Company's professional services business remained relatively flat due to the
impact of temporary delays in receiving government funding and delays in the
procurement process (i.e., awarding contracts). Since funding delays are
generally temporary, the Company expects to report the revenues from contract
work already completed in sudsequent periods. The shortfall in product sales is
primarily attributable to the Company's environmental software products, which
experience lower than anticipated revenues from new license sales of its health
and environmental tracking software system.
A large percentage of the Company's revenues are derived from contracts
with the U.S. Department of Defense (DoD). Possible decreases or funding delays
in the DoD budget may negatively impact the Company's plans and ability to
achieve revenue growth. However, the Company believes that its contract base is
sufficiently diverse so that the cancellation of any one DoD program would not
have a material effect on the Company. In addition, the Company also believes
that there are sufficient opportunities for other contract awards in the DoD,
NASA, other governmental agencies and the private sector allow the Company to
sustain its revenue level or grow over time.
As of june 30, 1995, the value of the Company's backlog (without options)
approximates one year's revenues, and the value of the total backlog (with
options) approximates two years, revenues. The backlog consists of approximately
175 active contracts which vary in the period of performance from a few months
to muti-year. The work to be performed on these contracts involves the
following: information technology; studies and analysis; modeling and
simulation; and testing and evaluation.
Cost of revenues were $111.8 million for 1995, compared with $103.6 million
in 1994. The increase of $8.2 million or 7.9% is attributable entirely to the
increase in subcontract revenues of $8.9 million. Gross margin was $26 million
or 18.9% of revenues for 1995, compared with $26.3 million or 20.3% of revenues
for 1994. The decrease of $.3 million in gross margin is attributable to the
increase of $8.9 million in subcontract work, for which the Company typically
does not earn any fee, and the slight decrease in the Company's product sales.
With the exclusion of the subcontract work from the Company's financial results,
both revenues and gross margin would be flat.
Operating income was $4.8 million or 3.5% of revenues for 1995, compared
with $6.1 million or 4.7% of revenues for 1994. The $1.3 million decrease in
1995 operating income is attributable to increased marketing and R&D
expenditures, the write down of previously capitalized software costs, lower
revenues (excluding subcontract work) and the impact on indirect rates from the
temporary delays in receiving government funding and delays in the procurement
process (i.e., awarding contracts). Operating income for 1995 included the gain
of approximately $.9 million from the sale of the Company's California facility.
During the fiscal year 1995, the Company increased its deferred software
costs by a net $6.2 million, resulting in a balance at June 30, 1995 of
approximately $8.0 million. The Company capitalizes internal software costs
incurred for products to be sold only after technological feasibility has been
established (see Note 1). The majority of the deferred software costs relates to
the Company's efforts associated with its OSU(TM) Network Interface, a
telecommunications product. During fiscal 1995, the Company wrote down the
deferred software costs for prior development efforts associated with its
commercial environmental software products to its estimated net realizable value
by approxiamtely $.5 million (charged to cost of revenues) after reassessing
current trends in the market place.
In October 1993, the Company was served with a lawsuit filed in the
Superior Court of Orange County, California by ICN Biomedicals, Inc. ("ICN") and
its parent company, ICN Pharmaceuticals,Inc. ("Pharamaceuticals"). The suit
alleged fraud, negligent misrepresentation, violations of state and federal
securities laws and other claims against the Company in connection with the sale
of its biomedical business to ICN in 1989, and sought to recover all monies paid
and damages for expenses and interest in the approximate amount of $100 million.
In December 1993, the court ordered ICN to arbitrate its claims, and ICN filed
for arbitration in March 1994. In December 1994, the arbitration panel dismissed
ICN's claims and ordered ICN to pay the Company the remaining amounts due under
the 1989 agreement, approxiamtely $2.7 million. In March 1995, the court
confirmed the arbitration award, and ICN paid the final amounts due to the
Company in April 1995. In May 1995, the court dismissed the remaining claims of
Pharmaceuticals, without prejudice to Pharamaceuticals filing an action in
federal court in Delaware pursuant to the forum selection clause in the 1989
agreement. In June 1995, the court denied Pharmaceuticals motion for
reconsideration of the dismissal. In August 1995, Pharmaceuticals appealed the
dismissal. In September 1995, the Court of Appeal dismissed Pharmaceuticals'
appeal.
As a result of the various arbitration and court decisions, the Company was
able to reverse reserves during fiscal 1995 of approximately $.4 million
(credited to general, administrative, etc.) that were associated with the
various ICN matters. However, during the course of the lawsuit and arbitration,
ICN informed the Company of three ongoing tax inquiries of the biomedical
business involving potential tax deficiencies exceeding $1 million (including
interest and penalties), which include periods of the Company's ownership. The
Company believes that it has adequate reserves to cover the final resolution of
any of these matters that may involve periods of its ownership.
In June 1995, the Company sold approxiamtely 13.1 acres, including all
buildings, structures, parking areas and other improvements, located in Santa
Barbara, California for $4.3 million. 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 approxiamtely $3.4. The Company has included the
note in deposits and other. The transaction resulted in the Company recognizing
again of approximately $.9 million for fiscal 1995.
In addition to the sale of the property, the Company entered into a 15 year
lease for a portion of a new building that is scheduled to be built on the
existing property site.
The Company's net interest income is not significantly different between
the comparable periods.
Income taxes continue to be insignificant to the operating results, since
the Company has utilized both its net operating loss carryforwards and its
capital loss carryforwards to shelter its income from tax.
FISCAL YEAR 1994 COMPARED WITH FISCAL YEAR 1993
- -----------------------------------------------
Revenues were $129.9 million for 1994, compared with $130.6 million for
1993. The revenue decrease of $.7 million or 0.5% is attributable entirely to
the decrease in subcontract work (work performed by other organizations on
subcontracts and included in the Company's revenues). The revenues generated
from the Company's services and products business remained relatively flat, as
expected, due in part to the direct impact of cost-cutting measures on cost-plus
contract work, as well as funding decreases or delays in the government
procurement process.
As of June 30, 1994, the value of the Company's backlog (without options)
is approximately one year's revenues, and the value of the total backlog (with
options) exceeds two years' revenues. The backlog consists of 189 active
contracts which vary in length from a few months to multi-year. The work to be
performed on these contracts involves the following: systems research and
analysis; information systems; operating analysis; testing and evaluation;
systems engineering; economic modeling; cost estimating; applied physics; data
processing; software development; military system effectiveness; and personnel
management.
Operating income was $6.1 million or 4.7% of revenues for 1994, compared
with $5.7 million or 4.3% of revenues for 1993. The increase in operating income
of $.4 million or 7.2% is attributable to the benefits derived from the
Company's efforts to reduce its operating expenses in the area of finance and
administration activities. The consolidation and reorganization of the finance
ant administration functions were undertaken to provide more effective,
efficient and uniform services across all of the Company's entities and
locations. The overall cost reduction in support and facility expense was
achieved in large part by office space consolidation measures which reduced
total facility requirements by over 10%. Lower overhead costs have contributed
to improved profit margins on fixed price type contracts.
Net interest income was $.3 million for 1994, compared with $.1
million for 1993. The increase in net interest income of $.2 million or 138.1%
is attributable to both the interest income earned on the investment of excess
cash and cash equivalents and from the elimination of interest expense
associated with the Company's long-term debt. In October and November 1993, the
Company used approximately $3 million of its available cash and cash equivalents
to pay off the remaining balance on the mortgage associated with its California
property.
Income taxes continue to be insignificant to the operating results, since
the Company has utilized its net operating loss carryforwards to shelter a
significant portion of its income from tax.
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The new
statement supersedes the Company's previous accounting practice of accounting
for income taxes under Statement of Financial Accounting Standards No. 96,
"Acounting for Income Taxes" (SFAS 96). As a result of adopting this change, the
Company recognized $1 million of income attributable to recording a net deferred
tax asset on its books.
Net income was $7.1 million or 5.5% of revenues for 1994, compared with
$5.5 million of 4.2% of revenues for 1993. The 1994 increase of $1.6 million of
29.1% is attributable to $1 million from the accounting change, $.4 million from
improved margins on contract work due to the benefits derived from cost-cutting
steps and $.2 million from increased interest income.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has been able to finance its operations during the last three
fiscal years by a combination of internally generated working capital and
borrowing against its available credit facilities. Management believes that the
Company has adequate resources to finance its current and future operations from
existing or internally generated working capital and available credit. In July
1990, the Company entered into a revolving credit agreement in the amount of $10
million. This agreement, amended May 28, 1992, permits the Company to borrow up
to a maximum of $10 million under the agreement. The interest rate under the
agreement is the prime rate (9.0% as of June 30, 1995). The agreement extends
until April 1998, with the Bank required to provide 15 months prior written
notice to terminate the facility (absent any defaults under the agreement). The
agreement remains fully available as of June 30, 1995.
As of June 30, 1995, the Company had $2.7 million of cash and cash
equivalents available to support its working capital requirements.
During July of 1994, the Company used approximately $.8 million of cash and
cash equivalents for the payment associated with the Treasury stock that was
purchased prior to June 30, 1994. The $.8 million was reflected in other current
liabilities at June 30,1994.
Subsequent to June 30, 1995, the Company amended its revolving credit
agreement to double its credit line from $10 million to $20 million. The Company
took this action in anticipation of resources needed to support the growth of
its new Telecommunications unit, which was established in August 1995. This new
unit will focus Company-wide telecommunications business activities for
development, production and commercialization of network systems products,
network systems analysis capabilities, software development network operations
and network security.
STOCK PRICES AND DIVIDENDS
- --------------------------
The Company's common stock is traded on the New York and Pacific Stock
Exchanges. As of July 31, 1995, there were 1,690 holders of record of the
Company's common stock. Stock price information by quarter is presented in
the following table:
FISCAL YEAR
MARKET ------------------------------ THROUGH
PRICE 1994 1995 JULY 31,1995
----- --------- ---------- -------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
1st Quarter 8 1/2 5 7/8 14 1/2 11 1/8 26 3/8 15 7/8
2nd Quarter 8 1/8 7 1/8 16 1/2 10 3/4
3rd Quarter 11 1/8 7 3/8 17 3/4 11 3/8
4th Quarter 12 1/8 9 1/2 17 1/8 13 1/8
In November 1985, the Company declared a dividend of one common stock
purchase right on each share of common stock currently outstanding or to be
issued in the future (see Note 9 to the Company's financial statements presented
elsewhere herein). With the exception of the dividend for the stock rights, the
Company did not declare or pay any other 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.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
GRC International Inc.
We have audited the accompanying consolidated balance sheets of GRC
International, Inc. and subsidiaries as of June 30, 1995 and 1994, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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
subsidiries at June 30, 1995 and 1994, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1995,
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for income taxes, effective July 1, 1993, to conform with
Statement of Financial Accounting Standards No. 109.
DELOITTE AND TOUCHE LLP
McLean, Virginia
AUGUST 11, 1995, except as to the fourth
paragraph of Note 5, as to which the date
is September 14, 1995
GRC INTERNATIONAL, INC, AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED JUNE 30,
----------------------------
1995 1994 1993
--------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenues $137,808 $129,922 $130,644
Cost of revenues 111,822 103,594 105,730
-------- -------- --------
Gross margin 25,986 26,328 24,914
General, administrative, marketing,
research and development expenses 21,075 19,438 18,822
Provision for losses 1,054 797 409
Gain on sale of asset (903) -- --
-------- -------- --------
Operating income 4,760 6,093 5,683
Interest income 381 531 526
Interest expense (111) (212) (392)
--------- --------- ---------
Income before cumulative effect of
accounting change and before income taxes 5,030 6,412 5,817
Provision for income taxes -- 299 308
--------- --------- ---------
Income before cumulative effect of 5,030 6,113 5,509
accounting change
Cumulative effect of accounting change -- 1,000 --
--------- --------- ---------
Net income $ 5,030 $ 7,113 $ 5,509
========= ========= =========
INCOME PER COMMOM AND
COMMON EGUIVALENT SHARE:
Before cumulative effect of accounting
change $ .54 $ .65 $ .60
From cumulative effect of accounting
change -- .11 --
--------- --------- ---------
$ .54 $ .76 $ .60
========= ========= =========
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC, AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF JUNE 30,
-------------
ASSETS
------
1995 1994
------- -------
(IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents $ 2,679 $ 3,660
Accounts receivable 32,419 29,403
Unbilled reimbursable costs and fees 5,662 8,366
Inventories, at the lower of cost
or market 1,990 1,185
Other receivables 1,160 3,380
Prepaid expenses 918 1,570
------- -------
Total current assets 44,828 47,564
------- -------
PROPERTY AND EQUIPMENT, AT COST:
Land, buildings and leasehold
improvements 4,275 8,603
Equipment, furniture and fixtures 13,830 12,229
Less - Accumulated depreciation and
amortization (7,773) (8,488)
------- -------
10,332 12,344
------- -------
OTHER ASSETS:
Goodwill and other intangible
assets, net 2,555 2,799
Deferred software costs, net 7,954 1,714
Deferred income taxes 2,561 2,711
Deposits and other 5,479 1,948
------- ------
18,549 9,172
------- ------
$73,709 $69,080
------- -------
The accompanying notes are an integral part of these balance sheets.
GRC INTERNATIONAL, INC, AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF JUNE 30,
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
1995 1994
-------- --------
(IN THOUSANDS)
CURRENT LIABILITIES:
Accounts payable $ 7,774 $ 5,135
Accounted compensation and benefits 11,960 11,851
Deferred income taxes 1,561 1,711
Accrued expenses 2,564 2,631
Other current liabilities 201 1,175
-------- --------
Total current liabilities 24,060 22,503
-------- --------
OTHER NON-CURRENT LIABILITIES $ 1,381 $ 1,537
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value -
Authorized - 30,000,000 shares
issued - 9,325,000 shares in 1995
and 9,152,000 shares in 1994 932 915
Paid-in capital 76,812 76,363
Accumulated deficit (25,631) (30,661)
-------- -------
52,113 46,617
Less: Treasury stock, at cost; 300,000 shares
in 1995 and 142,500 shares in 1994 (3,845) (1,577)
-------- --------
Total stockholders' equity 48,268 45,040
-------- --------
$ 73,709 $ 69,080
-------- --------
The accompanying notes are an integral part of these balance sheets.
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED JUNE 30,
----------------------------
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,030 $ 7,113 $ 5,509
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,685 2,613 2,199
Provision for losses on accounts receivable,
unbilled reimbursable costs and fees 705 791 1,079
Gain on sale of assets (903) --- ---
Cumulative effect of accounting change --- (1,000) ---
Changes in assets and liabilities:
Accounts receivable and unbilled reimbursable
costs and fees (1,017) (4,257) (3,904)
Inventory (805) (275) (75)
Prepaid expenses 652 (786) (436)
Accounts payable, accruals, income taxes and other
current liabilities 2,510 (744) 5,153
Other, net (156) (194) (244)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,701 3,261 9,281
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from notes receivables 2,750 --- ---
Capital expenditures (3,731) (3,610) (3,304)
Deferred software costs (7,011) (1,171) (446)
Other, net (85) (1,064) (344)
------- ------- -------
NET CASH USED BY INVESTING ACTIVITIES (8,077) (5,845) (4,094)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital lease obligations --- (3,245) (1,361)
Purchase of treasury stock (3,071) (774) ---
Other, net 466 194 111
------- ------- -------
NET CASH USED BY FINANCING ACTIVITIES (2,605) (3,825) (1,250)
------- ------- -------
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (981) (6,409) 3,937
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 3,660 10,069 6,132
------- ------- -------
CASH & CASH EQUIVALENTS AT END OF YEAR $ 2,679 $ 3,660 $10,069
======= ======= =======
Supplemental disclosures:
Cash payments:
Interest $ 371 $ 214 $ 392
Income taxes 111 411 270
Noncash transactions:
Capital lease obligations --- --- 203
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED JUNE 30
---------------------------
Preferred Stock Common Stock Paid-In Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock
------ ------ ------ ------ ------- ----------- --------
(in thousands)
BALANCES AS OF JUNE 30, 1992 21 $ 21 8,880 $ 888 $76,219 $(43,239) --
Proceeds from stock options
exercised -- -- 118 12 (73) -- --
Preferred stock dividends -- -- -- -- -- (27) --
Net Income -- -- -- -- -- 5,509 --
------ ------ ----- ------ ------ -------- -------
BALANCES AS OF JUNE 30, 1993 21 21 8,998 900 76,146 (37,757) --
Proceeds from stock options
exercised -- -- 90 9 202 -- --
Preferred stock dividends -- -- -- -- -- (17) --
Conversion of Preferred Stock (21) (21) 64 6 15 -- --
Net Income -- -- -- -- -- 7,113 --
Purchased of 142,500 shares of
Treasury stock -- -- -- -- -- -- (1,577)
------ ------ ----- ------ ------ -------- -------
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)
====== ====== ===== ====== ======= ======== =======
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 1995, 1994 AND 1993
----------------------------
(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 - The vast majority of the Company's revenues are derived
--------------
from contracts with the U.S. Department of Defense (DoD).
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on
-------------------------
hand, cash in banks and temporary investments purchased with a maturity of three
months or less.
The Company has a policy of investing all available cash, on a daily
basis, in either overnight master note agreements or overnight time deposits
issued by banks. Since these transactions are recorded daily in a book entry
format, the Company does not take possession of any securities. At June 30, 1995
and 1994, the Company had approximately $2.6 million and $3.5 million,
respectively, invested in overnight time deposits issued by Fuji Bank of Japan.
INVENTORIES - Inventory costs include materials, labor and manufacturing
-----------
overhead. Inventories are priced using the average unit cost method.
1995 1994
------ ------
(IN THOUSANDS)
Raw materials and supplies. $ 693 $ 602
Work-in-process 569 91
Finished goods 728 492
------ ------
$1,990 $1,185
====== ======
PROPERTY AND EQUIPMENT - Expenditures for betterments, major renewals and
----------------------
interest incurred during construction 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, 1995 and 1994, of
goodwill was $1,083,000 and $1,007,000, respectively, and of other intangible
assets was $975,000 and $878,000, respectively.
DEFERRED SOFTWARE COSTS - Internal software costs incurred for products to
-----------------------
be sold are capitalized only after establishing technological feasibility.
Capitalized software is amortized over the greater of straight-line or estimated
future revenue stream on an individual product basis. The amount of software
costs capitalized was $7,011,000, $1,171,000 and $446,000 and the related
amortization expense was $771,000, $162,000 and $140,000 in 1995, 1994 and 1993,
respectively. During fiscal 1995, the Company wrote down the deferred software
costs for prior development efforts associated with its commercial environmental
software products to its estimated net realizable value by $500,000 (charged to
costs of revenues), after reassessing current trends in the marketplace.
ACCOUNTING FOR CONTRACT REVENUES - 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.
RESEARCH AND DEVELOPMENT - Research and development expenditures were
------------------------
approximately $1,100,000, $400,000 and $700,000 for 1995, 1994 and 1993,
respectively.
PROVISION FOR LOSSES - The Company includes the provisions for
--------------------
uncollectible accounts and costs incurred in excess of contractual authorization
under the caption of provision for losses on the consolidated statements of
income. In addition, the Company records provisions for rate overruns as a
reduction to revenues, while provisions for both inventories and future losses
on contracts are recorded in cost of revenues.
RETIREMENT PLANS - The Company has a 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 $3,694,000, $3,911,000, and $3,881,000 in 1995, 1994 and 1993,
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 $50,000, $73,800 and
$124,000 in 1995, 1994 and 1993, respectively. The present value of the
projected benefit obligation is approximately $185,400 and $239,000 at June 30,
1995 and 1994, respectively.
INCOME TAXES - The provision for income taxes for fiscal years 1995 and
------------
1994 have been computed under the requirements of SFAS No. 109, "Accounting for
Income Taxes". The
adoption of SFAS No. 109, effective July 1, 1993, resulted in a cumulative
effect adjustment to increase income by $1 million for fiscal year 1994. SFAS
No. 109 supersedes the Company's previous accounting practice of accounting for
income taxes under SFAS No. 96. Both statements require the use of the liability
method of accounting for income taxes, but the recognition of deferred tax
assets was limited under SFAS No. 96. Under SFAS No. 109, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and the tax basis of assets and liabilities, using enacted tax rates
in effect for the year in which the differences are expected to reverse.
EARNINGS PER SHARE - Earnings per common share are computed based upon the
------------------
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares consist of
stock options calculated using the treasury stock method. Primary and fully
dilutive per share data, based on 9,393,000 shares in 1995, 9,426,000 shares in
1994 and 9,211,000 shares in 1993, respectively, is the same in each year.
CHANGES IN PRESENTATION - Certain amounts in the 1994 and 1993 Consolidated
-----------------------
Financial Statements have been reclassified to conform to the 1995 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, and
provides for the annual payment of both interest and principal. The Company has
included the note in deposits and other. The transaction resulted in the Company
recognizing a gain of approximately $900,000. for fiscal 1995 from the sale.
In addition to the sale of the property, the Company entered into a 15 year
lease for a portion of a new building that is scheduled to be built on the
existing property site.
(3) DEBT
The Company has entered into a revolving credit agreement that permits it
to borrow up to a maximum of $10 million. Advances under the agreement accrue
interest at the prime rate (9.0% as of June 30, 1995). The agreement extends
until April 1998, with the bank required to provide 15 months prior written
notice to terminate the facility (absent any defaults under the agreement). The
agreement remains fully available as of June 30, 1995.
The agreement contains certain covenants, including a material adverse
change clause, which require that the Company maintain certain minimums for
earnings, tangible net worth, working capital and debt ratios. Any borrowings
made under the agreement would be on an unsecured basis.
(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:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Tax at statutory federal rate $ 1,710 $ 2,180 $ 1,978
State income taxes 161 335 189
Utilization of loss carryforwards (753) (1,100) (1,859)
Change in valuation reserve (1,150) (1,150) ---
Other 32 34 ---
------- ------- -------
Actual income tax provision $ --- $ 299 $ 308
======= ======= =======
The primary components of temporary differences which give rise to the
Company's net deferred tax asset are as follows:
AS OF JUNE 30,
-----------------------
1995 1994
---- ----
(IN THOUSANDS)
Deferred tax assets:
Reserves and other contingencies $ 1,701 $ 2,080
Compensation not currently deductible 1,884 1,492
Net operating loss 8,476 8,420
AMT and general business credits 1,206 1,187
Other 31 138
Valuation reserve (5,349) (6,499)
------- -------
Total deferred tax assets 7,949 6,818
------- -------
Deferred tax liabilities:
Reimbursable costs and fees (3,224) (4,122)
Prepaid expenses and rent (364) (414)
Depreciation (tax over book) (557) (555)
Internally developed software (2,804) (727)
------- -------
Total deferred tax liabilities (6,949) 5,818
------- -------
Net deferred tax asset $ 1,000 $ 1,000
======= =======
At June 30, 1995, the Company had net operating loss carryforwards of
approximately $25 million to reduce future federal tax liabilities through 2006.
(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 LEASES
----------------
(IN THOUSANDS)
1996 $ 5,494
1997 5,300
1998 5,114
1999 4,909
2000 4,639
2001 and thereafter 40,830
-------
$66,286
=======
Rent expense under operating leases was $6,181,000, $6,716,000 and
$7,194,000 net of sublease income of $395,000, $457,000 and $481,000, in 1995,
1994 and 1993, respectively.
The Company has employment agreements with 13 employees which provide for
severance payments, in the event of a change of control situation, totalling
approximately $2,100,000.
CONTINGENCIES -In October 1993, the Company was served with a lawsuit filed
-------------
in the Superior Court of Orange County, California by ICN Biomedicals, Inc.
("ICN") and its parent company, ICN Pharmaceuticals, Inc. ("Pharmaceuticals").
The suit alleged fraud, negligent misrepresentation, violations of state and
federal securities laws and other claims against the Company in connection with
the sale of its biomedical business to ICN in 1989, and sought to recover all
monies paid and damages for expenses and interest in the approximate amount of
$100 million. In December 1993, the court ordered ICN to arbitrate its claims,
and ICN filed for arbitration in March 1994. In December 1994, the arbitration
panel dismissed ICN's claims and ordered ICN to pay the Company the remaining
amounts due under the 1989 agreement, approximately $2.7 million. In March 1995,
the court confirmed the arbitration award, and ICN paid the final amounts due to
the Company in April 1995. In May 1995, the court dismissed the remaining claims
of Pharmaceuticals, without prejudice to Pharmaceuticals filing an action in
federal court in Delaware pursuant to the forum selection clause in the 1989
agreement. In June 1995, the court denied Pharmaceuticals' motion for
reconsideration of the dismissal. In August 1995, Pharmaceuticals appealed the
dismissal. In September 1995, the Court of Appeal dismissed Pharmaceuticals'
appeal.
As a result of the various arbitration and court decisions, the Company was
able to reverse reserves during fiscal 1995 of approximately $400,000 (credited
to general, administrative, etc.) that were associated with the various ICN
matters.
In addition, during the course of the lawsuit and arbitration, ICN informed
the Company of three ongoing tax inquiries of the biomedical business involving
proposed tax deficiencies exceeding $1 million (including interest and
penalties), which includes periods of ownership by the Company.
Management believes that the proposed tax assessments are excessive and
that ICN is responsible for a significant portion of any liabilities associated
with these assessments. Management does not believe that the ultimate outcome of
these actions will have a material adverse effect on the consolidated financial
conditions or results of operations of the Company.
(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:
1995 1994
------ ------
(IN THOUSANDS)
Accounts receivable, net of reserves of
$16 in 1995 and $64 in 1994 -
U.S. Government $30,252 $27,789
Non-U.S. Government 2,167 1,614
------- -------
$32,419 $29,403
======= =======
Unbilled reimbursable costs and fees,
net of reserves of $3,821 in 1995
and $3,606 in 1994 -
U.S. Government $ 5,615 $ 7,391
Non-U.S. Government 47 975
------- -------
$ 5,662 $ 8,366
======= =======
Invoices released in July that relate to June activity were
$11,536,000 and $9,813,000 for 1995 and 1994, respectively, and are reflected in
accounts receivable in the accompanying financial statements.
The components of unbilled reimbursable costs and fees are as follows:
1995 1994
------ ------
(IN THOUSANDS)
Unbilled reimbursable costs and fees,
net of reserves -
Retainages billable upon completion of contract $ 3,113 $ 5,443
Indirect costs incurred in excess of provisional billing rates 273 108
Costs incurred in excess of contractual authorization,
billable upon execution of a contract or contractual
amendment to increase funding 2,276 2,815
------- -------
$ 5,662 $ 8,366
======= =======
At June 30, 1995, unbilled reimbursable costs and fees expected to be
collected after one year were approximately $3,232,000.
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
One of the Company's directors is of counsel to a law firm which serves as
counsel for the Company. As of June 30, 1995, this director owns 19,356 shares
and options to purchase 1,335 shares. In addition, the wife of this director
holds 6,000 shares as trustee of various trusts. Fees for legal services
rendered by the law firm to the Company aggregated $83,000, $25,000 and $20,000,
in 1995, 1994 and 1993, respectively.
A former director who served until November 4, 1993 was a partner in a law
firm which served as counsel for the Company. Fees for legal services rendered
by this law firm to the Company aggregated $4,000 and $38,000, in 1994 and 1993,
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).
(8) STOCK OPTIONS
On July 28, 1994, the Board adopted and the shareholders approved, at the
1994 Annual Shareholders' Meeting, two new stock-based benefit plans. The first
is a new 1994 Employee Option Plan, under which key employees may be awarded
incentive and non-qualified stock options to purchase up to 500,000 shares of
stock. The second is an Employee Stock Purchase Plan qualified under Section 423
of the Internal Revenue Code which enables all employees to purchase stock at a
15% discount.
As of June 30, 1995, there are 634,593 shares of authorized but unissued
common stock reserved for issuance under the Company's 1985 Employee Stock
Option Plan. The number of shares subject to option at that date is 634,593. An
option entitles the holder to purchase shares of the Company's stock at the
market price on the date of grant. As of June 30, 1995, options for 340,946
shares are exercisable. The following table summarizes the option activity:
1985 EMPLOYEE STOCK OPTION
SHARES UNDER OPTION
-------------------
OPTION PRICE
NUMBER OF SHARES PER SHARE
---------------- ------------
BALANCE, JUNE 30, 1992 963,125 $2.75 -$6.50
Granted 35,500 3.25 - 6.19
Exercised (281,684) 2.75 - 6.25
Expired/Cancelled (22,250) 2.75 - 5.88
--------
BALANCE, JUNE 30, 1993 694,691 2.75 - 6.50
Granted 164,500 6.50 -11.25
Exercised (112,378) 2.75 - 5.88
Expired/Cancelled (45,125) 3.13 - 7.31
--------
BALANCE, JUNE 30, 1994 701,688 2.75 -11.25
Granted 111,888 12.38 -16.00
Exercised (161,795) 2.75 - 6.06
Expired/Cancelled (17,188) 3.13 -15.44
--------
BALANCE, JUNE 30, 1995 634,593 3.00 -16.00
========
As of June 30, 1995, there are 500,000 shares authorized but unissued
common stock reserved for issuance under the Company's 1994 Employee Stock
Option Plan. The number of shares subject to option at that date is 195,152. An
option entitles the holder to purchase shares of the Company's stock at the
market price on the date of grant. As of June 30, 1995, there are no options
that are exercisable. The following table summarizes the option activity:
1994 EMPLOYEE STOCK OPTION
SHARES UNDER OPTION
-------------------
OPTION PRICE
NUMBER OF SHARES PER SHARE
---------------- ------------
BALANCE, JUNE 30, 1994 0 N.A.
Granted 200,152 $14.00 -$16.06
Exercised --- ---
Cancelled (5,000) 15.44
-------
BALANCE, JUNE 30, 1995 195,152 14.00 - 16.06
=======
As of June 30, 1995, there are 89,489 shares of authorized but unissued
common stock reserved for issuance under the Company's Directors Fee Replacement
Plan. The number of shares subject to option at that date is 24,385. 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 three years after a participant ceases
to be a director. As of June 30, 1995, options for 24,385 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. The
table below summarizes the option activity.
As of June 30, 1995, there are 434,994 shares of authorized but unissued
common stock reserved for issuance under the Company's Cash Compensation
Replacement Plan. The number of shares subject to option at that date is 17,118.
Participation in the Plan is limited to upper management of the Company. Under
the Plan, participating executives 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 three years after an executive's termination as an
employee. As of June 30, 1995, options for 14,856 shares are exercisable. The
table below summarizes the option activity.
NUMBER OF SHARES UNDER OPTION
-----------------------------
DIRECTORS FEE CASH COMPENSATION
REPLACEMENT PLAN REPLACEMENT PLAN
---------------- ----------------
BALANCE, JUNE 30, 1992 35,526 0
Granted 9,141 2,737
Exercised (9,229) ---
------- ------
BALANCE, JUNE 30, 1993 35,438 2,737
Granted 5,899 8,104
Exercised (4,452) ---
------- ------
BALANCE, JUNE 30, 1994 36,885 10,841
Granted 7,649 11,283
Exercised (20,149) (5,006)
------- ------
BALANCE, JUNE 30, 1995 24,385 17,118
======= ======
In December 1994, the Company announced that it had completed the
previously authorized repurchase of 300,000 shares of its common stock, at a
cost of $3,845,000, and that its Board of directors authorized the repurchase of
up to 200,000 additional shares of its common stock in the open market or in
private transactions.
The timing and number of shares of the repurchase of the additional 200,000
shares of common stock will depend greatly on market conditions and other
factors. The shares will be purchased with existing cash, short-term borrowings,
future cash flows, or a combination of these factors, and may be retired or used
for general corporate purposes. As of June 30, 1995, the Company has not
purchased any additional shares under its repurchase program.
(9) COMMON STOCK PURCHASE RIGHTS
The Company has a Shareholder Rights Plan under which a dividend of one
common stock purchase right (right) is automatically issued for each share of
the Company's common stock. The rights are not exercisable or transferable apart
from the common stock until ten business days after a person has acquired
beneficial ownership of 25% or more of the common stock, or commences, or
announces an intention to commence, a tender offer for 25% or more of the common
stock. Separate certificates for the rights will be mailed to holders of the
common stock as of such date, and each right will entitle the holder thereof to
buy one share of common stock at an exercise price of $30 ($100 beginning
January 1, 1996). 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.
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL STATEMENTS
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 public accountants to discuss auditing, internal accounting controls
and financial reporting matters and to ensure that each is properly discharging
its responsibilities. The independent public accountants periodically meet alone
with the Audit Committee and have full and unrestricted access to the Committee
at any time.
GRC INTERNATIONAL, INC.
Jim Roth Phillip R. Pietras
President and Chief Vice President, Treasurer
Executive Officer and Chief Financial Officer
SUPPLEMENTARY DATA
- ------------------
Quarterly Results of Operations
(Unaudited)
The following is a summary of the quarterly results of operations for the
years ended June 30, 1995 and 1994 (in thousands, except for per share data):
1995
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- --------
Revenues $31,494 $29,813 $35,688 $40,813 $137,808
Operating income * 1,352 903 1,013 1,492 4,760
Net Income 1,507 930 1,107 1,486 5,030
Income per share $ .16 $ .10 $ .12 $ .16 $ .54
======= ======= ======= ======= ========
1994
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------
Revenues $30,780 $31,545 $30,883 $36,714 $129,922
Operating income 1,497 1,561 1,421 1,614 6,093
Income before cumulative effect of
accounting change 1,485 1,520 1,475 1,633 6,113
Cumulative effect of accounting change 1,000 --- --- --- 1,000
Net income 2,485 1,520 1,475 1,633 7,113
Income per share:
Before cumulative effect of accounting
change $ .16 $ .16 $ .16 $ .17 $ .65
From cumulative effect of accounting
change .11 --- --- --- .11
------- ------- ------- ------- --------
$ .27 $ .16 $ .16 $ .17 $ .76
======= ======= ======= ======= ========
* NOTE: Operating income for the fourth quarter of 1995 includes the gain of
approximately $.9 million from the sale of the Company's California
facility, as well as the write down of approximately $.5 million of
deferred software costs.