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, 1998
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.
1-7517 (703) 506-5000 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, 1998, the aggregate market value of the Registrant's
voting common stock held by non-affiliates was $61,481,621. As of July 31, 1998,
there were 10,213,482 shares of the Registrant's $.10 par value common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Corporation's 1998 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.
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 6
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 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 42
PART III.
Item 10. Directors and Executive Officers of the Registrant 42
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners and Management 43
Item 13. Certain Relationships and Related Transactions 43
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 43
Signatures 44
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 1998, 1997 and 1996 were 156, 144 and 149, 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.
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. By June 30, 1997, the Company had sold its GRC
Instruments/Dynatup, Vindicator, and Optical Service Unit ("OSU") businesses.
On December 19, 1997, the Company sold the assets and liabilities of
its Commercial Information Solutions ("CIS") business unit. Payment is based on
a royalty schedule.
On January 8, 1998, the Company sold the assets of its NetworkVUE
business unit. Payment is based on a royalty schedule.
The cash used by the discontinued operations in fiscal 1998 consisted
primarily of $1.6 million final cash payment of debt relating to an acquisition,
$1.7 million in operating expenses and $200 thousand for payment of payroll and
accounts payable accrued in fiscal 1997. The largest components of operating
expenses included payment for outside legal and financial fees, as well as
payments to consultants per agreements entered into during the closing of the
operations.
The net liability held for disposition was reduced in fiscal 1998 by
$4.3 million due primarily to the cash used by discontinued operations and the
reduction of exit accrual requirements of $750 thousand, reported as income in
the second quarter of fiscal 1998.
Patents, Trademarks, Licenses, Copyrights
-----------------------------------------
The Company has a number of patents, trademarks and trademark
applications, none of which is material to the operations of the Company.
Contracts
---------
Government contract revenues from professional and technical services,
either as prime contractor or subcontractor, represented approximately 98%, 95%,
and 93% of the Company's total revenues for fiscal years ended June 30, 1998,
1997, and 1996, 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 1998, 1997, and 1996, approximately 49%, 60%, and 62%,
respectively, of the Company's professional and technical services revenues were
from cost reimbursable contracts, while approximately 51%, 40%, 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, 1998, the Company had a maximum contract backlog amounting
to $450 million, compared to $372 million, and $327 million for 1997 and 1996,
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, 1998,
amounted to $58 million, compared to $44 million, and $49 million for 1997 and
1996, respectively. Funded contract backlog represents the expected contract
revenues for which contract awards have been made and funded, and 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 AATI, ACSC, CACI, Condor, CSC, Nichols Research, SAIC, Titan
and TRW.
Employees
---------
As of June 30, 1998, the Company employed 1,160 people, comprised of
1,059 full time and 101 part time people, an increase of 35 people, or 3%, from
the 1,125 people employed at June 30, 1997, comprised of 994 full-time and 131
part-time people. At June 30, 1998, the Company had approximately 173 openings
for full-time employees, compared to approximately 210 openings at June 30,
1997.
ITEM 2. PROPERTIES
----------
All of the Company's operations are conducted in leased facilities. The
Company has approximately 30 leased facilities for continuing operations within
the United States comprising approximately 351 thousand square feet. The minimum
annual rentals for fiscal year 1999 under non-cancelable operating leases are
approximately $8.5 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 Virginia and California. The Company believes that its facilities
are adequate for its purposes. The company currently owns no real property, but
has the option to buy a 3 acre parcel in California at a nominal price.
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.
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 1998.
PART II
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, 1998, there were 1,314 holders of record of the
Company's common stock. Stock price information by quarter is presented in the
following table:
Market Fiscal Year
Price 1998 1997
-------- --------------------- -----------------
High Low High Low
---- --- ---- ---
1st Quarter 7 14/16 5 38 5/8 13 3/4
2nd Quarter 7 3/16 5 1/4 18 1/4 6
3rd Quarter 6 13/16 5 9/16 8 3/8 3 3/4
4th Quarter 10 15/16 5 3/8 6 1/4 4 1/4
On September 11, 1998, the closing price of the Company's common stock
was $4.81.
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
None.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
GRC International, Inc. and Subsidiaries
FOR THE YEAR ENDED JUNE 30, 1998 1997 1996 1995 1994
----- ----- ----- ----- ----
(in thousands, except for per share data)
Revenue $130,927 $117,599 $117,016 $132,812 $122,872
Operating income (loss) 5,402 4,622 (182)* 6,800* 6,468
Interest income (expense), net (1,866) (1,343) (518) 270 319
Income tax (provision) benefit 7,166 10,582 --- --- (299)
Cumulative effect of accounting change --- --- --- --- 1,000
------- -------- -------- -------- ------
Income (loss) from continuing operations 10,702 13,861 (700) 7,070 7,488
Gain (loss) on discontinued operations 758 (31,611) (16,937) (2,040) (375)
------- ------- -------- -------- -------
Net income (loss) $ 11,460 $(17,750) $(17,637) $ 5,030 $ 7,113
======== ======== ======== ======== =======
Basic income (loss) per share from continuing operations $ 1.09 $ 1.48 $ (0.08) $ 0.79 $ 0.83
Basic income (loss) per common share $ 1.17 $ (1.91) $ (1.92) $ 0.56 $ 0.79
Weighted average number of common shares outstanding 9,838 9,338 9,172 9,001 9,037
Diluted income (loss) per share from continuing operations $ 1.07 $ 1.45 $ (0.08) $ 0.75 $ 0.80
Diluted net income (loss) per common share $ 1.14 $ (1.76) $ (1.92) $ 0.53 $ 0.76
Weighted average number of common shares and equivalents 10,254 9,843 9,172 9,393 9,370
Working capital (excluding discontinued operations) $ 19,073 $ 20,459 $ 14,857 $ 19,688 $24,683
Net assets (liabilities) of discontinued operations $ (297) $ (4,591) $ 14,742 $ 9,975 $ 3,449
Total assets $ 71,263 $ 65,964 $ 67,070 $ 71,107 $67,230
Long-term debt (less current maturities) $ 23,256 $ 28,153** $ 16,527** $ --- $ ---
Stockholders' equity $ 27,360 $ 13,076 $ 28,675 $ 48,268 $45,040
* The operating loss for 1996 reflects a write-off of $3.3 million in deferred
software and related costs, and the operating income for 1995 reflects the
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-------------------------------------------------------------------
FINANCIAL CONDITION
-------------------
Summary
-------
The following table sets forth for the years indicated the percentage
of total revenues for each item in the Consolidated Statements of Operations and
the percentage change of those items as compared to the prior year:
Period to
Relationship to Total Revenues Period Change
------------------------------ ---------------------
FY98 FY97 FY96 98 vs. 97 97 vs. 96
---- ---- ---- --------- ---------
Revenues 100% 100% 100% 11.3% 0.5%
Cost of revenues 84% 82% 85% 14.9% -3.3%
---- ---- ----
Gross Margin 16% 18% 15% -4.8% 21.6%
G&A, marketing, R&D expenses 12% 14% 12% -10.8% 15.8%
Write-Down 0% 0% 3% NM NM
-- -- -
Operating income 4% 4% 0% 16.8% NM
Net interest expense 1% 1% 0% 38.9% 159.3%
-- - --
Income (loss) from continuing operations,
before income taxes 3% 3% -1% 7.8% NM
Income tax benefit -5% -9% 0% NM NM
--- --- --
Income (loss) from continuing operations 8% 12% -1% NM NM
-- --- --
Discontinued operations, net of tax 1% -21% -14% NM NM
Loss on disposal of discontinued
operations 0% -5% 0% NM NM
-- --- --
Net income (loss) 9% -15% - 15% NM NM
"NM" indicates the percentage change is not meaningful.
Fiscal Year 1998 Compared to Fiscal Year 1997
- ---------------------------------------------
Continuing Operations
- ---------------------
Revenues
--------
Fiscal year 1998 revenues of $130.9 million were $13.3 million, or 11%,
higher than fiscal year 1997 revenues of $117.6 million. Of the increase, $9.3
million was attributable to the award of the GCSS contract to develop a new
retail logistics information system for the United States Army.
For 1998, revenues of $130.9 million consisted of $129.7 million in
services revenues and $1.2 million in product revenues. For 1997, revenues of
$117.6 million consisted of $115.9 million in service revenues and $1.7 million
in product revenues.
Cost of Revenues and Gross Profit
---------------------------------
Cost of revenues for 1998 amounted to $110.5 million, or 84% of
revenues, compared to $96.1 million, or 82% of revenues for 1997. A significant
portion of the increase in costs is a result of the GCSS contract mentioned
above.
Gross profit for 1998 amounted to $20.5 million, or 16% of revenues,
compared to $21.5 million, or 18% of revenues for 1997, a decrease of 5%. The
decrease in gross profit is primarily the result of cost overruns on certain
contracts during the current year.
Operating Expenses and Operating Income
---------------------------------------
Fiscal year 1998 total operating expenses of $15.0 million, or 12% of
revenues, were $1.9 million less than the $16.9 million, or 14% of revenues, in
operating expenses for 1997. Operating profit from continuing operations for
1998 amounted to $5.4 million compared to $4.6 million for FY 1997, an increase
of 17%. The decreased expenses and related increased operating profits were
attributable to reductions in bid and proposal and other general and
administrative expenses.
Net Interest Expense
--------------------
Net interest expense of $1.9 million for 1998, compared to net interest
expense of $1.3 million for 1997, reflects the increase in debt incurred in late
1997 in order to fund what are now discontinued operations.
Income Tax Benefit
------------------
In fiscal year 1998, the Company recognized a $7.2 million deferred tax
asset related to its net loss carryforwards for income tax purposes, bringing to
$17.9 million the total net deferred tax asset.
As a result of tax losses incurred in prior periods, the Company, at
June 30, 1998, 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 Products
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.
The Company is considering certain tax planning strategies which, in
conjunction with operating income, would enable the Company to fully utilize the
tax loss carryforward expiring in the fiscal year ending June 30, 1999. If the
Company does not generate
sufficient taxable income to fully utilize such tax loss carryforward, the
maximum tax benefit will not be recognized.
Income from Continuing Operations
---------------------------------
Income from continuing operations for 1998 amounted to $10.7 million,
compared to $13.9 million for 1997. This $3.2 million decrease is primarily due
to a $3.4 million reduction in recognized income tax benefit from fiscal 1997 to
fiscal 1998.
Discontinued Operations
-----------------------
The 1998 gain on discontinued operations reflects the sale of
NetworkVUE, the last remaining business, and adjustments of estimated remaining
liabilities related to such business.
Net Income or Loss
------------------
Net income for fiscal year 1998 amounted $11.5 million, comprised of a
profit from continuing operations of $10.7 million and a profit from
discontinued operations of $758 thousand.
Net loss for fiscal year 1997 amounted to $17.8 million, comprised of a
profit from continuing operations of $13.9 million and a loss from discontinued
operations of $31.6 million.
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,
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 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 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
-----------------------
The net loss from discontinued operations for fiscal year 1997 amounted
to $31.6 million, compared to a loss of $16.9 million for 1996. The 1997 loss
included a substantial write down of capitalized software.
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, compared to a net loss for fiscal year 1996 of
$17.6 million, comprised of loss of $700 thousand from continuing operations and
a loss from discontinued operations of $16.9 million.
Borrowings
----------
At June 30, 1998, the Company was party to a revolving credit agreement
that provides for secured borrowings of up to $22 million, of which $14.9
million (net of cash) was utilized at June 30, 1998. The agreement extends to
January 2000, 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 up to an additional $8 million in term
loan financing under a standby facility, available on an offering basis, with
borrowings thereunder due September 1, 2000, of which $4.75 million was utilized
at June 30, 1998. 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,
1998. The collateral under the Amended and Restated Revolving Credit and Term
Loan Agreement includes all of the Company's assets.
In June 1996, the Company completed a $7.5 million financing of
substantially all of its furniture and equipment. The loan was originally to be
amortized over a five year period at an interest rate of 9%, but with partial
paydowns that were made from the proceeds of the following divestitures, the
loan is now anticipated to be fully retired by the end of fiscal 1999. On April
30, 1997, the Company applied the $2 million in proceeds from the sale of its
GRC Instruments/Dynatup business against its obligations under the equipment
financing. In June and July 1997, the Company applied $1.5 million in proceeds
from the sale of its OSU business against its obligations under the equipment
financing. As of June 30, 1998, the outstanding balance on the equipment
financing was $961 thousand.
Liquidity and Capital Resources
-------------------------------
The Company had $3.6 million in cash and cash equivalents at June 30,
1998, compared to $5.8 million at June 30, 1997.
Net cash provided by continuing operations amounted to $5.6 million for
fiscal 1998, compared to $5.7 million for fiscal 1997. Net cash used in
discontinued operations amounted to $3.1 million for fiscal 1998, compared to
$12.4 million in fiscal 1997. Net cash used in investing activities for fiscal
1998 amounted to $1.8 million, compared to $3.8 million for the prior year. Net
cash used in financing activities amounted to $2.8 million for fiscal 1998,
compared to $13.6 million provided in fiscal 1997. The net decrease in cash and
cash equivalents for fiscal 1998 amounted to $2.1 million, compared to an
increase of cash and cash equivalents of $3.0 million in the prior year.
As a result of the decrease in debt and increase in net income during
fiscal 1998, the Company's ratio of total debt (net of cash) to total
capitalization amounted to 43% at June 30, 1998, compared to 67% at June 30,
1997.
For fiscal 1999, the Company expects positive cash flow, including
capital expenditures and payments on outstanding debt. Liquidity over the next
year will be determined by (a) net cash flow from operations, (b) capital
expenditures (including the possible replacement of the Company's MIS system),
(c) payments on outstanding debt, (d) receipt of payment on $2 million note due
January 31, 1999 relating to the 1995 sale of its Santa Barbara property. 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, 1998, the Company had $24.3 million of debt and equipment
lease financings, $1.0 million of which was classified as short term, and $23.3
million of which was
classified as long term. The Company had $27.1 million of bank debt and
equipment lease financings at June 30, 1997.
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
$4.8 million was drawn down at June 30, 1998; a $22 million revolving line of
credit ("Revolving Credit"), of which $18.5 million was used at June 30, 1998;
and a $961 thousand debt (as of June 30, 1998) arising from the equipment
financing ("Equipment Lease") arranged with the bank's equipment leasing
subsidiary.
The Term Loan is due on September 1, 2000, and bears interest at the
bank's floating prime rate, currently 8.50% per annum. The Revolving Credit is
due on January 15, 2000, 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, 1997, and, thus, the Revolving Credit is currently repayable on
January 15, 2000. 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 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, 1998, 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.
Risk Factors
------------
The Company and its shareholders face a number of risks, including, but
not limited to the following:
- 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.
- The risk that the Company will not be sufficiently prepared for
the so-called Y2K problem, and/or that the Company may incur
Y2K-related liabilities (see the next section).
Year 2000 Issue
---------------
The Year 2000 (Y2K) problem is the result of computer programs being
written using two digits rather than four to define the applicable year. Thus
the year 1998 is represented by the number "98" in many legacy software
applications. Consequently, on January 1, 2000, the year will jump back to "00"
in accordance with many non-Y2K compliant applications. To systems that are
non-Y2K compliant, the time will seem to have reverted back 100 years. So, when
computing basic lengths of time, the Company's computer programs, certain
building infrastructure components (including, elevators, alarm systems,
telephone networks, sprinkler systems, security access systems and certain HVAC
systems) and any additional time-sensitive software that are non-Y2k compliant
may recognize a date using "00" as the Year 1900. This could result in system
failures or miscalculations which could cause personal injury, property damage,
disruption of operations, and/or delays in payments from the Company's
customers, any or all of which could materially adversely effect the Company's
business, financial condition, or results of operations.
During the fourth quarter of fiscal 1998 the Company implemented an
internal Y2K compliance task force. The goal of the task force is to minimize
the disruptions to the Company's business which could result from the Y2K
problem, and to minimize other liabilities which the Company might incur in
connection with the Y2K problem. The task
force consists of existing employees of the Company, and no new employees have
been hired specifically to address the Company's internal Y2K issues.
The Company is in the process of conducting a company-wide assessment
of its computer systems and operations infrastructure, including systems being
developed to improve business functionality, to identify computer hardware,
software, and process control systems that are not Y2K compliant. The Company
presently believes that its business-critical computer systems which are not
presently Y2K-compliant will have been replaced, upgraded or modified in the
normal replacement cycle prior to 2000.
The Company's financial accounting software system is an old system
which was built in the early 1980's on a commercial database platform by Company
employees. The Company has modified this system to be Y2K compliant, but its Y2K
compliance has not been tested by any independent party. The Company presently
intends to have this system independently tested in the quarter ending December
31, 1998. If significant deficiencies are found, the Company may have to expend
significant resources to correct them, or in an extreme case, the Company may
have to purchase and implement a new system on an accelerated basis. Either of
those outcomes would be likely to have a material adverse affect on the
Company's operating results and financial position.
The Company has also initiated communications with third parties whose
computer systems' functionality could impact GRCI. These communications will
facilitate coordination of Y2K solutions and will permit GRCI to determine the
extent to which the Company may be vulnerable to failures of third parties to
address their own Y2K issues. However, as to the systems of the third parties
that are linked to GRCI, in particular those of the US Government, there can be
no guarantee that such systems that are not now Y2K compliant will be timely
converted to Y2K compliance.
The Company is also assessing any potential Y2K-related exposure it may
have with respect to software or hardware it has delivered to its customers.
The costs of the Company's Y2K compliance efforts are being funded with
cash flows from operations. As normal business costs, these costs are generally
reimbursible by the government under the Company's government contracts under
present regulations. In total, these costs are not expected to be substantially
different from the normal, recurring costs that are incurred for systems
development, implementation and maintenance. As a result, these costs are not
expected to have a material adverse effect on GRCI's overall results of
operations or cash flows.
Additionally, there can be no guarantee that third parties of business
importance to GRCI, in particular the US Government, will successfully and
timely reprogram or replace, and test, all of their own computer hardware,
software and process control systems. Because the majority of the Company's
business is contracted with the US Government, the failure of the US Government
to achieve Y2K compliance by the year 2000 would have a significant adverse
effect on GRCI's business, financial position, results of operations and cash
flows. Furthermore, if the Company's government customers delay other work in
order to accelerate their own Y2K compliance efforts, it could have a
significant adverse effect on GRCI's business, financial position and results of
operations.
The Company does not yet have a comprehensive contingency plan with
respect to the Y2K problem, but intends to establish such a plan during calendar
1999 as part of its ongoing Y2K compliance effort.
The foregoing assessment of the impact of the Y2K problem on GRCI is
based on management's best estimates at the present time, and could change
substantially. The assessment is based upon numerous assumptions as to future
events. There can be no guarantee that these estimates will prove accurate, and
actual results could differ from those estimated if these assumptions prove
inaccurate.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates, in particular, debt
obligations. GRCI does not trade in these instruments or use derivatives. The
table represents principal cash flows and related weighted average interest
rates by expected maturity dates.
Financial Instruments by Expected Maturity Date
(in thousands)
There- Fair
1999 2000 2001 2002 2003 after Total Value
----------------------------------------------------------------------------------
Liabilities
Long-term debt:
Variable rate --- $23,256 --- --- --- --- $23,256 $23,256
Average interest
Rate 8.5% 8.5% --- --- --- --- --- ---
ITEM 8. FINANCIAL STATEMENTS
--------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
----
Independent Auditors' Report 19
Report of Management 20
Consolidated Statements of Operations for the years ended
June 30, 1998, 1997 and 1996 21
Consolidated Balance Sheets as of June 30, 1998 and 1997 22-23
Consolidated Statements of Cash Flows for the years ended
June 30, 1998, 1997 and 1996 24-25
Consolidated Statements of Stockholders' Equity
for the years ended June 30, 1998, 1997 and 1996 26
Notes to Consolidated Financial Statements 27
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 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
July 28, 1998
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/ Gary Denman /s/ Timothy C. Halsey
- ------------------------------------- ----------------------------------
Gary Denman Timothy C. Halsey
President and Chief Executive Officer Controller,
(Acting) Chief Financial Officer &
(Acting) Chief Accounting Officer
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
1998 1997 1996
---------- ---------- --------
(in thousands, except for per share data)
Revenues $130,927 $117,599 $117,016
Cost of services 110,477 96,123 99,344
Write down of deferred software
and other related costs --- --- 3,283
Indirect and other costs 15,048 16,854 14,571
---------- --------- ----------
Operating income (loss) 5,402 4,622 (182)
Interest expense, net (1,866) (1,343) (518)
----------- --------- ------------
Income (loss) from continuing operations
before income tax benefit 3,536 3,279 (700)
Income tax benefit 7,166 10,582 ---
----------- --------- -----------
Income (loss) from continuing operations 10,702 13,861 (700)
---------- ---------- ------------
Discontinued Operations:
Income (loss) from discontinued operations, 758 (25,220) (16,937)
net of tax of $471 in 1998
Loss on disposal of discontinued operations,
including provision of $2,775 for
operating losses during phase out --- (6,391) ---
--------- --------- -----------
Income (loss) from discontinued operations 758 (31,611) (16,937)
---------- --------- ----------
Net income (loss) $ 11,460 $ (17,750) $ (17,637)
========= ========= ==========
Earnings Per Share Amounts:
Basic income (loss) per share from
continuing operations $ 1.09 $ 1.48 $ (0.08)
Basic income (loss) per common share $ 1.17 $ (1.91) $ (1.92)
Weighted average common shares outstanding 9,838 9,338 9,172
Diluted income (loss) per share from
continuing operations $ 1.07 $ 1.45 $ (0.08)
Diluted net income (loss) per common share $ 1.14 $ (1.76) $ (1.92)
Weighted average common shares and
Equivalents 10,254 9,843 9,172
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
ASSETS
1998 1997
---------- -------
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 3,648 $ 5,756
Accounts receivable, net 28,702 25,087
Unbilled reimbursable costs and fees, net 4,189 4,076
Other receivables 893 1,090
Prepaid expenses and other current assets 486 576
Deferred income taxes 1,239 2,686
-------- ---------
Total current assets 39,157 39,271
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Land, buildings and leasehold improvements 5,121 4,874
Equipment, furniture and fixtures 15,517 15,093
Less - Accumulated depreciation and amortization (11,069) (9,414)
-------- ---------
Property and equipment, net 9,569 10,553
--------- --------
OTHER ASSETS:
Goodwill and other intangible assets, net 2,176 2,409
Software development costs, net 349 461
Deferred income taxes 16,678 8,896
Deposits and other 3,334 4,374
-------- ---------
Total other assets 22,537 16,140
-------- --------
TOTAL ASSETS $ 71,263 $ 65,964
======== ========
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
---------- -------
(in thousands, except share
and per share data)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 975 $ 1,679
Accounts payable 3,897 2,610
Accrued compensation and benefits 13,268 12,210
Accrued expenses and other current liabilities 1,944 2,313
Net liabilities related to discontinued operations 297 4,591
-------- ---------
Total current liabilities 20,381 23,403
-------- --------
LONG-TERM LIABILITIES:
Long-term debt 23,264 28,153
Other long-term liabilities 258 1,332
-------- ---------
Total long-term liabilities 23,522 29,485
-------- --------
COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value -
300,000 shares authorized, none outstanding --- ---
Common stock, $.10 par value -
Authorized - 30,000,000 shares,
issued - 10,508,791 shares in 1998
and 9,849,000 shares in 1997 1,051 985
Paid-in capital 79,712 76,954
Accumulated deficit (49,558) (61,018)
-------- --------
31,205 16,921
Less: Treasury stock, at cost; 300,000 shares (3,845) (3,845)
-------- ---------
Total stockholders' equity 27,360 13,076
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 71,263 $ 65,964
======== ========
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
1998 1997 1996
---------- ---------- -------
(in thousands)
CASH FLOWS FROM CONTINUING OPERATIONS:
Income (loss) from continuing operations $ 10,702 $ 13,861 $ (700)
Reconciliation of income from continuing operations
Depreciation and amortization 3,177 3,330 3,509
Loss provision on current assets 1,052 1,067 956
Income tax benefit (6,806) (10,582) ---
Write-down of deferred software and related costs --- --- 3,283
Changes in assets and liabilities
Accounts receivable (4,780) (120) 5,414
Prepaid expenses and other current assets 287 (37) 239
Accounts payable 1,287 (2,197) (2,472)
Accrued expenses and other current liabilities 689 227 467
Income taxes payable --- 114 (176)
Other (44) (11) 129
---------- ------------ ------------
Net cash provided by operating activities 5,564 5,652 10,649
---------- --------- ----------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Loss from discontinued operations 758 (31,611) (16,937)
Reconciliation of income from discontinued operations
Non-cash charges and changes in net assets/liabilities (4,223) 9,429 (4,767)
Proceeds from sale of discontinued operations 400 3,366 ---
Provision for loss on disposal of discontinued operations --- 6,391 ---
---------- ---------- --------------
Net cash used in discontinued operations (3,065) (12,425) (21,704)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (1,733) (3,468) (3,141)
Proceeds from sale of property and equipment 74 --- ---
Deferred software costs --- (97) (2,919)
Proceeds from notes receivable --- --- 1,440
Other (106) (247) (35)
---------- ----------- ------------
Net cash used in investing activities (1,765) (3,812) (4,655)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and capital lease obligations (5,552) (4,443) (148)
Bank borrowings 2,710 13,881 17,925
Proceeds from convertible debenture, warrants and other --- 4,000 ---
Deferred financing costs --- (207) ---
Issuance of common stock --- 320 ---
Taxes related to exercises of employee stock options --- --- (1,956)
---------- ---------- -----------
Net cash (used in) provided by financing activities (2,842) 13,551 15,821
---------- --------- ----------
Net (decrease) increase in cash and equivalents (2,108) 2,966 111
Cash and equivalents at beginning of year 5,756 2,790 2,679
---------- ----------- ----------
Cash and equivalents at end of year $ 3,648 $ 5,756 $ 2,790
========== ========== ==========
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
1998 1997 1996
---- ---- ----
(in thousands)
Supplemental disclosures:
Cash paid for:
Interest $2,239 $2,055 $754
Taxes 28 80 84
Other non-cash financing activities:
Conversion of debenture to common stock 2,814 750 ---
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Paid-in Accumulated Treasury
Shares Amount Capital Deficit Stock
------ ------ ------- ----------- --------
(in thousands)
Balances as of July 1, 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)
Stock options exercised net of shares retained
for exercise price and taxes 25 2 9 --- ---
Compensation on officers' stock options 13 1 86 --- ---
Conversion of debenture to common stock 621 63 2,751
Discount on Employee Stock Purchase Plan --- --- (88) --- ---
Net income --- --- --- 11,460 ---
------- ------- ------- ------- --------
Balances as of June 30, 1998 10,511 $1,051 $79,712 $(49,558) $(3,845)
====== ====== ======= ========= ========
The accompanying notes are an integral part of these statements.
GRC INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
(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 - 98%, 94% and 91% of the Company's revenues were
derived from contracts with the U.S. Department of Defense (DoD) and 8%, 9% and
17% of revenues were derived from one contract for fiscal years 1998, 1997 and
1996, 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.
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 7 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. As of June 30, 1998 and 1997, accumulated
amortization of goodwill was $1,312,000 and $1,235,000, respectively, and of
other intangible assets was $1,392,000 and $1,272,000, 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 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, 1998 and 1997, was
$336,000 and $130,000, 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 $3,367,000, $3,785,000 and $3,842,000 in 1998,
1997 and 1996, 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 $61,000, $53,000 and
$50,000 in 1998, 1997 and 1996, respectively. The present value of the projected
benefit obligation is approximately $156,000 and $145,000 at June 30, 1998 and
1997, respectively.
Income taxes - The Company accounts for income taxes under the asset
and liability approach which requires the recognition of deferred tax assets and
liabilities for the differences between the financial reporting and tax bases 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 - During 1998, the Company adopted Statement of
Financial Standards (SFAS) No. 128, Earnings Per Share and has computed basic
and diluted earnings per share based on the weighted average number of shares of
common stock and potential common stock outstanding during the period. Potential
common stock, for purposes of determining diluted earnings per share, includes,
where applicable, the effects of dilutive stock options, warrants, and
convertible securities, computed using the treasury
stock method or the if-converted method. Comparative earnings per share data
have been restated for prior periods.
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 dates of
the financial statements and the reported amount of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
New Accounting Pronouncements - In 1999, the Company will be required
to adopt the provisions of Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. The Company has not completed
its evaluation of the impact that the adoption of such statements will have on
its financial statements.
(2) EARNINGS PER SHARE
The following table represents a reconciliation of the net income and
shares outstanding figures used in the basic and diluted earnings per share from
continuing operations computations.
1998 1997 1996
----------------------------- --------------------------- -----------------------------
$ Per $ Per Income $ Per
Income Shares Share Income Shares Share Loss Shares Share
----------------------------- --------------------------- -----------------------------
Basic EPS $ 10,702 9,838 $ 1.09 $13,861 9,338 $ 1.48 $ (700) 9,172 $ (0.08)
Income available to common
stockholders
Effect of dilutive securities
Stock options 146 176 ---
Debenture 184 270 425 329
--- ---
Diluted earnings per share
Income available to common
------------------------------ ---------------------------- -----------------------------
stockholders assuming conversion $ 10,886 10,254 $ 1.07 $14,286 9,843 $ 1.45 $ (700) 9,172 $ (0.08)
(3) DEBT
Long-term debt at June 30, consists of the following:
1998 1997
--------- -------
(in thousands)
Revolving credit agreement $ 18,506 $ 19,267
Term loans 4,750 4,900
Equipment financing 961 2,871
Convertible debenture --- 2,758
Other 22 36
--------- -----------
Total long-term debt $ 24,239 $ 29,832
Less current portion (975) (1,679)
---------- -----------
$ 23,264 $ 28,153
======== ========
The fair market values of the Company's debt instruments approximate
the carrying values.
Equipment Financing - In June 1996, the Company completed a $7.5
million financing of substantially all of its furniture and equipment. The loan
was originally to be amortized over a five year period at an interest rate of
9%, but with partial paydowns made from the proceeds from divestitures of
discontinues operations, the loan is now anticipated to be fully retired by the
end of fiscal 1999. As of June 30,1998, the outstanding balance on the equipment
financing lease was $961 thousand.
Revolving Credit Agreement and Term Loans - At June 30, 1998, the
Company had a revolving credit agreement with its bank that provides for secured
borrowings up to $22 million. The agreement extends to January 2000, 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, 2000. 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, 1998. 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.
At June 30, 1998, the Company was in compliance with its covenants under this
Agreement.
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"). By April 1998, the Debenture had been fully
converted into 804,322 shares.
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"). The Debenture Warrant became exercisable on July 31, 1998. If the
Company sells substantially all of its assets or enters into a merger or
acquisition or other similar transaction, the Debenture Warrant is to be
repriced at the lesser of (i) $8.47 per share, or (ii) 80% of the Transaction
Value (as defined in the Debenture Warrant).
Aggregate annual maturities for long-term debt for the next five years
(unless extended) are as follows: 1999, $975 thousand; 2000, $23,264,000; 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 recorded for each year are
as follows:
1998 1997 1996
-------- -------- ------
(in thousands)
Income tax (benefit) at statutory federal rate $ 1,619 $ 1,115 $ (238)
State income taxes, net of federal benefit 225 151 (28)
Change in valuation reserve (8,349) (11,848) 230
Other (190) --- 36
-------- --------- --------
Income tax benefit $ (6,695) $(10,582) $ ---
========= ======== =========
The primary components of the Company's net deferred tax asset are as
follows:
As of June 30,
1998 1997
-------- -------
(in thousands)
Deferred tax assets:
Reserves and other nondeductible accruals $ 2,167 $ 4,266
Compensation not currently deductible 2,094 2,207
Net operating losses 26,257 26,195
AMT and general business credits 816 800
Other 9 ---
Valuation reserve (9,150) (17,500)
--------- --------
Total deferred tax assets 22,193 15,968
--------- --------
Deferred tax liabilities:
Reimbursable costs and fees (2,945) (3,555)
Prepaid expenses and rent (342) (232)
Depreciation (tax over book) (349) (410)
Internally developed software (143) (189)
Other (497) ---
--------- ---------
Total deferred tax liabilities (4,276) (4,386)
-------- ---------
Net deferred tax asset $ 17,917 $ 11,582
======== ========
At June 30, 1998, the Company had net operating loss carryforwards of
approximately $64 million available to reduce future federal tax liabilities, of
which approximately $10 million expire in 1999, $15 million expire between 2000
and 2010, $27 million expire in 2011, and $12 million expire in 2012.
Realization of the net deferred tax asset of $17.9 million 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 net 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 periods are reduced.
(5) COMMITMENTS AND CONTINGENCIES
Commitments - The Company leases all of its facilities and rents
certain equipment under operating lease agreements, some with inflation
escalator clauses. The minimum annual rentals due under non-cancelable operating
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)
1999 $ 6,538 $ 1,166
2000 5,737 1,155
2001 5,086 1,014
2002 4,806 462
2003 4,656 142
Thereafter 28,244 ---
-------- ------------
$55,067 $ 3,939
======= ========
Rent expense under operating leases was $ 7,429,000, $7,367,000 and
$6,643,000, net of sublease income of $1,095,000, $555,000 and $477,000, in
1998, 1997 and 1996, respectively.
As of June 30, 1998, the Company had employment agreements with 16
employees providing for severance payments upon employment termination after a
change in control. The maximum amount payable under these arrangements was
approximately $3,300,000.
(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:
1998 1997
---------- --------
(in thousands)
Accounts receivable, net of reserves of
$41 in 1998 and 1997 -
U.S. government $ 27,616 $ 23,420
Non-U.S. government 1,086 1,667
-------- ---------
$ 28,702 $ 25,087
======== ========
Unbilled reimbursable costs and fees,
net of reserves of $4,743 in 1998
and $4,594 in 1997 -
U.S. government $ 3,424 $ 3,646
Non-U.S. government 765 430
-------- ---------
$ 4,189 $ 4,076
========= =========
Invoices released in July that relate to June activity were $12,668,000
and $10,736,000 for 1998 and 1997, respectively, and are reflected in accounts
receivable in the accompanying financial statements.
The components of unbilled reimbursable costs and fees are as follows:
1998 1997
-------- ------
(in thousands)
Retainages billable upon completion of contract $ 2,561 $ 2,301
Unbilled direct costs, fee and indirect costs incurred
in excess of provisional billing rates 836 501
Costs incurred in excess of contractual authorization,
billable upon execution of a contract or contractual
amendment to increase funding 792 1,274
-------- --------
$ 4,189 $ 4,076
======= ========
At June 30, 1998, unbilled reimbursable costs and fees expected to be
collected after one year were approximately $2,050,000.
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
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 and term loan 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.
(8) STOCK-BASED COMPENSATION PLANS
At June 30, 1998, 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.
Under the 1985 Employee Stock Option Plan ("1985 Plan"), no further
options may be granted, but 80,470 options remain outstanding as of June 30,
1998.
Under the 1994 Employee Stock Option Plan ("1994 Plan"), a total of
20,720 shares have been issued (17,222 of them to officers), and 795,317 options
are outstanding, of which 541,854 are held by officers.
Under the 1996 Employee Stock Option Plan ("1996 Employee Plan"), no
shares have been issued, 202,813 options are outstanding. Under the 1996
Officers Stock Option Plan ("1996 Officers Plan"), no shares have been issued,
302,250 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 to 24 months. Options have a 10-year term and are issued at the fair market
value on the date of grant, and therefore, under the intrinsic value method, no
compensation is recorded in the Statement of Operations.
During the second quarter of FY98, employees other than the 7
highest-paid officers were permitted to reprice their options at the then
current fair value in exchange for a reduced number of options.
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, 1998, options for 59,542 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, 1998, June 30, 1997
and June 30, 1996 was approximately $78 thousand, $112 thousand and $118
thousand, respectively.
Under the Company's Cash Compensation Replacement Plan, officers may
elect to forego cash compensation (up to 25% of salary and up to 100% of bonus)
to purchase stock and/or 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, 1998,
options for 46,850 shares are
exercisable. Compensation cost recognized under the Cash Compensation
Replacement Plan for the years ended June 30,1998, June 30, 1997 and June 30,
1996 equaled approximately $37 thousand, $103 thousand and $359 thousand,
respectively.
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.):
1998 1997
------------------------ ---------------------
As Pro As Pro
Reported Forma Reported Forma
--------- ----- -------- -----
Net income (loss) (in thousands) $11,460 $ 9,422 $(17,750) $(19,562)
Earnings Per Share Amounts (Diluted)
- -----------------------------------
Net income (loss) $ 1.14 $ .94 $ (1.76) $ (1.94)
A summary of the status of the Company's stock options as of June 30,
1998, 1997 and 1996 and changes during those years is presented below (shares in
thousands):
1985, 1994 and 1996 Plans
1998 1997 1996
--------------------------- -------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
-------------------------- -------------------------- -------------------------
Outstanding @
beginning of year 1,133,540 $17.42 855,661 $18.58 829,745 $ 9.04
Granted 814,349 $6.77 518,771 $13.59 415,011 $25.20
Exercised (82,665) $ 5.71 (83,655) $ 6.02 (373,595) $ 4.89
Canceled (484,375) $18.85 (157,237) $17.15 (15,500) $15.35
--------- ---------- ---------
Outstanding @
end of year 1,380,849 $11.32 1,133,540 $17.42 855,661 $18.58
========= ========= ========
Options exercisable
at year end 606,244 $12.18 292,165 $16.20 166,286 $18.90
========== ========= ========
Options available
for future grant 137,473 172,053 95,337
========== ========== =========
Weighted Average
fair value of options
granted during the
year $ 3.40 $ 6.66 $ 9.16
========== ============ =========
Directors Fee Replacement Plan & Cash Compensation Replacement Plan
1998 1997 1996
--------------------------- -------------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------------------------- -------------------------- -------------------------
Outstanding @
beginning of year 89,810 $3.20 59,924 $3.59 41,503 $1.96
Granted 22,881 $1.68 29,906 $2.40 22,982 $6.92
Exercised (6,299) $4.00 (20) $9.43 (4,561) $5.53
Canceled --- --- --- --- --- ---
---------- ---------- ----------
Outstanding @
end of year 106,392 $2.82 89,810 $3.20 59,924 $3.59
========= ========= =========
Options exercisable
at year end 100,050 $2.60 82,628 $3.05 54,117 $3.38
========= ========= =========
Options available
for future grant 389,499 419,503 459,858
========= ========= ========
Weighted Average fair
value of options
granted during the
year $ 5.57 $ 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, 1998, 1,352 and 10,560 of the outstanding shares expire in FY 1999 and
FY 2000, respectively. As of June 30, 1998, 1,103 and 9,813 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:
1998 1997 1996
------ ------ ------
(a) Dividends --- --- ---
(b) Expected volatility 50% 50% 44%
(c) Risk-free interest rate 5.5% 6.5% 6.5%
(d) Expected life in years 5 5 5
The following table summarizes information about stock options
outstanding at June 30, 1998 (shares in thousands):
1985, 1994 and 1996 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 - $ 9.38 915,349 8.5 $ 6.44 339,119 $ 5.66
$ 15.44 - $37.69 465,500 7.5 $20.91 267,125 $20.45
--------- --- ------ ------- ------
$ 4.13 - $37.69 1,380,849 8.2 $11.32 606,244 $12.18
Directors Fee Replacement Plan & Cash Compensation Replacement Plan
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
Range of Average Average
Exercise Number Exercise Number Exercise
Prices Outstanding Price Exercisable Price
- ------------------------------------- --------------------------------------------------
$. 10 - $ 3.77 83,511 $1.75 79,563 $1.74
$ 5.07 - $ 9.43 22,881 $6.73 20,487 $6.78
------- ----- -------- -----
$ .10 - $ 9.43 106,392 $2.82 100,050 $2.77
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 58,230, 65,871 and 25,304 shares of common stock to its
employees during the years ended June 30, 1998, 1997 and 1996, respectively. The
weighted average value of those purchase rights granted in 1998 and 1997 was
approximately $2.40 and $1.89 per share.
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) 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 $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 rights will terminate. The rights expire on December 31, 2005.
Structured Equity Line Financing - The Company is a party to a
Structured Equity Line Flexible Financing Agreement ("Equity Line Agreement")
whereby 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 over a 3 year
period beginning October 1, 1998. 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 Line Warrant became exercisable on July
31, 1998. If the Company sells substantially all of its assets or enters into a
merger or acquisition or other similar transaction, the Equity Line Warrant will
be repriced at the lesser of (i) $8.47, or (ii) 80% of the Transaction Value (as
defined in the Equity Line Warrant). The Additional Equity Line Warrant, when
issued, will contain provisions similar to the Equity Line Warrant. The
investor's obligation to purchase under the Equity Line Agreement is subject to
various conditions, including (i) the effectiveness of a registration statement
with respect to the underlying shares, (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.
(10) DISCONTINUED OPERATIONS
During the quarter ended March 31, 1997, the Company adopted a plan to
dispose of its Telecommunications and Advanced Products Divisions. As of January
8, 1998, all business units within those divisions had been sold. Consequently,
the Company has reported its results of operations for the Telecommunications
and Advanced Products Divisions as discontinued operations.
On April 30, 1997, the Company sold the assets and liabilities of its
GRC Instruments/Dynatup business unit of its discontinued Advanced Products
Division for $2.0 million in cash.
On June 5, 1997, the Company sold the assets and liabilities of its
Vindicator business unit of its discontinued Advanced Products Division for
approximately $700 thousand, with initial payment of $250 thousand. Subsequent
installments of approximately $130 thousand have been received. The remainder of
the purchase price, $320 thousand, is due on December 31, 1998, and is reflected
within net liabilities of discontinued operations.
On June 27, 1997, the Company sold the assets and liabilities of its
OSU business unit of its discontinued Telecommunications Division for an initial
payment of $1.5 million and royalties on sales of the OSU unit or derivatives
over the next 10 years.
On December 19, 1997, the Company sold the assets of its Commercial
Information Solutions ("CIS") component of its discontinued Advanced Products
Division in exchange for royalties on future sales of Flow Gemini and derivative
products and related services.
On January 8, 1998, the Company sold the assets of its NetworkVUE
business unit of its discontinued Telecommunications Division in exchange for
royalties on future sales of NetworkVUE, NetSolve and derivative products and
related services.
Summarized balance sheet data related to the discontinued operations is
as follows:
June 30, June 30,
1998 1997
---- ----
(in thousands)
Net assets to be disposed of:
Current assets $ 40 $ 417
Property, plant & equipment, net 391 1,035
Other 10 44
--------- --------
441 1,496
Liabilities 96 ---
--------- --------
Net assets to be disposed of 345 874
Proceeds receivable from sale of divisions 400 400
Provision for losses (1,042) (3,883)
QSI obligation --- (1,982)
--------- --------
Net liabilities related to discontinued
operations $ (297) $(4,591)
======== =======
Discontinued operations reflect management's 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
--------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
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.
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 17, 1998 By: /s/ Gary Denman
------------------ ----------------------------
Gary Denman
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Timothy C. Halsey 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 17, 1998 By: /s/ Gary Denman
----------------- --------------------------
Gary Denman
President and Chief Executive
Officer
Date: September 17, 1998 By: /s/ Timothy C. Halsey
------------------ --------------------------
Timothy C. Halsey
Controller,
(Acting) Chief Financial
Officer & (Acting) Chief
Accounting Officer
Date: September 17, 1998 By: /s/ Joseph R. Wright, Jr.
------------------ -------------------------------
Joseph R. Wright, Jr., Chairman
of the Board of Directors
Date: September 17, 1998 By: /s/ Peter A. Cohen
------------------ -------------------------------
Peter A. Cohen, Vice Chairman
of the Board of Directors
Date: September 17, 1998 By: /s/ H. Furlong Baldwin
------------------ ------------------------------
H. Furlong Baldwin, Director
Date: September 17, 1998 By: /s/ Frank J.A. Cilluffo
------------------ ------------------------------
Frank J.A. Cilluffo, Director
Date: September 17, 1998 By: /s/ Leslie B. Disharoon
------------------ ------------------------------
Leslie B. Disharoon, Director
Date: September 17, 1998 By: /s/ Charles H.P. Duell
------------------ ------------------------------
Charles H.P. Duell, Director
Date: September 17, 1998 By: /s/ Edward C. Meyer
------------------ ------------------------------
Edward C. Meyer, Director
Date: September 17, 1998 By: /s/ George R. Packard
------------------ ------------------------------
George R. Packard, Director
Date: September 17, 1998 By: /s/ Herbert Rabin
------------------ ------------------------------
Herbert Rabin, Director
Date: September 17, 1998 By: /s/ Jim Roth
------------------ ------------------------------
Jim Roth, Director
Date: September 17, 1998 By: /s/ E. Kirby Warren
------------------ ------------------------------
E. Kirby Warren, Director
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, 33-87982 and
333-38445 of GRC International, Inc. on Form S-8 of our report dated July 28,
1998, appearing in this Annual Report on Form 10-K of GRC International, Inc.
for the year ended June 30, 1998.
DELOITTE & TOUCHE LLP
McLean, Virginia
September 18, 1998
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, 1998
Reserves for uncollectible receivables -
Deducted from accounts receivable $ 41 $ --- $ --- $ --- $ 41
Deducted from unbilled reimbursable
costs and fees 4,594 925 127 (904) 4,742
-------- -------- ------- ------- --------
$ 4,635 $ 925 $ 127 $ (904) $ 4,783
========= ======== ======= ======= ========
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
======= ======== ====== ======= =======
(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.
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 (incorporated by reference to Exhibit
10.2 to the 1997 Form 10-K)
10.3* 1996 Officers Stock Option Plan -----
10.4* 1998 Option Plan -----
10.5* Cash Compensation Replacement Plan (incorporated by reference to
Exhibit 10.4 to the 1997 Form 10-K)
10.6* Incentive Compensation Plan (incorporated by reference to Exhibit
10.7 to the 1995 Form 10-K)
10.7* Directors Fee Replacement Plan (incorporated by reference to
Exhibit 10.6 to the 1997 Form 10-K)
10.8* Directors Phantom Stock Plan (incorporated by reference to
Exhibit 10.7 to the 1996 Form 10-K)
10.9* Directors Retirement Plan (incorporated by reference to Exhibit
10.8 to the 1997 Form 10-K)
10.10 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)
10.11 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)
10.12 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)
10.13 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)
10.14 Third Allonge to Secured Note (Commercial) of GRC International,
Inc. to Mercantile-Safe Deposit & Trust Company in the Principal
Amounts of $2,200,000 dated February 12, 1996; $400,000 dated
March 8, 1996; and $2,600,000 dated June 7, 1996 -----
10.15 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)
10.16 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)
10.17 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)
10.18 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)
10.19 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)
10.20* Employment Agreement between the Company and Jim Roth dated as of
July 1, 1995 (incorporated by reference to Exhibit 10.16 to the
1996 Form 10-K)
10.21* Amendment Number One to Employment Agreement between the Company
and Jim Roth dated as of June 30, 1998 -----
10.22* 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)
10.23* Amendment to Deed of Trust Note dated as of March 26, 1998 -----
10.24* Independent Contractor Agreement dated as of July 1, 1998 between
the Company and Jim Roth -----
10.25* Employment Agreement between the Company and Gary L. Denman -----
10.26* Form of Employment Agreement for Thomas E. McCabe and Ronald B.
Alexander -----
10.27* Form of Employment Agreement for James L. Selsor and Michael G.
Stolarik -----
10.28 Building Lease between the Company and Bermant Development
Company (incorporated by reference to Exhibit 10.21 to the 1995
Form 10-K)
10.29 First and Second Amendments to Building Lease between the Company
and Bermant Development Company (incorporated by reference to
Exhibit 10.23 to the 1997 Form 10-K)
10.30 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)
10.31 $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)
10.32 320,000 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)
10.33 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)
10.34 Structured Equity Line Flexible Financing Agreement ("Equity Line
Agreement") dated as of January 21, 1997 (amended and restated as
of August 26, 1998) between the Company and Cripple Creek
Securities, LLC ("Cripple Creek")
10.35 125,000 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)
10.36 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 43 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.