ITEM 1: BUSINESS - -----------------
Nooney Real Property Investors-Two, L.P. (the "Registrant") is a limited partnership formed under the Missouri Uniform Limited Partnership Law on September 26, 1979, to invest, on a leveraged basis, in income-producing real properties such as shopping centers, office buildings, apartment complexes, office/warehouses and light industrial properties. The Registrant originally invested in six real property investments described in Item 2

ITEM 2: PROPERTIES - -------------------
On October 3, 1979, the Registrant purchased the Maple Tree Shopping Center (the "Center") located at the corner of Clayton and Clarkson Roads in West St. Louis County, Missouri. Constructed in 1974 of steel and masonry block, the Center contains approximately 72,000 net rentable square feet and is located on a 7.8 acre site which provides paved parking for 366 cars. The Center was 96% leased by 15 tenants at year end. The purchase price of the Center was $3,184,053.
On October 15, 1980, the Registrant purchased Park Plaza I & II, ("Park Plaza") an office/warehouse center located at 5707-5797 Park Plaza Court in Indianapolis, Indiana. Park Plaza consists of two one-story, concrete block buildings. Park Plaza I was built in 1975 and Park Plaza II in 1979. Park Plaza is located on a 9 acre site which provides paved parking for 150 cars. The buildings contain a total of approximately 95,000 net rentable square feet and were 100% leased by 29 tenants at year end. The purchase price of Park Plaza was $2,411,163.
On March 27, 1981, the Registrant purchased Morenci Professional Park Buildings A, B, C, D & G ("Morenci"), an office/warehouse complex located at 62nd Street and Guion Road in Indianapolis, Indiana. Morenci consisted of five one-story, masonry buildings located on a 13.35 acre site. Buildings A, B, C & D were built in 1975 and building G was built in 1979. On November 14, 1991, Building G was sold to a party unaffiliated with the Registrant. The remaining buildings contain a total of approximately 105,600 net rentable square feet and were 99% leased by 29 tenants at year end. The major tenant occupying 49% of the property vacated as of December 31, 1995. The total purchase price, excluding Building G, of Morenci was $3,009,924.
On March 27, 1981, the Registrant purchased the Jackson Industrial Building A ("Jackson A"), a warehouse building located at Post Road and 30th Street in Indianapolis, Indiana. Jackson A is a one-story, masonry building and is located on a 21.87 acre site. The building, originally constructed in 1976 and subsequently expanded in 1980, contains approximately 320,000 net rentable square feet. Jackson A was 100% leased by 2 tenants at year end. The purchase price of Jackson A was $6,089,929.
Reference is made to Note 3 to Notes to Financial Statements filed herewith as Exhibit 99.3 in response to Item 8 for a description of the mortgage indebtedness secured by the Registrant's real property investments. Reference is also made to Note 6 to Notes to Financial Statements for a discussion of revenues derived from major tenants.
The following table sets forth certain information as of November 30, 1995, relating to the properties owned by the Partnership.
ITEM 3:

ITEM 3: LEGAL PROCEEDINGS - --------------------------
The Registrant is not a party to any material pending legal proceedings.
ITEM 4:

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1995.
PART II -------
ITEM 5:

ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - --------------------------------------------------------------
As of February 1, 1996, there were 1,081 record holders of Interests in the Registrant. There is no public market for the Interests and it is not anticipated that a public market will develop.
There were no cash distributions paid to the Limited Partners during fiscal 1994 or fiscal 1995.
ITEM 6:

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ----------------------------------------------------------
Liquidity and Capital Resources - -------------------------------
Cash reserves as of November 30, 1995 are $628,358, an increase of $25,319 from year ended November 30, 1994. The increase in cash was provided by the operations of the Registrant's properties. The cash balances are being allowed to accumulate to establish adequate cash reserves to fund future capital expenditures, leasing, and tenant finish costs. These reserves are necessary based on the fact that a major tenant occupying 49% of the space at Morenci Professional Park vacated in December 1995, and partial roof replacement is needed at Jackson Industrial. The Registrant expects to fund anticipated capital expenditures throughout 1996 from cash flow provided by operations and the current level of cash reserves. The anticipated capital expenditures by property are as follows:
Throughout 1996, approximately $502,791 of capital expenditures have been forecasted. Park Plaza I & II, Morenci Professional Park, and Maple Tree Shopping Center have leasing capital to fund tenant alterations to their respective suites along with lease commissions for new leases signed. At Park Plaza I & II, the Registrant has forecasted resurfacing of sections of the rear parking areas, concrete repair/replacement, and interior sprinkler head adjustments. At Morenci Professional Park, the Registrant has forecasted other capital to clean up and renovate the space previously occupied by the major tenant in order for it to present well to potential tenants. At Maple Tree Shopping Center, the Registrant has scheduled the enclosure of its waste storage bins in an effort to comply with city ordinances. At Jackson Industrial, the Registrant has forecasted the re-roofing of approximately 68,000 square feet at the southern end of the building.
As of November 1, 1995, the Registrant negotiated an extension of the second mortgages secured by Park Plaza I & II, Morenci Professional Park, and Maple Tree. The term of the extension is for a period of one year at a rate of 1.5% over the then published prime rate. As of November 30, 1995, interest rate on the debt was 10.25%. The balance of the debt on Park Plaza I & II and Morenci as of November 30, 1995, is $259,925. The balance of the debt on Maple Tree as of November 30, 1995, is $290,060.
The first mortgage debt on Morenci Professional Park and Park Plaza I & II have maturity dates of October 1, 2005, and December 31, 2003, respectively.
On November 1, 1995, the Registrant refinanced the existing first deed of trust on Jackson Industrial for a period of five years at a rate of 9.31%, being amortized over 18 years.
The future liquidity of the Registrant is dependent on its ability to fund future capital expenditures and mortgage payments from operations and cash reserves, maintain occupancy, and negotiate with lenders the refinancing of mortgage debt as it matures. Until such time as the real estate market recovers and profitable sale of the properties is feasible, the Registrant will continue to manage the properties to achieve its investment objectives.
Results of Operations - ---------------------
The results of operations for the Registrant's properties for the years ended November 30, 1995, 1994, and 1993 are detailed in the schedule below. Expenses of the Registrant are excluded.
At Jackson Industrial, the wide swings in revenues and expenses relate to the property's real estate taxes. In 1994 the county taxing authority discovered an error in the method in which the property had been assessed. The error was corrected, resulting in a significant increase in the real estate tax expense accrual in 1994. As the real estate tax accruals increased, they were passed through to the tenants in the form of a real estate tax reimbursement. From 1994 to 1995 real estate taxes paid leveled out with the expense accrual
resulting in a decrease of $56,212 in the expense. Real estate tax reimbursement decreased $30,395 from 1994 to 1995 due to the renewal of a major tenant's lease, resulting in a change in their real estate tax base year.
Maple Tree Shopping Center had increases in net income for the three years presented due primarily to decreasing expenses. Revenues have remained relatively stable over the three year period. The decrease in expenses from 1993 to 1994 relates to repairs and maintenance ($16,700), snow removal ($5,037), and real estate taxes ($18,662), offset by parking lot expenditures ($22,874). The expense decrease from 1994 to 1995 is attributable to depreciation expense ($32,582) and administrative costs ($6,877), offset by increases in repairs and maintenance ($15,317) and real estate taxes ($11,020).
The operating results at Park Plaza I & II for the years ended November 30, 1995 and 1994 are similar. However, net income from 1993 to 1994 increased $48,214 due to an increase in revenues of $26,458 and a decrease in expenses of $21,756. The increase in revenues can be attributed to increased occupancy resulting in increased rental revenues. The decrease in expenses relates to repairs and maintenance ($16,634).
At Morenci Professional Park, net income varied significantly from year to year. Revenues increased from year to year while expenses increased from 1993 to 1994 and then decreased from 1994 to 1995. The increase in revenues from 1993 to 1994 relate to escalation income which is a result of increases in reimbursable operating expenses. The operating expenses that increased from 1993 to 1994 are repairs and maintenance ($6,501), real estate taxes ($3,845), snow removal ($2,917), and vacancy expenses ($3,684). Revenues from 1994 to 1995 increased due to higher occupancy which resulted in increased rental income. Expenses trended downward from 1994 to 1995 due to decreases in vacancy expense ($6,889), repairs and maintenance ($9,546), snow removal ($4,133), and sewer charges ($3,456).
The occupancy at the Registrant's properties at year-end remain at a high level. However, as previously discussed, a major tenant that occupied approximately 49% of Morenci Professional Park vacated the premises in December 1995. The occupancy levels at November 30 are as follows:
For the quarter ended November 30, 1995, occupancy at Park Plaza I & II increased from 92% to 100% through the leasing of 9,720 square feet to three individual tenants, offset by a single tenant vacating 2,340 square feet. For the year, leasing at Park Plaza I & II consisted of the renewal of 19,800 square feet, the execution of six new leases with a total square feet of 30,360, and the vacating by 6 tenants who occupied 30,360 square feet. At Park
Plaza I & II, no tenant occupies more than 10% of the total space. The occupancy at the years ended 1994 and 1995 was 100%.
During the fourth quarter, the occupancy level at Morenci Professional Park remained the same as the previous quarter. Leasing activity during the fourth quarter is as follows: one new lease occupying 1,200 square feet, two lease renewals for 3,600 square feet, and one tenant vacated 1,200 square feet. During the year, occupancy increased 5% due to the execution of four new leases with 9,600 square feet, the renewal of 9,600 square feet, and the vacating of 4,800 square feet. As previously stated, a tenant which occupies approximately 49% of the available space vacated their space at the expiration of their lease in December 1995. The remainder of the space is leased in small sections by various tenants.
At Maple Tree Shopping Center during the fourth quarter, leasing activity netted a decrease in occupancy by 2% or 1,200 square feet. The Registrant renewed 18,560 square feet, signed one new lease for 2,640 square feet, and one tenant vacated 1,200 square feet. For the year, occupancy decreased 2% and had the following leasing activity: one new lease for 2,640 square feet, renewed three leases totaling 19,360 square feet, vacated two leases with 3,840 square feet. Maple Tree Shopping Center has two major tenants who occupy 18% and 42% of the available space. The tenants that occupy approximately 18% and 42% of the available space have lease expirations of April 30, 2000, and July 31, 1999, respectively.
Jackson Industrial currently has two tenants who lease 100% of the available space. The major tenant who occupies approximately 70% of the available space has renewed their lease for a period of five years. The renewal has a marginal increase in rate and expires July 31, 2001. The other tenant has a lease expiration of July 31, 1997.
1995 Comparisons - ----------------
As of November 30, 1995, the Registrant's consolidated revenues are $2,341,704 compared to $2,357,368 for the year ended November 30, 1994. On a consolidated basis, revenues decreased $15,664 or less than 1%. Even though consolidated revenues remained relatively stable from 1994 to 1995, the individual properties had changes from year to year. These changes have been previously analyzed.
The Registrant's consolidated expenses for the year ended November 30, 1995 is $2,287,260. When compared to year ended November 30, 1994, consolidated expenses decreased $105,152 or 4.40%. The decrease is attributable to interest expense, real estate taxes, and other operating expenses. The decrease in interest expense is attributable to all the Registrant's properties. All the properties, except for Jackson Industrial, have long-term loans with original amortization periods ranging from 25 to 30 years. As these loans amortize, each payment is applied less to interest and more to principal resulting in a decrease in interest expense. As previously stated, the decrease in real estate taxes is attributable to Jackson Industrial. The decrease in other operating expenses is comprised of several categories and they are: vacancy expense ($16,134); administrative ($9,154); snow removal ($8,797); and insurance ($4,675). Offsetting the aforementioned expense decreases were increases in professional services ($12,830) and office expenses ($5,507).
With revenues remaining relatively flat and expenses decreasing, the Registrant had favorable operating results for the year ended November 30, 1995. Net income is $54,444 or $4.49 per limited partnership unit, an increase in net income of $89,488 or $7.38 per limited partnership unit when comparing November 30, 1995, to November 30, 1994. Cash flow provided by operations for the year ended November 30, 1995, is $493,356 which enabled the Registrant to fund capital expenditures of $135,205 and reduce loan balances by $332,832.
1994 Comparisons - ----------------
For the year ended November 30, 1994, consolidated revenues were $2,357,368 which represents an increase of $91,455 when compared to November 30, 1993. The increase in revenues is attributable to an increased real estate tax reimbursement at Jackson Industrial, rental income and expense pass throughs at Maple Tree Shopping Center, and rental income at Park Plaza I & II. The increase in real estate tax reimbursement at Jackson Industrial was previously discussed. The increases in rental income at Maple Tree Shopping Center and Park Plaza I & II relate to the Registrant's ability to renew and execute new leases at rental rates that exceeded the previous tenants' rates. The increase in expense pass throughs at Maple Tree Shopping Center directly correlate with increases in expenses which can be passed through to the tenants of the property.
As of November 30,1994, consolidated expenses for the year-end are $2,392,412, an increase of $65,160 or 2.80% when compared to year-to-date consolidated expenses as of November 30, 1993. The increase in consolidated expenses is attributable to real estate tax expense at Jackson Industrial. Offsetting the significant increase in real estate taxes are decreases in interest and depreciation and amortization. The decrease in interest expense is attributable to all the Registrant's properties. All the properties, except for Jackson Industrial, have long-term loans with amortization periods ranging from 25 to 30 years. As these loans amortize, each payment is applied less to interest and more to principal resulting in a decrease in interest expense. The decrease in depreciation and amortization relates to tenant alterations and lease commissions at Jackson Industrial and the amortization of these items over the term of the appropriate leases.
Net loss for the year ended November 30, 1994, was $35,044 or $2.89 per limited partnership unit. For the same period ended November 30, 1993, the net loss was $61,339 or $5.06 per limited partnership unit. Cash flow provided by operations for the year ended November 30, 1994, was $315,534. The operating cash flow along with reserve cash was applied by the Registrant to fund capital expenditures of $63,324 and to fund principal payments of $307,491.
Inflation - ---------
The effects of inflation did not have a material impact upon the Registrant's operation in fiscal 1995, and are not expected to materially affect the Registrant's operation in 1996.
Interest Rates - --------------
Interest rates on floating rate debt went up in 1995 which negatively affected the operations of the Registrant in 1995. Future increases in the prime interest rate can adversely affect the operations of the Registrant in 1996 and in the future.
ITEM 8:

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
Financial Statements of the Registrant are filed herewith as Exhibit 99.3 and are incorporated herein by reference (see Item 14(a)(1)). The supplementary financial information specified by Item 302 of Regulation S-K is provided in Item 7.
ITEM 9:

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ----------------------------------------------------------
None
PART III --------
ITEM 10:

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
The General Partners of the Registrant responsible for all aspects of the Registrant's operations are Gregory J. Nooney, Jr., age 65, and Nooney Investors, Inc., a Missouri corporation. Gregory J. Nooney, Jr. is a senior officer of Nooney Company, the sponsor of the Registrant.
The background and experience of the General Partners are as follows:
Gregory J. Nooney, Jr. joined Nooney Company in 1954 and is currently Chairman of the Board and Chief Executive Officer.
John J. Nooney is a Special General Partner of the Partnership and as such, does not exercise control of the affairs of the Partnership.
John J. Nooney joined Nooney Company in 1958 and was President and Treasurer until he resigned in 1992. Mr. Nooney is currently Chairman of the Board of Dalton Investments, a real estate asset management firm.
Nooney Investors, Inc., a wholly-owned subsidiary of Nooney Company, was formed in June 1979 for the purpose of being a general and/or limited partner in the Registrant and other limited partnerships. Gregory J. Nooney, Jr. is a director of Nooney Investors, Inc.
Gregory J. Nooney, Jr. and John J. Nooney are brothers. Gregory J. Nooney, Jr. and Faith L. Nooney (wife of John J. Nooney) are stockholders of Nooney Company, with Gregory J. Nooney, Jr. controlling all voting stock of Nooney Company.
The General Partners will continue to serve as General Partners until their withdrawal or their removal from office by the Limited Partners.
Certain of the General Partners act as general partners of limited partnerships and hold directorships of companies with a class of securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of the Act. A list of such directorships, and the limited partnerships for which the General Partners serve as general partners, is filed herewith as Exhibit 99.1 and incorporated herein by reference.
During 1993 Lindbergh Boulevard Partners, L.P. filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. Gregory J. Nooney, Jr. is the general partner of Nooney Ltd. II, L.P, which in turn is the general partner of Nooney Development Partners, L.P., which in turn is the general partner of Nooney-Hazelwood Associates, L.P., which is the general partner of Lindbergh Boulevard Partners, L.P. Lindbergh Boulevard Partners, L.P. emerged from bankruptcy on May 17, 1994, when its Plan of Reorganization was confirmed.
ITEM 11:

ITEM 11: EXECUTIVE COMPENSATION - --------------------------------
The General Partners are entitled to a share of distributions and a share of profits and losses as more fully described under the headings "Compensation to General Partners and Affiliates" on pages 8-11 and "Profits and Losses for Tax Purposes; Distributions; and Expenses of General Partners" on pages A-14 to A-17 of the Prospectus of the Registrant dated November 16, 1979, as supplemented and filed pursuant to Rule 424(c) of the Securities Act of 1933 (the "Prospectus"), which are incorporated herein by reference.
During fiscal 1995, there were no cash distributions paid to the General Partners by the Registrant.
See Item 13 below for a discussion of transactions between the Registrant and certain affiliates of the General Partners.
ITEM 12:

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The aggregate amount beneficially owned by the above listed reporting persons totals 856 Units, or 7.06% of the outstanding interests of the Registrant. The sole general partner of each of the above reporting persons is Liquidity Financial Group, L.P., a California limited partnership. Voting and dispositive power is exercised on behalf of each reporting person by its general partner.
(b) Security Ownership of Management.
None of the General Partners is known to the Registrant to be the beneficial owner, either directly or indirectly, of any Interests in the Registrant.
(c) Changes in Control.
There are no arrangements known to the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant.
ITEM 13:

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------
(a) Transactions with Management and Others.
Certain affiliates of the General Partners are entitled to certain fees and other payments from the Registrant in connection with certain transactions of the Registrant as more fully described under the headings "Compensation to General Partners and Affiliates" on pages 8-11 and "Management" on pages 23-25 of the Prospectus, which are incorporated herein by reference.
Nooney Krombach Company, the manager of Registrant's properties, is a wholly- owned subsidiary of Nooney Company. Nooney Krombach Company is entitled to receive monthly compensation from the Registrant for property management and leasing services, plus administrative expenses. During fiscal 1995 the Registrant paid property management fees of $116,228 to Nooney Krombach Company.
The Registrant paid Nooney Krombach Company $30,000 during fiscal 1995 as reimbursement for indirect expenses incurred in connection with management of the Registrant.
See Item 11 above for a discussion of cash distributions paid to the General Partners during fiscal 1995.
(b) Certain Business Relationships.
The relationship of certain of the General Partners to certain of their affiliates is set forth in Item 13(a) above. Also see Item 13(a) above for a discussion of amounts paid by the Registrant to the General Partners or their affiliates during fiscal 1995 in connection with various transactions.
(c) Indebtedness of Management.
Not Applicable.
(d) Transactions with promoters.
Not Applicable.
PART IV -------
ITEM 14:

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - --------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Financial Statements (filed herewith as Exhibit 99.3):
Independent auditors' report Balance sheets Statements of operations Statements of partners' equity (deficiency in assets) Statements of cash flows Notes to financial statements
(2) Financial Statement Schedules (filed herewith as Exhibit 99.3):
Schedule - Reconciliation of partners' equity (deficit) Schedule III - Real estate and accumulated depreciation
All other schedules are omitted because they are inapplicable or not required under the instructions.
(3) Exhibits:
See Exhibit Index on Page 17.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the Registrant filed no reports on Form 8-K.
(c) Exhibits:
See Exhibit Index on Page 17.
(d) Not Applicable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) under the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NOONEY REAL PROPERTY INVESTORS-TWO, L.P.
Date: February 21, 1996 /s/ Gregory J. Nooney, Jr. ----------------------------------------- Gregory J. Nooney, Jr. General Partner
Nooney Investors, Inc. General Partner
Date: February 21, 1996 By: /s/ Gregory J. Nooney, Jr. ------------------------------------- Gregory J. Nooney, Jr. Chairman of the Board and Chief Executive Officer
By: /s/ Patricia A. Nooney ------------------------------------- Patricia A. Nooney Senior Vice President and Secretary
EXHIBIT INDEX -------------
Exhibit Number Description - -------------- ---------------------------------------------------------------
3.1 Amended and Restated Agreement and Certificate of Limited Partnership dated November 5, 1979, is incorporated by reference to the Prospectus contained in Amendment No. 1 to the Registration Statement on Form S-11 under the Securities Act of 1933 (File No. 2-65006).
10 Management Contract between Nooney Real Property Investors-Two, L.P. and Nooney Company is incorporated by reference to Exhibit 10(a) to the Registration Statement on Form S-11 under the Securities Act of 1933 (File No. 2-65006). The Management Contract was assigned by Nooney Company to Nooney Management Company (now Nooney Krombach Company), a wholly-owned subsidiary of Nooney Company, on April 1, 1985, and is identical in all material respects.
27 Financial Data Schedule (provided for the information of the U.S. Securities and Exchange Commission only)
99.1 List of Directorships filed in response to Item 10.
99.2 Pages 8-11, 23-25 and A-14 - A-17 of the Prospectus of the Registrant dated November 16, 1979, as supplemented and filed pursuant to Rule 424(c) of the Securities Act of 1933 are incorporated by reference.
99.3 Financial Statements and Schedules.


ITEM 1. BUSINESS --------
1. GENERAL DESCRIPTION OF BUSINESS -------------------------------
GRC International, Inc. (the "Company") was organized in California in 1961. Since 1974, the Company has been a Delaware corporation. The Company, headquartered in Vienna, Virginia, is an internationally recognized provider of professional and technical services to military, civil and commercial clients. As a leader in knowledge-based services and high-quality technical solutions, the Company has gained prominence for innovation in complex information technology, studies and analysis, modeling and simulation, testing and evaluation, proprietary products and telecommunications.
2. NARRATIVE DESCRIPTION OF BUSINESS ---------------------------------
The majority of the Company's revenues are generated from professional and technical services. The Company provides a wide variety of services under cost- plus-fee, fixed price and time and materials contracts, primarily in the field of defense and national security. In general, the contracts involve the investigation and application of advanced technology and innovative management techniques to help make critical decisions and increase productivity and efficiency, primarily for defense-related agencies of the United States Government. The Company's services capabilities involve systems research and analysis, information systems, operations analysis, testing and evaluation, systems engineering, economic modeling, cost estimating, applied physics, data processing, software development, military system effectiveness, and personnel management.
The Company has long been providing high-quality knowledge-based services and technical solutions in numerous areas of national importance. These are:
Information technology: The Company is involved in creating large-scale ---------------------- decision-support systems and software engineering environments; applying operations research and mathematical modeling to business and management systems; and implementing advanced database technology.
The Company has expertise at creating pure open system computing environments which employ diverse technology platforms and are accessible from different security levels. These seamless information systems let customers draw useful information from virtually any type of electronic data to help them make critical decisions.
The Company has capabilities in data collection, information management and presentation that support automated government acquisition, financial management and personnel functions. Our contract work has led to automating administrative functions to make certain documentation activities more efficient.
The Company's extensive involvement in technology transfer and related export control issues has led to the development of DecisionVue(R) - a collection of specialized decision-support tools. Through hyper-texting and other functions, DecisionVue(R) breaks down complex technologies, such as satellites, into individual components so that the details of suitable replacement parts can be determined. DecisionVue(R) has also been used in evaluating technology transfer issues, such as whether exporting satellite or radar technologies will compromise national security; summary and comparison of research and development facilities; and analysis of space qualified components.
Studies and analysis: The Company provides studies and analysis -------------------- capabilities to help customers solve complex multidisciplinary problems involved in policy development and planning of state-of-the-art high-technology systems. The Company's technical staff has extensive experience in radar, optics, communication networks, electronics, navigation, guidance and control systems, and space and surveillance systems. In addition, we provide independent, unbiased evaluation verification, and solutions that support a cost-conscious military evaluating high technology policy development and system acquisition. As our cost and operational effectiveness analysis and micro/macro simulations define a problem, the Company works to identify the tools which will best help customers quantify, assess and mitigate risks or highlight available options.
Modeling and simulation: The Company has expertise in developing ----------------------- responsive, cost-effective driver hardware and software used in real-time testing of sensor, weapon and battlefield management command, control and communication (BM/C/3/) systems. In addition, our computer-based solutions are becoming valuable training tools. We have worked to build an interactive multimedia training module to teach pilots about different types of electronic warfare and radar systems and optical evasive tactics. Our additional high- performance, computer-aided training solutions include interactive video disk with touch screen, multiple language treatment, insitu training and workforce retraining.
Testing and evaluation: Intertwined with the Company's modeling and ---------------------- simulation capabilities are its professionals' testing and evaluation skills. The Company has an established 20-year record of working with the United States Government in conducting laboratory and field tests and evaluations of nuclear and kinetic energy weapons, hypervelocity impact effects, advanced armor and anti-armor performance and effects of space debris on operational satellites.
In parallel with the governmental testing and evaluation support, the Company designs, manufactures and markets a line of electronically instrumented impact testing equipment for dynamic materials testing under the Dynatup(R) trademark and markets several software products. The materials testing product line, sold to industrial users for materials evaluation, includes instrumental drop tower systems and microprocessor-based automated test systems which are used to determine failure points in a wide variety of structures and materials. The Company also develops and markets hardware/software systems which utilize adaptive learning networks to perform non-destructive materials testing.
Proprietary products: The Company's Flow Gemini(TM) software product is a -------------------- comprehensive and flexible data management system with applications for occupational health information, environmental information and personnel assurance. This system is designed to manage health, environmental and personnel related data to facilitate compliance with federal and state recordkeeping and to help organizations deal effectively with problems in these areas. In addition, the Company offers two software/hardware library data systems using CD-ROM and personal computers. These are the LASERQUEST(R) system, which contains a bibliographic database and software that facilitates library cataloging, and the LASERGUIDE(R) system, which is a library patron access catalog system.
The Company markets an AASP(TM) security product (Automated Assessment Signal Processor), which is a neural network signal processor that can be integrated into existing perimeter security systems to enhance their real-time intrusion detection capabilities. The AASP(TM) can be "trained to distinguish between perimeter sensor signals that are nuisances", such as wildlife and other environmental factors, and actual intruders penetrating a security system. The product is particularly effective at large high security installations, such as military bases, nuclear power plants, petrochemical facilities and prisons, as well as commercial and smaller installations.
Telecommunications: The Company has entered the fiber optics ------------------ telecommunications market with the introduction of its OSU(TM) Network Interface, which solves problems of network isolation, security and
interoperability in the emerging new world of wide-band communications. Once integrated into a fiber optic network, the OSU(TM) will help interexchange carriers (IECs) and Regional Bell Operating companies (RBOCs) detect performance anomolies in a network rapidly and allow networks to operate securely with reduced risk of disruptions.
In addition, a new application for the Company's technology was identifieid when an agreement was signed for the use of an OSU-derivative product in the video distribution market. This product will enable video, previously available only on cable networks, to be distributed through RBOCs. The Company believes that as fiber optic telecommunications mature, new network boundaries where the OSU(TM) can provide standard demarcation, security and interoperability features will emerge.
As part of the Company's strategy of exporting its government products to commercial markets, it has begun the development of NetworkVUE(TM), a telecommunications network configuration and optimization analysis management system. NetworkVUE(TM), an integration of several of the Company's leading-edge technology tools for modeling, simulation and visualization, artificial intelligence and database management is designed to serve a niche market of telecommunications and Fortune 500 network operations and outsourcing firms.
CONTRACTS ---------
Contract revenues from professional and technical services, either as prime contractor or subcontractor, represented approximately 96%, 95% and 95% of the Company's total revenues from the fiscal years ended June 30, 1995, 1994 and 1993, respectively. The Company's government contracts can fall into one of three categories: (1) cost-plus-fee, (2) fixed price, or (3) time and materials. Under a cost-plus-fee 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 1995 and 1994, approximately 53% and 56% of the Company's professional and technical services revenues were from cost-plus-fee contracts, while approximately 47% and 44% were fixed price or time and materials type contracts, respectively.
During fiscal year 1995, the Company's contracts were 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, agencies of state and local governments 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, changing national priorities, the potential of suspension or debarment from new government business, and significant changes in contract scheduling and funding.
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 it 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.
Competition for the Company in the materials testing field is more limited due to a confined market and the high degree of specialization involved. Nevertheless, a number of other products used for materials testing are produced by other corporations. Sales of the Company's testing machines account for a relatively small percentage of all product sales associated with materials testing. The software market in general is highly competitive and rapidly changing, although the competition experienced by any one product or specialty application may be limited.
RESEARCH AND DEVELOPMENT ------------------------
The Company concentrates its research and development efforts on projects intended to result in technological enhancements to present products and the development of new products compatible with existing product lines. This approach reflects management's commitment to research and development activities intended to produce additional revenues in the near term. Research and development expenditures were approximately $1.1 million, $.4 million and $.7 million for 1995, 1994 and 1993, respectively.
PATENTS, TRADEMARKS, LICENSES, COPYRIGHTS -----------------------------------------
While the Company and its subsidiaries hold a number of patents, trademarks, licenses and copyrights, in the opinion of management no individual patent, trademark, license or copyright is material to the present operations of the Company as a whole.
EMPLOYEES ---------
As of June 30, 1995, the Company employed 1,290 full-time people.
ITEM 2.

ITEM 2. PROPERTIES ----------
All of the Company's operations are conducted in leased facilities. The terms of Company leases range from monthly tenancies to fifteen years, and many of these leases may be renewed for additional periods at the option of the Company. Major leased facilities are at locations in California and Virginia.
Management believes that the Company's facilities and equipment are generally well maintained, in good operating condition, and adequate for its present operations. Management does not anticipate any material adverse effect on the Company's financial position or results of operations in connection with obtaining lease renewals or suitable alternative space for any of its facilities.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS -----------------
In October 1993, the Company was served with a lawsuit filed in the Superior Court of Orange County, California by ICN Biomedicals, Inc. ("ICN") and its parent company, ICN Pharmaceuticals, Inc. ("Pharmaceuticals"). The suit alleged fraud, negligent misrepresentation, violations of state and federal securities laws and other claims against the Company in connection with the sale of its biomedical business to ICN in 1989, and sought to recover all monies paid and damages for expenses and interest in the approximate amount of $100 million. In December 1993, the court ordered ICN to arbitrate its claims, and
ICN filed for arbitration in March 1994. In December 1994, the arbitration panel dismissed ICN's claims and ordered ICN to pay the Company the remaining amounts due under the 1989 agreement, approximately $2.7 million. In March 1995, the court confirmed the arbitration award, and ICN paid the final amounts due to the Company in April 1995. In May 1995, the court dismissed the remaining claims of Pharmaceuticals, without prejudice to Pharmaceuticals filing an action in federal court in Delaware pursuant to the forum selection clause in the 1989 agreement. In June 1995, the court denied Pharmaceuticals' motion for reconsideration of the dismissal. In August 1995, Pharmaceuticals appealed the dismissal. In September 1995, the Court of Appeal dismissed Pharmaceuticals' appeal.
As a result of the various arbitration and court decisions, the Company was able to reverse reserves during fiscal 1995 of approximately $400,000 (credited to general, administrative, etc.) that were associated with the various ICN matters.
In addition, during the course of the lawsuit and arbitration, ICN informed the Company of three ongoing tax inquiries of the biomedical business involving proposed tax deficiencies exceeding $1 million (including interest and penalties), which includes periods of ownership by the Company.
Management believes that the proposed tax assessments are excessive and that ICN is responsible for a significant portion of any liabilities associated with these assessments. Management does not believe that the ultimate outcome of these actions will have a material adverse effect on the consolidated financial conditions or results of operations of the Company.
ITEM 4.

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 1995.
PART II -------
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS --------------------------------------------------------------------
Information as to the markets in which the Company's common stock is traded, the high and low prices of such stock, stockholders of record and dividend policy appears on page 11 of the Company's Annual Report to Stockholders for 1995, and is incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA -----------------------
Selected financial data appears on page 6 of the Company's Annual Report to Stockholders for 1995, and is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION -------------------
Management's discussion and analysis of results of operations and financial condition appears on pages 7 through 11 of the Company's Annual Report to Stockholders for 1995, and is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------
The Consolidated balance sheets as of June 30, 1995 and 1994 and the consolidated statements of income and cash flows for each of the three years in the period ended June 30, 1995, together with the report of independent public accountants contained on pages 12 through 27 of the Company's Annual Report to Stockholders for 1995 are incorporated herein by reference.
ITEM 9.

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.

ITEM 11. EXECUTIVE COMPENSATION ----------------------
The information required by this item is hereby incorporated by reference to the Proxy Statement (to be filed).
ITEM 12.

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.

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.

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 SCHEDULES
The following financial information is filed herewith on the pages indicated:
All other schedules are omitted since they are not applicable, not required or the required information is included in the financial statements or notes thereto.
(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 21, 1995 By: /s/ JimRoth ------------------ ------------------------------- Jim Roth President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Philip R. Pietras 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 21, 1995 By: /s/ Jim Roth ------------------ ------------------------------- Jim Roth President and Chief Executive Officer
Date: September 21, 1995 By: /s/ Philip R. Pietras ------------------ ------------------------------- Philip R. Pietras Vice President, Treasurer and Chief Financial Officer
Date: September 21, 1995 By: /s/ H. Furlong Baldwin ------------------ ------------------------------- H. Furlong Baldwin, Director
Date: September 21, 1995 By: /s/ Leslie B. Disharoon ------------------ ------------------------------- Leslie B. Disharoon, Director
Date: September 21, 1995 By: /s/ Charles H.P. Duell ------------------ ------------------------------- Charles H.P. Duell, Director
Date: September 21, 1995 By: /s/ Edward C. Meyer ------------------ ------------------------------- Edward C. Meyer, Chairman of the Board
Date: September 21, 1995 By: /s/ George R. Packard ------------------ ------------------------------- George R. Packard, Director
Date: September 21, 1995 By: /s/ Herbert Rabin ------------------ ------------------------------- Herbert Rabin, Director
Date: September 21, 1995 By: /s/ Harris W. Seed ------------------ ------------------------------- Harris W. Seed, Director and Assistant Secretary
Date: September 21, 1995 By: /s/Joseph R. Wright, Jr. ------------------ ------------------------------- Joseph R. Wright, Jr., Director
INDEPENDENT AUDITORS' REPORT ---------------------------- ON -- SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE ------------------------------------------
To the Stockholders of GRC International, Inc.:
We have audited the consolidated financial statements of GRC International, Inc. and subsidiaries as of June 30, 1995 and 1994, and for each of the three years in the period ended June 30, 1995, and have issued our report thereon dated August 11, 1995, except as to the fourth paragraph of Note 5, as to which the date is September 14, 1995; such financial statements and report are included in your 1995 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of GRC International, Inc. listed in Item 14. This consolidated financial statement schedule is the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP McLean, Virginia August 11, 1995, except as to the fourth paragraph of Note 5, as to which the date is September 14, 1995
INDEPENDENT AUDITORS' CONSENT -----------------------------
We consent to the incorporation by reference in Registration Statements No. 33-1046, 33-39512, 33-39513, 33-52536, 33-52538, 33-87981 and 33-87982 of GRC International, Inc. on Form S-8 of our reports dated August 11, 1995, except as to the fourth paragraph of Note 5, as to which the date is September 14, 1995, appearing in and incorporated by reference in this Annual Report on Form 10-K of GRC International, Inc. for the year ended June 30, 1995.
DELOITTE & TOUCHE LLP McLean, Virginia September 21, 1995
GRC INTERNATIONAL, INC. AND SUBSIDIARIES ---------------------------------------- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ----------------------------------------------- (IN THOUSANDS)
/(A)/ Reductions of revenue for potentially nonrecoverable costs. /(B)/ Write off of uncollectible accounts and cost against reserves, net of recoveries.
INDEX TO EXHIBITS
(EXHIBIT NUMBERS CORRESPOND TO EXHIBIT TABLE, REGULATION S-K, ITEM 601)
* Indicates management contract or compensatory plan.