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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter period ended March 31, 1995
Commission File Number: 2-88617
QUESTECH, INC.
(Exact name of Registrant as specified in its charter)
Virginia
(State or other jurisdiction of incorporation or organization)
54-0844913
(I.R.S. Employer I.D. No.)
7600A Leesburg Pike, Falls Church, Virginia 22043
(Address of principal executive offices) (Zip code)
(703) 760-1000
(Registrant's telephone number, including area code)
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of the close of business May 1, 1995, the registrant had 1,568,000
shares of Common Stock outstanding, par value $.05 per share.
QuesTech, Inc. and Subsidiaries
I N D E X
March 31, 1995
Page No.
PART I. Financial Information
Item 1 Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS 2
CONSOLIDATED STATEMENTS OF EARNINGS 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. Other Information
Item 1 Legal Proceedings 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8K 12
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE 13
Officers' Signatures 14
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
Mar. 31 Dec. 31
1995 1994
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents ................ $ 156,500 $ 261,900
Accounts receivable ...................... 7,462,600 9,232,900
Prepaid expenses and other ............... 360,200 335,500
Deferred income taxes .................... 968,500 968,500
Total current assets ................ $ 8,947,800 $10,798,800
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - at
cost less accumulated depreciation and
amortization of $6,509,200 and $6,503,800,
respectively ............................. 985,600 938,500
GOODWILL less accumulated amortization of
$1,301,100 and $1,262,500, respectively .. 1,635,500 1,674,100
DEFERRED INCOME TAXES, net of valuation
allowance of $148,000 .................... 805,200 805,200
OTHER ASSETS ............................... 1,799,600 1,542,700
TOTAL ASSETS $14,173,700 $15,759,300
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Mar. 31 Dec. 31
1995 1994
(Unaudited)
CURRENT LIABILITIES
Line of Credit ........................... $ 578,800 $ 254,200
Current maturities of long-term
obligations payable .................... 53,100 51,100
Accounts payable ......................... 1,201,100 2,126,900
Accrued liabilities ...................... 4,087,900 5,344,300
Income taxes
Currently payable ...................... 232,400 119,900
Total current liabilities ........... $ 6,153,300 $ 7,896,400
LONG-TERM OBLIGATIONS ...................... 198,700 213,300
INDEBTEDNESS TO RELATED PARTIES ............ 1,192,500 1,188,800
ACCRUED POST-RETIREMENT BENEFIT COST ....... 1,064,800 976,800
OTHER LONG-TERM OBLIGATIONS ................ 812,800 831,300
Total Liabilities ................... $ 9,422,100 $11,106,600
STOCKHOLDERS' EQUITY
Common stock - authorized 3,000,000
shares of $.05 par value, issued
1,578,000 shares, outstanding
1,568,000 shares at March 31, 1995
and December 31, 1994 ................ 78,900 78,900
Additional paid in capital ............... 2,722,700 2,722,700
Retained earnings ........................ 2,412,500 2,313,600
Less Treasury Stock at cost .............. <30,000> <30,000>
Due from SECT ............................ <432,500> <432,500>
Total Stockholders' Equity .......... $ 4,751,600 $ 4,652,700
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,173,700 $15,759,300
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended March 31,
1995 1994
Revenues ...................................... $12,253,400 $11,780,800
Operating expenses
Salaries, wages and employee benefits ....... 7,184,400 6,867,600
Other operating expenses .................... 4,774,400 4,634,900
Total operating expenses .............. $11,958,800 $11,502,500
Income from operations ................ 294,600 278,300
Other expense
Interest expense ............................ <92,800> <113,900>
Earnings before income taxes ........... $ 201,800 $ 164,400
Provision for income taxes .................... 102,900 77,300
Net earnings ........................... $ 98,900 $ 87,100
Earnings per share............................. $ .07 $ .06
Common shares and equivalents outstanding ..... 1,446,816 1,346,208
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months
Ended March 31
1995 1994
Increase <Decrease> in Cash and Cash Equivalents
Cash flows from operating activities:
Net earnings ................................ $ 98,900 $ 87,100
Adjustments to reconcile net earnings to
Net cash provided by operating activities:
Depreciation and amortization ............. 139,900 155,500
Amortization of deferred credits .......... -- <52,900>
Reserve for unrecovered contract costs
and doubtful accounts ................... -- <12,000>
Increase in fund value of nonqualifying
plan assets ............................. <55,200> --
Accrued post-employment benefits .......... 24,100 20,600
Accrued post-retirement benefits .......... 120,000 133,600
Changes in assets and liabilities ......... <509,200> <707,300>
Net cash <used in> operating activities . <181,500> <375,400>
Cash flows from investing activities:
Capital expenditures ........................ <172,100> <51,100>
Proceeds from return on investment in
whole life policies ....................... -- 90,000
Net cash provided by <used in> investing
activities ............................ <172,100> 38,900
Cash flows from financing activities:
Increase <decrease> in Line of Credit ....... 324,600 849,400
Financing of SECT's stock acquisition ....... -- <432,500>
Repayment of long-term debt ................. <12,600> <50,300>
Indebtedness to Related Parties ............. <46,700> <56,800>
Repayment of Other Long-Term Obligations .... <17,100> <10,800>
Net cash provided by financing
activities ............................ 248,200 299,000
Effect of Exchange Rate Changes on cash ....... -- --
Net <decrease> in cash ........................ <105,400> <37,500>
Cash, beginning of period ..................... 261,900 172,500
Cash, end of period ........................... $ 156,500 $ 135,000
Cash payments for:
Interest .................................... $ 41,900 $ 53,100
Income taxes ................................ -- 322,700
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Three Months
Ended March 31
1995 1994
Common Stock:
Balance at March 31,
Issued 1,578,000 shares (including 10,000
treasury shares in 1995 and 1994) ..... $ 78,900 $ 78,900
Additional paid in capital .................. 2,722,700 2,722,700
Retained Earnings:
Balance at January 1 ...................... 2,313,600 1,995,800
Net Earnings .............................. 98,900 87,100
Balance at March 31 ....................... 2,412,500 2,082,900
Cost of Treasury Stock:
Balance at March 31 ....................... <30,000> <30,000>
Due from SECT (including 221,792 shares in
1995 and 1994) ............................ <432,500> <432,500>
Total Stockholders' Equity .................. $4,751,600 $4,422,000
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1995 and 1994
(Unaudited)
General
The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally
included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to those rules and regulations, although the company believes that
the disclosures made are adequate to make the information presented not
misleading.
In the opinion of management, the accompanying condensed financial
statements for the periods presented reflect all adjustments and
reclassifications that are necessary for fair presentation. It is suggested
that these condensed financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
company's latest annual report to the Securities and Exchange Commission on
Form 10-K.
Earnings Per Share
The computation of earnings per common share is based on the weighted
average number of common, and if dilutive, common equivalent shares
outstanding, during each quarter. Although outstanding, the shares held by
the Company-controlled Stock Employee Compensation Trust are excluded from the
weighted average number of shares, for purposes of calculating earnings per
share. As of March 31, 1995, a total of 319,500 shares are subject to
outstanding employee stock option agreements and accounted for as dilutive
common stock equivalents under the treasury stock method. The strike prices
of these options are $1.75, $1.87 and $4.00 per share. The bid price of the
Company's stock at March 31, 1995 was $4.62 per share.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
The following table sets forth the percentages of major items reflected
in the Unaudited Consolidated Statement of Earnings as a percentage of
revenue.
Three Months Ended
March 31
1995 1994
Revenues 100.00% 100.00%
Operating Expenses 97.60% 97.64%
Income from operations 2.40% 2.36%
Other income (expense) <.76%> <.96%>
Provision for income taxes <.84%> <.66%>
Net Earnings .80% .74%
During the first quarter of 1995, the Company's revenues increased 4%
over the same period in 1994. QuesTech Research Division ("QTRD"), the
Company's primary operating division, provided 95% of the Company's revenues,
up from 87% for the same period last year. The impact of a business unit on
the Company's revenue mix at any one time is affected by its utilization of
resources as directed by contract. QTRD's position was enhanced by a 12%
increase in its revenues, which rose over last year by approximately $1.3
million. The revenue increase for 1995 was driven primarily by increased
utilization of in-house direct labor, in lieu of subcontracted efforts,
thereby resulting in more favorable gross margins. Revenues were further
boosted by performance on new contracts/task orders awarded during the fourth
quarter of last year. Despite QTRD's performance, the Company's growth was
diminished by the continued business contraction of another subsidiary,
QuesTech Service Company ("QTSC"), which posted revenues at half of last
year's level, due to the loss of a major contract. Although QTSC's revenues
for 1995 are expected to be less than 1994, revenue margins on its remaining
contracts adequately covered its cost of operations, thereby helping boost
operating margins for the Company as a whole. No sales were recognized for
QuesTech Ventures, Inc. ("QVI"), which had unfilled sales orders, pending its
completion of equipment set-up and initial facility build-out.
Operating expenses increased slightly less than 4% in the aggregate, with
most of the increase due to higher labor costs and related fringe. A
substantial amount of the labor cost increase was contractually required in
accordance with customer task orders. Despite a $0.5 million decline in costs
related to direct subcontract and B&P efforts, other operating expenses
increased due to the following:
(a) start-up costs incurred in connection with equipment set-up and
product development efforts at QVI. Management does not expect to post sales
for QVI until commencement of production during the second half of the year;
(b) increased purchases of direct materials and other direct costs;
(c) facility related expenses, including moving expenses associated with
the consolidation of the corporate headquarters office in the newly reduced
lease space. Cost savings from the newly negotiated corporate headquarters'
lease, which was consummated during April, 1995, will be reflected in the
results of operations for the remainder of the year;
(d) additional litigation expenses incurred in the Company's ongoing
litigation against its former landlord.
For the same period last year, most of the expense increase was due to
higher expenditures towards bids and proposals, and procurement of direct
subcontracts and materials.
Income from Operations increased 6% over last year as a result of
favorable margins on existing contracts. Additionally, QTSC's operating
margins almost tripled, despite its revenue drop to half of last year's level.
The Company did not assume new long-term borrowings during 1995, thereby
benefiting from interest cost savings during the current year.
Pre-tax earnings were up 23%, due to the combined favorable impact of
improved operating margins and interest cost savings. For the remainder of
the year, the Company projects an effective tax rate of 51%, after accounting
for the estimated effect of goodwill amortization costs and other expenses
that are non-deductible for tax purposes. Despite the increased provision for
income taxes, net earnings rose 14%, from $87,100 during 1994 to $98,900
during 1995 due to favorable operating margins and interest cost savings.
Per share earnings were $0.07, up from $0.06 last year. For purposes of
calculating earnings per share, total outstanding shares were reduced by the
number of shares held by the SECT and increased by the dilutive effect of
common stock equivalents.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain financial data with respect to
changes in the Company's liquidity and capital resources since December 31,
1994 (in thousands of dollars except for ratios):
3/31/95 12/31/94 NET CHANGES
Working capital $ 2,795 $ 2,903 $ <108>
Current assets 8,948 10,799 <1,851>
Current liabilities 6,153 7,896 <1,743>
Working capital ratio (1) 1.45 1.37 6%
(1) Current assets over current liabilities.
During the first quarter, the Company used cash from operations
(primarily, collections on receivables) and proceeds from its line of credit
to finance the following transactions, the related costs for which were
included in accrued liabilities of the financial statements at December 31,
1994:
- - - - - - - - payment made to the headquarters' landlord for lease termination costs,
including accrued legal expenses, amounting to approximately $1 million;
- - - - - - - - accrued amounts for direct materials and subcontractor costs amounting to $1
million;
- - - - - - - - annual pay-outs to retirees and terminated participants of the Deferred
Compensation Plan.
Additionally, the Company incurred greater amounts of capital
expenditures towards leasehold improvements, new personal computers, and new
furniture during the quarter, compared to the same period last year.
Management believes that the Company does not owe additional tax payments
on its estimated 1994 taxable income, as of the return's due date. Estimated
tax payments of $61,500 for the first quarter were made during April, 1995.
The Board of Directors of the Company has previously authorized the
Company to utilize its existing line of credit with the Signet Bank for the
purpose of financing the Company's performance of QVI under the Supply
Agreement with Munchkin Bottling Co., Inc. It is expected that expenditures
in connection with that performance will be up to $1.5 million. Of this
amount, approximately $750,000 has been committed towards the purchase of
custom forming units and related equipment consisting of heating and material
handling units. On March 13, 1995, the Company's Board of Directors
authorized management to negotiate and execute, subject to the Board's
approval, all necessary documentation to implement the financing, by ten-year
Industrial Revenue Bonds, of an investment of up to approximately $3.7
million, in the aggregate, which will be applied towards the purchase of
machines for QVI, plus the lease of an approved production facility. The cost
of the machines include costs of configuring several specialized pieces of
equipment designed to produce thermoformed containers en masse, in addition to
the costs of plant and other equipment.
By the second half of the year, management expects to allocate an
additional $500,000 towards the implementation of a new corporate information
system and required leasehold improvements to accommodate the consolidation of
the headquarters' staff in one floor of the 7600-A facility.
INFLATION
The impact of inflation on the Company's costs should be minimal due to
the fact that increased costs of this type are normally included in the
pricing structure or otherwise recovered through reimbursement of contract
costs incurred.
BACKLOG
The term "backlog" as used herein includes the aggregate contract
revenues, remaining to be earned at the stated time, to the extent of the
value of the contract award thereunder. Virtually all of the Company's
backlog is expected to be completed within three years. The following table
reflects the Company's funded and unfunded backlog as of March 31, 1995 and
March 31, 1994.
Funded Backlog Unfunded Backlog
March 31 March 31
1995 1994 1995 1994
$49,677,300 $30,510,000 $175,410,400 $140,940,000
The term "funded" used herein refers to the portion of aggregate contract
revenues remaining to be earned that is covered by funding appropriations and
allotments to the contract by the procuring agency. The term "unfunded"
refers to the excess of the value of the contract award over the funded value.
Management does not provide any assurance that the customer will authorize
funding amounts in addition to funding commitments existing as of the period
just ended.
PART II
Item 1. Legal Proceedings
There have been no material developments in litigation involving the
Company as previously reported in its Form 10-K filing for the year ended
December 31, 1994.
Item 2. Other Information
During April, 1995, management authorized its legal representatives in
Canada to undertake the appropriate measures to formally close out its
Canadian subsidiary, QuesTech North American Limited ("QNAL"). The Company
has not had any corporate presence or operation in Canada since it closed down
its Ontario facility in 1992. The subject transaction does not have any
impact on the financial statements.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
11. Statement of Computation of Earnings Per Share.
(b) Reports on Form 8-K:
No reports were filed by the Company on form 8-K for the period
January 1, 1995 through March 31, 1995.
S.E.C FORM 10-Q
March 31, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant as duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUESTECH, INC.
(Registrant)
Date: Vincent L. Salvatori
Chief Executive Officer and
Chairman of the Board
Date: Joseph P. O'Connell, Jr.
Vice President and
Chief Financial Officer