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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 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)
8911
(Primary Standard Industrial Classification Code Number)
54-0844913
(I.R.S. Employer Identification No.)
__________________
QuesTech, Inc.
7600A Leesburg Pike
Falls Church, Virginia 22043
(703) 760-1000
(Address, including zip code, and telephone number,
including area code of Registrant's principal executive offices)
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 November 1, 1995, the registrant had
outstanding 1,536,461 shares of Common Stock, par value $.05 per share.
QuesTech, Inc. and Subsidiaries
I N D E X
September 30, 1995
Page No.
PART I. Financial Information
Item 1 Financial Statements (Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS -
September 30, 1995 and December 31, 1994 2
CONSOLIDATED STATEMENTS OF EARNINGS -
Three Months ended September 30, 1995 and 1994;
Nine Months ended September 30, 1995 and 1994 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
Nine Months ended September 30, 1995 and 1994 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -
Nine Months ended September 30, 1995 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
September 30, 1995 and September 30, 1994 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. Other Information
Item 1 Legal Proceedings 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8K 13
Officers' Signatures 14
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
Sept. 30 Dec. 31
1995 1994
(Unaudited) (Note)
CURRENT ASSETS
Cash and cash equivalents ................ $ 161,700 $ 261,900
Accounts receivable ...................... 9,409,900 9,232,900
Inventories .............................. 17,000 --
Prepaid expenses and other ............... 255,800 335,500
Deferred income taxes .................... 968,500 968,500
Total current assets ................ $10,812,900 $10,798,800
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - at
cost less accumulated depreciation and
amortization of $6,728,500 and $6,503,800,
respectively ............................. 1,873,300 938,500
GOODWILL LESS ACCUMULATED AMORTIZATION OF
$1,378,400 and $1,262,500, respectively .. 1,558,200 1,674,100
DEFERRED INCOME TAXES, net of valuation
allowance of $148,000 .................... 805,200 805,200
OTHER ASSETS ............................... 1,676,900 1,542,700
TOTAL ASSETS $16,726,500 $15,759,300
The accompanying notes are an integral part of these statements.
NOTE: The balance sheet at December 31, 1994 has been derived from the
audited financial statements at that date.
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Sept. 30 Dec. 31
1995 1994
(Unaudited) (Note)
CURRENT LIABILITIES
Line of Credit ........................... $ 572,700 $ 254,200
Current maturities of long-term
obligations payable .................... 55,100 51,100
Accounts payable ......................... 1,776,800 2,126,900
Accrued liabilities ...................... 5,752,100 5,344,300
Income taxes
Currently payable ...................... 102,500 119,900
Total current liabilities ........... $ 8,259,200 $ 7,896,400
LONG-TERM OBLIGATIONS ...................... 170,600 213,300
INDEBTEDNESS TO RELATED PARTIES ............ 1,213,800 1,188,800
ACCRUED POST-RETIREMENT BENEFIT COST ....... 1,052,300 976,800
OTHER LONG-TERM OBLIGATIONS ................ 1,186,000 831,300
Total Liabilities ................... $11,881,900 $11,106,600
STOCKHOLDERS' EQUITY
Common stock - authorized 3,000,000
shares of $.05 par value, issued
1,578,000 shares, outstanding
1,536,461 shares at September 30, 1995
and 1,568,000 shares at
December 31, 1994 .................... 78,900 78,900
Additional paid in capital ............... 2,721,000 2,722,700
Retained earnings ........................ 2,651,100 2,313,600
Less Treasury Stock at cost .............. <227,300> <30,000>
Due from SECT ............................ <379,100> <432,500>
Total Stockholders' Equity .......... $ 4,844,600 $ 4,652,700
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $16,726,500 $15,759,300
The accompanying notes are an integral part of these statements.
NOTE: The balance sheet at December 31, 1994 has been derived from the
audited financial statements at that date.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended Sept. 30,
1995 1994
Revenues .................................. $15,706,700 $15,095,800
Operating expenses
Salaries, wages and employee benefits ... 7,047,300 6,836,800
Other operating expenses ................ 8,055,500 7,856,800
Total operating expenses .......... $15,102,800 $14,693,600
Income from operations ............ 603,900 402,200
Other expense ........................... <299,100> <147,500>
Interest expense ........................ <104,300> <101,800>
Earnings before income taxes ...... $ 200,500 $ 152,900
Provision for income taxes ................ <102,400> <71,800>
Net earnings ...................... $ 98,100 $ 81,100
Earnings per share:
Primary ............................... $ .07 $ .06
Fully diluted ......................... $ .06 $ .06
Weighted average number of common shares
outstanding:
Primary ............................... 1,428,994 1,387,407
Fully diluted ......................... 1,518,289 1,409,075
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Nine Months Ended Sept. 30,
1995 1994
Revenues .................................. $43,439,900 $40,543,300
Operating expenses
Salaries, wages and employee benefits ... 21,441,400 20,569,900
Other operating expenses ................ 20,495,700 18,977,800
Total operating expenses .......... $41,937,100 $39,547,700
Income from operations ............ 1,502,800 995,600
Other expense ........................... <522,100> <147,500>
Interest expense ........................ <291,800> <297,100>
Earnings before income taxes ...... $ 688,900 $ 551,000
Provision for income taxes ................ <351,400> <259,000>
Net earnings ...................... $ 337,500 $ 292,000
Earnings per share:
Primary ............................... $ .24 $ .21
Fully diluted ......................... $ .22 $ .21
Weighted average number of common shares
outstanding:
Primary ............................... 1,427,708 1,377,534
Fully diluted ......................... 1,532,439 1,409,075
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months
Ended Sept. 30
1995 1994
Increase <Decrease> in Cash and Cash Equivalents
Cash flows from operating activities:
Net Earnings .................................... $ 337,500 $ 292,000
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization .............. 480,600 520,000
Amortization of deferred credits ........... -- <153,100>
Increase in fund values of non-qualifying
assets under deferred compensation plans . <135,100> <60,300>
Other accrued costs ........................ 246,400 218,700
Accrued post-employment benefits ........... 70,400 61,900
Accrued post-retirement benefits ........... 360,000 400,700
Changes in assets and liabilities .......... <98,900> 200,500
Net cash provided by
operating activities ..................... $ 1,260,900 $ 1,480,400
Cash flows from investment activities:
Capital expenditures .......................... <1,337,000> <274,500>
Proceeds from return on investment in
whole life policies ......................... -- 90,000
Net cash used in investing activities ...... $<1,337,000> $ <184,500>
Cash flows from financing activities:
Increase<decrease> in Line of Credit borrowings 318,500 <535,200>
Cash advance to SECT for stock acquisition .... -- <432,500>
Cash proceeds from exercise of stock options .. 53,400 --
Purchase of treasury stock .................... <197,300> --
Repayment of long-term debt ................... <38,700> <84,900>
Repayment of indebtedness to related parties .. <107,700> <140,300>
Repayment of other long-term debt ............. <52,300> <44,300>
Net cash used in financing activities ...... $ <24,100> $<1,237,200>
Net increase <decrease> in cash ................. $ <100,200> $ 58,700
Cash, Beginning of period ....................... 261,900 172,500
Cash, End of period ............................. $ 161,700 $ 231,200
Cash payments for:
Interest ................................. $ 106,100 $ 122,100
Income taxes ............................. 379,100 462,900
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Nine Months
Ended Sept. 30
1995 1994
Common Stock:
Balance at September 30 (Issued 1,578,000
shares, outstanding 1,536,461 shares at
September 30, 1995, and 1,568,000 shares
at September 30, 1994) .................. $ 78,900 $ 78,900
Additional paid in capital .................. $2,721,000 $2,722,700
Retained Earnings:
Balance at January 1 ...................... 2,313,600 1,995,800
Net Earnings .............................. 337,500 292,000
Balance at September 30 ................... $2,651,100 $2,287,800
Cost of Treasury Stock:
Balance at January 1 (10,000 shares) ...... <30,000> <30,000>
Treasury Stock Purchases (31,539 shares) .. <197,300> --
Balance at September 30 (41,539 shares at
1995 and 10,000 shares at 1994) ......... $ <227,300> $ <30,000>
Due from SECT:
Balance at January 1 ....................... $ <432,500> $ <432,500>
Proceeds from exercise of stock options .... 53,400 --
$ <379,100> $ <432,500
Total Stockholders' Equity .................. $4,844,600 $4,626,900
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1995 and 1994
(Unaudited)
Basis of Presentation
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 reflect all necessary adjustments and reclassifications that are
necessary for fair presentation for the periods presented. 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. The results of operations for the three and nine-month periods
ended September 30, 1995, are not necessarily indicative of the results to be
expected for the full year.
Inventories
Inventories at September 30, 1995 consist of raw materials (plastics)
that are valued at the lower of cost or market, determined by the use of the
first-in, first-out method.
Earnings Per Share
Per share earnings are calculated based on weighted average shares.
Dilutive common stock equivalents consist of previously granted stock options,
with exercise prices between $1.75 and $4.40 per share. As of September 30,
1995, the closing bid price of the stock was $7.50 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 Statements of Earnings as a percentage of
revenue.
Nine Months Ended
Sept. 30
1995 1994
(Restated)
Revenues 100.00% 100.00%
Operating Expenses 96.54 97.55
Income from operations 3.46% 2.45%
Other Expense <1.20> <.36>
Interest <.67> <.73>
Provision for income taxes <.81> <.64>
Net Earnings .78% .72%
The Company posted revenues of $15.7 million for the three months ended
September 30, 1995, a 4% increase compared to the same period last year; for
the first nine months of the year, revenues were $43.4 million, up $2.9
million or 7% over last year. Approximately 96% of the Company's revenues
were from QuesTech Research Division ("QTRD"), which during the quarter,
benefited from a 7% revenue increase due to continued business growth. QTRD
derives over 55% of its revenues from its two largest Army contracts.
Performance on a recently awarded Army contract, its largest by far, has
stalled, pending resolution of a bid protest filed by a competitor, and is not
reflected in the results of operations. The matter is currently under
adjudication by the Government Accounting Office (GAO), which is not expected
to render a decision until December 1995. Initial production efforts at
QuesTech Ventures Inc. ("QVI"), a subsidiary, were hampered, pending final
technical review of its process; thus, no sales were reported for the quarter
just ended. Management believes that the delays are short-term and reasonable
in a start-up production venture. QuesTech Service Company ("QTSC") continues
to operate at half of last year's levels, with improved margins.
Total operating expenses were $15.1 million and $41.9 million for the
quarter and the nine month period ended September 30, 1995, up $409,200 and
$2.4 million, respectively when compared to last year. Most of the cost
increase was due to direct labor salaries and other operating expenses which
were contractually required, such as the costs of direct subcontracts. Costs
incurred in connection with continued equipment testing and quality control
efforts at QVI were mitigated by reduced operating expenses at QTSC. For the
Company as a whole, the net increase in indirect expenses compared to last
year was proportionally less than the labor costs associated with increased
billable hours.
Income from operations for the nine month period ended September 30,
1995 increased by $507,200, up 51% over last year. Approximately $201,700 of
this amount was earned during the third quarter, due to improved margins on
the Company's existing contracts, and a stable level of indirect expenses, as
a result of management's cost containment efforts. These efforts included
renegotiation of facility leases and more selective bid and proposal planning.
For the nine month period, interest expense declined when compared to
last year. The third quarter interest expense upturn was due to a general
increase in the Company's borrowing rate (up by 3 percentage points over last
year as a result of the increase in the prime rate), and more frequent line of
credit borrowings to finance QTRD's growth and QVI's initial production
efforts. Increased interest expense from line of credit borrowings, however,
was offset by interest cost savings from amortized long-term debt. Other
expense reflects the cost of legal proceedings, specifically from the
restructuring of the headquarters' facility lease and claims against the
previous landlord. It also includes the cost of the recently negotiated
settlement agreement with Mr. O. E. Hayes, a former founder. See Item 5,
Other Information.
Despite the impact of Other Expense on Income from Operations, pre-tax
earnings were $200,500 and $688,900, up 31% for the quarter and 25% for the
nine month period, respectively, when compared to last year. Net earnings
(after taxes) were $98,100 for the quarter, and $337,500 for the nine-month
period, up 21% and 16% respectively over last year.
After accounting for the dilutive effect of common stock equivalents
consisting mainly of outstanding stock options, primary earnings per share
were $.07 for the quarter and $.24 for the nine months; after full dilution,
(i.e., considering the full dilutive effect of these same options, vested or
not), earnings per share were $.06 and $.22 for the same periods,
respectively. Last year's earnings per share were $.06 for the quarter and
$.21 for the nine-month period.
LIQUIDITY AND SOURCES OF CAPITAL
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 working capital ratio):
9/30/95 12/31/94 NET CHANGES
Working capital $ 2,554 $ 2,903 $<349>
Current assets 10,813 10,799 14
Current liabilities 8,259 7,896 363
Working capital ratio (1) 1.31 1.37 <.06>
(1) Current assets over current liabilities.
The Company relied on cash flows from operations and frequent line of
credit borrowings to finance the cost of its business growth. As of September
30, 1995, the Company has made cash outlays in excess of $500,000 towards the
following: leasehold improvements in the reconfigured headquarters' facility;
new purchases and upgrades of personal computers, furniture, and other office
equipment. Additionally, the Company also financed the construction in
progress costs of QuesTech Ventures Inc.'s plant improvements and machinery,
which at September 30, 1995, approximated $700,000. Management estimates that
capital expenditures will total approximately $2,000,000 by year-end. The
Company is financing the start-up costs for QVI's manufacturing equipment and
inventories internally. Management is currently exploring other financing
options for QVI's needs. Recently, the Company's line of credit agreement
with Signet Bank was extended until December 31, 1995, with no other
significant changes in terms.
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" includes the aggregate contract revenues remaining to
be earned at the stated time, to the extent of the value of the underlying
contract award. Virtually all of the Company's backlog is expected to be
completed within five years. The following table reflects the Company's
funded and unfunded backlog as of September 30, 1995 and September 30, 1994.
Funded Backlog Unfunded Backlog
September 30 September 30
1995 1994 1995 1994
$28,937,600 $31,642,900 *$460,020,700 $181,237,900
*The unfunded backlog includes the $300 million contract value of the recently
awarded Department of the Army contract which is currently the subject of a
protest described under Results of Operations above.
The term "funded" refers to that portion of aggregate contract revenues
remaining to be earned which 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 its customers will authorize
funding amounts in addition to funding commitments existing as of the period
just ended.
PART II
Item 1. Legal Proceedings
The following information is furnished regarding legal proceedings in
which material developments have occurred during the period covered by this
Report. Litigation first reported in the Company's Form 10-Q for June 30,
1994 in which there have been no material developments during the third
quarter, has been omitted.
A. QuesTech, Inc. v. 7600 Limited Partnership
The Company's civil action for damages against its former landlord,
which had been dismissed by the Circuit Court for Fairfax County in May 195,
was the object of a Motion for Attorneys' Fees and Costs filed by the landlord
on August 18, 1995. QuesTech filed an opposition to the Motion on September
29, 1995. Thereafter, on October 19, 1995, the landlord withdrew its Motion
without prejudice.
B. QuesTech, Inc. v. 7600 Limited Partnership
This second civil action for damages against the Company's former
landlord, in which the Circuit Court for Fairfax County had entered a ruling
in favor of the landlord in June 1995, was also the object of a Motion for
Attorneys' Fees and Costs filed by the landlord on August 18, 1995. QuesTech
filed an opposition to the Motion on September 29, 1995. Thereafter, on
October 19, 1995, the landlord withdrew its Motion without prejudice.
The Company including its subsidiaries, are not subject to any other
material pending legal proceedings, and none of the assets of the Company or
its subsidiaries are subject to any such proceedings, other than what
constitutes routine litigation incidental to the business and against which
the Company is adequately insured or which is not material.
Item 5. Other Information
On July 19, 1995, the Company entered into a confidential settlement
agreement with Oscar E. Hayes, a former founder, officer and director of the
Company. The agreement resolved a number of disputes regarding the
interpretation of Mr. Hayes' former employment agreements, retirement and
pension plans, and stock rights with the Company. The agreement with Mr.
Hayes is confidential; however, its ramifications have been included in the
Company's financial statements for the quarter ending September 30, 1995.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10. Material Contracts
(z2) Loan and Security Agreement between the Company and Signet
Bank of Virginia, Amendment No. 11 dated August 31, 1995 and Amendment No. 12
dated September 28, 1995.
(z3) Settlement Agreement between QuesTech and Oscar E. Hayes
dated June 21, 1995, ratified by the Board of Directors on August 21, 1995.
(Redacted)
ll. Statement of Computation of Earnings Per Share.
(b) Reports on Form 8-K:
No reports on Form 8-K were required to be filed during the third
quarter of 1995.
S.E.C. FORM 10-Q
September 30, 1995
Pursuant to the requirements of 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.
QUESTECH, INC.
(Registrant)
Date: ______________________ ________________________________
Vincent L. Salvatori
Chairman of the Board and
Chief Executive Officer
Date: ______________________ ________________________________
Joseph P. O'Connell, Jr.
Vice President and
Chief Financial Officer