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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, 1996 Commission File Number: 2-88617
QUESTECH, INC.
(Exact name of Registrant as specified in its charter)
Virginia 54-0844913
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
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, 1996, the registrant had 1,536,461
shares of Common Stock outstanding, par value $.05 per share.
QuesTech, Inc. and Subsidiaries
I N D E X
March 31, 1996
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 11
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8K 11
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE 12
Officers' Signatures 13
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
Mar. 31 Dec. 31
1996 1995
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents ................ $ 125,400 $ 178,300
Accounts receivable ...................... 8,981,300 8,358,400
Inventories .............................. 85,500 81,500
Prepaid expenses and other ............... 300,400 225,500
Deferred income taxes .................... 751,300 751,300
Total current assets ................ $10,243,900 $ 9,595,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - at
cost less accumulated depreciation and
amortization of $6,486,100 and $6,531,500,
respectively ............................. 3,028,700 2,256,500
GOODWILL less accumulated amortization of
$1,455,700 and $1,417,000, respectively .. 1,480,900 1,519,600
DEFERRED INCOME TAXES, net of valuation
allowance of $148,000 .................... 1,329,000 1,218,100
OTHER ASSETS ............................... 1,928,900 1,834,500
TOTAL ASSETS $18,011,400 $16,423,700
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
1996 1995
(Unaudited)
CURRENT LIABILITIES
Line of Credit ........................... $ 939,300 $ 394,100
Current maturities of long-term
obligations payable .................... 58,000 57,100
Accounts payable ......................... 2,740,900 2,268,800
Accrued liabilities ...................... 5,195,200 4,834,300
Income taxes
Currently payable ...................... 127,800 45,200
Total current liabilities ........... $ 9,061,200 $ 7,599,500
LONG-TERM OBLIGATIONS ...................... 140,700 156,200
INDEBTEDNESS TO RELATED PARTIES ............ 1,348,300 1,321,900
ACCRUED POST-RETIREMENT BENEFIT COST ....... 1,150,800 1,161,000
OTHER LONG-TERM OBLIGATIONS ................ 1,117,200 1,137,300
Total Liabilities ................... $12,818,200 $11,375,900
STOCKHOLDERS' EQUITY
Common stock - authorized 3,000,000
shares of $.05 par value, issued
1,578,000 shares, outstanding
1,536,461 shares at March 31, 1996
and December 31, 1995 ................ 78,900 78,900
Additional paid in capital ............... 2,735,700 2,720,100
Retained earnings ........................ 2,944,400 2,833,700
Less Treasury Stock at cost .............. <227,300> <227,300>
Due from SECT ............................ <338,500> <357,600>
Total Stockholders' Equity .......... $ 5,193,200 $ 5,047,800
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,011,400 $16,423,700
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended March 31,
1996 1995
Revenues ...................................... $14,507,100 $12,253,400
Operating expenses
Salaries, wages and employee benefits ....... 7,966,700 7,184,400
Other operating expenses .................... 6,235,900 4,774,400
Total operating expenses .............. $14,202,600 $11,958,800
Income from operations ................ 304,500 294,600
Other expense
Interest expense ............................ <106,700> <92,800>
Earnings before income taxes ........... $ 197,800 $ 201,800
Provision for income taxes .................... 87,100 102,900
Net earnings ........................... $ 110,700 $ 98,900
Earnings per share:
Primary ................................ $ .07 $ .07
Fully diluted .......................... $ .07 $ .07
Weighted Average Number of common shares
outstanding:
Primary ................................ 1,516,707 1,446,816
Fully diluted .......................... 1,516,508 1,446,816
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
1996 1995
Increase <Decrease> in Cash and Cash Equivalents
Cash flows from operating activities:
Net earnings ................................ $ 110,700 $ 98,900
Adjustments to reconcile net earnings to
Net cash provided by operating activities:
Depreciation and amortization ............. 196,900 139,900
Increase in fund value of nonqualifying
plan assets ............................. <45,000> <55,200>
Changes in assets and liabilities ......... 80,700 <365,100>
Net cash <used in> operating activities . 343,300 <181,500>
Cash flows from investing activities:
Capital expenditures ........................ <928,900> <172,100>
Net cash provided by <used in> investing
activities ............................ <928,900> <172,100>
Cash flows from financing activities:
Increase in Line of Credit .................. 545,200 324,600
Cash proceeds from exercise of stock options 34,700 --
Repayment of long-term debt ................. <14,600> <12,600>
Indebtedness to Related Parties ............. <14,100> <46,700>
Repayment of Other Long-Term Obligations .... <18,500> <17,100>
Net cash provided by financing activities 532,700 248,200
Net <decrease> in cash ........................ <52,900> <105,400>
Cash, beginning of period ..................... 178,300 261,900
Cash, end of period ........................... $ 125,400 $ 156,500
Cash payments for:
Interest .................................... $ 14,400 $ 41,900
Income taxes ................................ 9,300 --
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
1996 1995
Common Stock:
Balance at March 31,
Issued 1,578,000 shares (including 31,539
and 10,000 treasury shares in 1996 and
1995) ................................. $ 78,900 $ 78,900
Additional paid in capital .................. 2,735,700 2,722,700
Retained Earnings:
Balance at January 1 ...................... 2,833,700 2,313,600
Net Earnings .............................. 110,700 98,900
Balance at March 31 ....................... 2,944,400 2,412,500
Cost of Treasury Stock:
Balance at March 31 ....................... <227,300> <30,000>
Due from SECT (including 183,392 and 221,792
shares in 1996 and 1995) ................. <338,500> <432,500>
Total Stockholders' Equity .................. $5,193,200 $4,751,600
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1996 and 1995
(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, 1996, a total of 287,100 shares are subject to outstanding stock
option agreements and if dilutive, are accounted for as common stock
equivalents under the treasury stock method. The strike prices of these
options range from $1.75 to $8.125 per share. The bid price of the
Company's stock at March 31, 1996 was $7.75 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
1996 1995
Revenues 100.00% 100.00%
Operating Expenses 97.90% 97.60%
Income from operations 2.10% 2.40%
Other income <.74%> <.76%>
Provision for income taxes <.60%> <.84%>
Net Earnings .76% .80%
During the first quarter of 1996, the Company's revenues were $14.5 million,
which increased by 18.4% over the same period in 1995. The Company's government
contract segment, consisting of QuesTech Research Division and QuesTech Service
Company ("QTRD" and "QTSC," respectively) contributed $14.2 million in the
aggregate towards the Company's revenues. The increase in revenues reflects the
impact of new task orders from the Company's various government contracts,
including the $300 million contract with the Department of the Army, which
commenced performance during the first quarter. Supplemented by additional
direct labor staffing, teaming efforts with subcontractors accounted for a
significant portion of the revenue growth. Despite production delays and
technical difficulties, the commercial packaging segment, QuesTech Packaging
Inc. ("QTPI") produced and sold to Munchkin Inc. millions of infant bottle
liners in partial fulfillment of the terms of a supply contract. Sales are
expected to improve as additional machines are placed in service by mid-
year. During the first quarter of 1995, QTPI was involved solely in machine
development efforts and did not have any sales.
Operating expenses were $14.2 million, up 18.8% when compared with the same
period in 1995. Operating expenses were impacted by increased costs of
subcontractors and materials that were contractually required on recently issued
task orders. Additional staff were hired to support contract requirements in
various sites across the country. All other indirect expenses increased
nominally when compared with the previous year. In the commercial area, the
cost of maintaining QTPI's operations increased over last year, mostly as a
result of enhanced production efforts.
Income from operations was $304,500, which improved 3.4% over last year.
Favorable margins within the government contract segment were mitigated by the
increased production costs at QTPI. Because QTPI is operating below full
capacity, the sales volume has not yet reached the break-even point, thereby
negatively impacting the Company's operating income. In addition, loss of
income from a temporary shut-down of a major government contract facility which
sustained winter storm damage scaled back further growth in operating income.
Interest expense increased 15% over last year, partly as a result of
financing QTPI's production efforts with frequent borrowings against the line of
credit. Pre-tax income declined to $197,800, compared to $201,800 last year,
because of increased borrowing costs.
Net income increased 12% over last year as the Company benefited from a
more favorable effective tax rate. Despite the dilutive impact of common stock
equivalents, earnings per share at $0.07 remained at the same level as last
year.
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, 1995
(in thousands of dollars except for ratios):
3/31/96 12/31/95 NET CHANGES
Working capital $ 1,183 $1,995 $ <812>
Current assets 10,244 9,595 649
Current liabilities 9,061 7,600 1,461
Working capital ratio (1) 1.13 1.26 <.13>
(1) Current assets over current liabilities.
During the first quarter, the Company used cash flows from operations and
proceeds from its line of credit to finance QTPI's construction in progress
and facility build-out costs, which amounted to $750,000 in the aggregate.
Other capital expenditures included $178,900 spent towards upgrades of certain
office fixtures and equipment, primarily personal computers. An additional
outlay of $700,000 is planned during the second quarter to enhance QTPI's
production capacity. At the present time, management is exploring long-term
financing alternatives for its manufacturing endeavors.
Management expects to continue to use cash flows from operations to defray
increasing costs of direct materials and subcontractors, which during the first
quarter of 1996, were up $1.6 million over last year. In addition, management
plans to expand its facilities, resources, and information systems to support
continued growth. Negotiations are in process for more favorable terms under
the Company's line of credit agreement, which is subject to renewal in May,
1996.
Subject to the approval of the stockholders, the Company's Board of
Directors has approved the adoption of the 1996 Incentive Stock Option Plan,
pursuant to which up to 200,000 shares of the Company's common stock may be
issued.
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 contract award
thereunder. 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 March 31, 1996 and March 31, 1995.
Funded Backlog Unfunded Backlog
March 31 March 31
1996 1995 1996 1995
$34,746,200 $49,677,300 $421,444,200 $175,410,400
The term "funded" 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
In April 1996, the Company settled the case of Denzler v. QuesTech,
Inc., a lawsuit filed by a former employee for breach of the Company's Officers
and Managers Deferred Compensation Plan (the "Plan"). After losing the case in
the United States District Court for the Eastern District of Virginia, the
Company appealed to the United States Court of Appeals for the Fourth Circuit.
In March 1996, the appellate decision was issued, remanding the case back to the
lower court to determine the correct amount of damages and legal fees owed to
the plaintiff, but affirming that the Company had a liability to the plaintiff
under the Plan. Thereafter, the case was settled for a lump sum payment, which
was less than the original award by the District Court. The settlement amount
was paid in full in April 1996. The Company had previously accrued the expected
cost of the settlement in the financial statements.
Item 5. Other Information
None.
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, 1996 through March 31, 1996.
S.E.C. FORM 10-Q
March 31, 1996
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
Chief Executive Officer and
Chairman of the Board
Date: ______________________ ________________________________
Joseph P. O'Connell, Jr.
Vice President and
Chief Financial Officer