========================================================================
UNITED STATES
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 the quarter ended September 30, 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
incorporation or organization) (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 November 1, 1996, the registrant had
outstanding 1,610,953 shares of Common Stock, par value $.05 per share.
QuesTech, Inc. and Subsidiaries
I N D E X
September 30, 1996
Page No.
PART I. Financial Information
Item 1 Financial Statements (Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS -
September 30, 1996 and December 31, 1995 2
CONSOLIDATED STATEMENTS OF EARNINGS -
Three Months ended September 30, 1996 and 1995;
Nine Months ended September 30, 1996 and 1995 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
Nine Months ended September 30, 1996 and 1995 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -
Nine Months ended September 30, 1996 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
September 30, 1996 and September 30, 1995 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
1996 1995
(Unaudited) (Note)
CURRENT ASSETS
Cash and cash equivalents ................ $ 136,900 $ 178,300
Accounts receivable ...................... 11,028,800 8,358,400
Inventories .............................. 165,600 81,500
Prepaid expenses and other ............... 634,300 225,500
Deferred income taxes .................... 751,300 751,300
Total current assets ................ $12,716,900 $ 9,595,000
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - at
cost less accumulated depreciation and
amortization of $6,789,500 and $6,531,500,
respectively ............................. 4,479,200 2,256,500
GOODWILL LESS ACCUMULATED AMORTIZATION OF
$1,532,900 and $1,417,000, respectively .. 1,403,600 1,519,600
DEFERRED INCOME TAXES, net of valuation
allowance of $148,000 .................... 1,218,100 1,218,100
OTHER ASSETS ............................... 2,032,200 1,834,500
TOTAL ASSETS $21,850,000 $16,423,700
The accompanying notes are an integral part of these statements.
NOTE: The balance sheet at December 31, 1995 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
1996 1995
(Unaudited) (Note)
CURRENT LIABILITIES
Line of Credit ........................... $ -- $ 394,100
Current maturities of long-term
obligations payable .................... 138,100 57,100
Accounts payable ......................... 5,048,400 2,268,800
Accrued liabilities ...................... 6,905,200 4,834,300
Income taxes currently payable ........... 20,000 45,200
Total current liabilities ........... $12,111,700 $ 7,599,500
LONG-TERM OBLIGATIONS ...................... 437,100 156,200
INDEBTEDNESS TO RELATED PARTIES ............ 1,400,900 1,321,900
ACCRUED POST-RETIREMENT BENEFIT COST ....... 1,309,800 1,161,000
OTHER LONG-TERM OBLIGATIONS ................ 1,013,800 1,137,300
Total Liabilities ................... $16,273,300 $11,375,900
STOCKHOLDERS' EQUITY
Common stock - authorized 3,000,000
shares of $.05 par value, issued
1,650,000 and 1,578,000 shares,
outstanding 1,610,953 shares and
1,568,000 shares at September 30, 1996
and December 31, 1995, respectively .. 82,500 78,900
Additional paid in capital ............... 2,805,600 2,720,100
Retained earnings ........................ 3,226,300 2,833,700
Less Treasury Stock at cost .............. <193,100> <227,300>
Due from SECT ............................ <344,600> <357,600>
Total Stockholders' Equity .......... $ 5,576,700 $ 5,047,800
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,850,000 $16,423,700
The accompanying notes are an integral part of these statements.
NOTE: The balance sheet at December 31, 1995 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,
1996 1995
Revenues .................................. $20,377,600 $15,706,700
Operating expenses
Salaries, wages and employee benefits ... 8,563,500 7,047,300
Other operating expenses ................ 11,479,000 8,055,500
Total operating expenses .......... $20,042,500 $15,102,800
Income from operations ............ 335,100 603,900
Other expense ........................... -- <299,100>
Interest expense ........................ <131,600> <104,300>
Earnings before income taxes ...... $ 203,500 $ 200,500
Provision for income taxes ................ <89,500> <102,400>
Net earnings ...................... $ 114,000 $ 98,100
Earnings per share:
Primary ............................... $ .08 $ .07
Fully diluted ......................... $ .08 $ .06
Weighted average number of common shares
outstanding:
Primary ............................... 1,514,753 1,428,994
Fully diluted ......................... 1,517,746 1,518,289
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Nine Months Ended Sept. 30,
1996 1995
Revenues .................................. $54,718,500 $43,439,900
Operating expenses
Salaries, wages and employee benefits ... 25,023,000 21,441,400
Other operating expenses ................ 28,624,500 20,495,700
Total operating expenses .......... $53,647,500 $41,937,100
Income from operations ............ 1,071,000 1,502,800
Other expense ........................... -- <522,100>
Interest expense ........................ <369,900> <291,800>
Earnings before income taxes ...... $ 701,100 $ 688,900
Provision for income taxes ................ <308,500> <351,400>
Net earnings ...................... $ 392,600 $ 337,500
Earnings per share:
Primary ............................... $ .26 $ .24
Fully diluted ......................... $ .26 $ .22
Weighted average number of common shares
outstanding:
Primary ............................... 1,516,246 1,427,708
Fully diluted ......................... 1,519,542 1,532,439
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
1996 1995
Increase <Decrease> in Cash and Cash Equivalents
Cash flows from operating activities:
Net Earnings .................................... $ 392,600 $ 337,500
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization .............. 658,300 480,600
Increase in fund values of non-qualifying
assets under deferred compensation plans . <160,100> <135,100>
Other accrued costs ........................ -- 246,400
Changes in assets and liabilities .......... 1,771,400 331,500
Net cash provided by
operating activities ..................... $ 2,662,200 $ 1,260,900
Cash flows from investment activities:
Capital expenditures .......................... <2,759,200> <1,337,000>
Net cash used in investing activities ...... $<2,759,200> $<1,337,000>
Cash flows from financing activities:
Increase<decrease> in Line of Credit borrowings 10,500 318,500
Cash proceeds from exercise of stock options .. 153,600 53,400
Treasury stock transactions ................... 34,200 <197,300>
Repayment of long-term debt ................... <42,700> <38,700>
Repayment of indebtedness to related parties .. <43,400> <107,700>
Repayment of other long-term debt ............. <56,600> <52,300>
Net cash provided by/<used in>
financing activities ..................... $ 55,600 $ <24,100>
Net <decrease> in cash .......................... $ <41,400> $ <100,200>
Cash, Beginning of period ....................... 178,300 261,900
Cash, End of period ............................. $ 136,900 $ 161,700
Cash payments for:
Interest ................................. $ 162,500 $ 106,100
Income taxes ............................. 678,900 379,100
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
1996 1995
Common Stock issued 1,650,000 shares in 1996
and 1,578,000 shares in 1995:
Balance at January 1 ...................... $ 78,900 $ 78,900
Exercise of employee stock options ........ 3,600 --
Balance at September 30 ................. 82,500 78,900
Additional paid in capital:
Balance at January 1 ...................... 2,720,100 2,722,700
Exercise of employee stock options ........ 85,500 <1,700>
Balance at September .................... $2,805,600 $2,721,000
Retained Earnings:
Balance at January 1 ...................... 2,833,700 2,313,600
Net Earnings .............................. 392,600 337,500
Balance at September 30 ................. $3,226,300 $2,651,100
Cost of Treasury Stock:
Balance at January 1 ...................... <227,300> <30,000>
Exercise of employee stock options ........ 34,200 <197,300>
Balance at September 30 ................. $ <193,100> $ <227,300>
Due from SECT:
Balance at January 1 ...................... $ <357,600> $ <432,500>
Exercise of employee stock options ........ 13,000 53,400
Balance at September 30 ................. $ <344,600> $ <379,100>
Total Stockholders' Equity .................. $5,576,700 $4,844,600
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1996 and 1995
(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, 1996, are not necessarily indicative of the results to
be expected for the full year.
Certain portions of the 10-Q include forward looking statements within
the meaning of Section 27(a) of the Securities Act of 1933, as amended, and
Section 21(e) of the Securities Exchange Act of 1934, as amended. Although
management believes that the expectations reflected in certain forward
looking statements contained in the Management's Discussion and Analysis are
based upon reasonable assumptions, it can give no assurance that its
expectations will be realized.
Inventories
Inventories at September 30, 1996 consist of raw materials (plastics)
and finished goods. Valuation is based on 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 $4.00 and $7.00 per share. As of
September 30, 1996, the closing bid price of the stock was $7.50 per share.
Shares held in the Company's Stock Employee Compensation Trust (SECT),
although outstanding, are excluded from the base of the earnings 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
1996 1995
Revenues 100.00% 100.00%
Operating Expenses 98.04 96.54
Income from operations 1.96% 3.46%
Other Expense -- <1.20>
Interest <.68> <.67>
Provision for income taxes <.56> <.81>
Net Earnings .72% .78%
For the quarter ended September 30, 1996, the Company's revenues were
$20.4 million, up by $4.7 million or 30% over 1995. Revenues for the first
nine months of the year were $54.7 million, up $11.3 million or 26% over
last year. Increased activity from the Company's largest contract which
commenced performance this year accounted for half of the revenue growth
within the government contract segment. Record revenue growth from
government contracts as a whole offset a third quarter slowdown in sales at
QuesTech Packaging, Inc. ("QTPI"), the Company's commercial packaging
segment. QTPI scaled back its production of monolayer infant bottle liners,
pending a resolution of a contract dispute with its customer, Munchkin, Inc.
Currently, QTPI is discussing the possible production of several new
products with a number of Fortune 500 companies. Any sales arising from
such production will commence no sooner than 1997.
Operating expenses were $20 million for the quarter and $53.6 million
for the nine months ended September 30, 1996, up 33% and 28%, respectively
when compared with the same periods in 1995. The increase in operating
expenses was driven by contract requirements for additional staff,
subcontracts, and material procurements to support newly issued delivery
orders. The costs of maintaining the packaging operation were $2.2 million
during the nine-month period.
Despite positive margins on its major contracts, the Company's income
from operations declined by 44.5% during the quarter and 28.7% during the
nine-month period. Operating margins were impacted by losses arising from
QTPI's initial high manufacturing costs resulting from production start-up
and unfilled sales orders during September 1996. QTPI's operating loss as
of September 30, 1996, was approximately $1.6 million, up from $1.0 million
for the same period last year.
Interest expense increased as the Company borrowed heavily from its
line of credit ("LOC") to finance QTPI's capital and operating requirements.
A significant portion of the interest cost associated with the construction
in progress at the Newport News plant facility was incurred during the third
quarter and charged to expense.
The Company's pre-tax earnings for the quarter were $203,500 which
remained at about the same level as last year. Pretax earnings for the nine
month period reflected a 1.8% increase, from $688,900 to $701,100.
Fully diluted earnings per share for the quarter were $.08 and $.26 for
the nine-month period, up $.02 and $.04, respectively over 1995. The
dilution of shares resulted from the impact of currently outstanding stock
options and small common stock issues to fund the exercise of previously
granted stock options.
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,
1995 (in thousands of dollars, except working capital ratio):
9/30/96 12/31/95 NET CHANGES
Working capital $ 605 $1,995 $<1,390>
Current assets 12,717 9,595 3,122
Current liabilities 12,112 7,600 4,512
Working capital ratio (1) 1.05 1.26 <.21>
(1) Current assets over current liabilities.
During the nine months ended September 30, 1996, the Company drew from
its line of credit to finance QTPI's construction in progress costs which
increased by $2.3 million over last year. Additionally, the Company infused
cash into QTPI's operations to fund its pre-tax losses which amounted to
$1.6 million. An additional outlay of $.5 million was incurred to provide
new personal computers and permit facility improvements in support of the
growth in the government contracts segment.
Subsequent to the date of the financial statements, the Company
executed a capital lease agreement with General Electric Capital Corporation
to finance certain of QTPI's machines. As a result, the Company received $2
million in cash, which was used to pay down its line of credit. At
September 30, 1996, the LOC position was approximately $.4 million. Of this
amount, $80,000 was reported under current maturities and the remainder was
included in the Long-Term Obligations of the financial statements to reflect
the partial impact of the financing. The LOC balance, which typically
ranged from $1.5 million to $2.0 million during the first nine months, is
expected to decline by 50% during the fourth quarter.
Working capital requirements of the core business will increase as a
result of commitments to subcontractors and materials expenditures, up 50%
over last year. Additionally, funds will be spent to cover the relocation
costs of certain staff, following the closure of the Vint Hill Farms
Station, a U.S. Army base. Within QTPI, pre-tax losses will reach $2
million by year-end. These losses stem in part from delays in reaching full
production capacity and unanticipated results of a pricing agreement entered
into prior to the commencement of production. Capital investment towards
facilities expansion, accounting and information systems, and manufacturing
equipment combined is expected to reach $3 million by year-end. Management
believes that its financial resources, including its LOC facility, and
proceeds from the recently negotiated capital lease and internally generated
funds, are adequate to meet its foreseeable needs.
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, 1996 and
September 30, 1995.
Funded Backlog Unfunded Backlog
September 30 September 30
1996 1995 1996 1995
$38,837,400 $28,937,600 $389,387,500 $460,020,700
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
Litigation-- 7600 Limited Partnership and Guy Beatty v. QuesTech, Inc.,
In January 1996, the Company was named as a defendant in a lawsuit filed by
its former landlord and the general partner of the landlord. The case
originally sought damages for breach of contract in the form of previously
incurred attorneys' fees, plus five tort claims, three of which have been
dismissed to date. The Company's counsel believes that the Company's
position with regard to the two remaining tort claims has merit. The
Company's general liability insurer has taken responsibility for the cost of
the basic defense of the entire case. The Company has retained additional
outside counsel at the Company's cost. Subject to a reservation of rights
issued by the insurer, the insurer should be liable for damages. The case
is scheduled for trial in March 1997. Management does not provide any
assurance on the outcome of the case.
Item 5. Other Information
Contract Dispute-- QTPI, the Company's manufacturing subsidiary, has
exchanged letters with its exclusive distributor of monolayer infant bottle
liners regarding issues of contract interpretation, specifications and
warranty. In October 1996, QTPI temporarily reduced its workforce and
limited production of liners.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10. Material Contracts
(s) Equipment Lease Agreement between General Electric Capital
Corporation and QuesTech Packaging, Inc. and QuesTech, Inc. dated
October 24, 1996.
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 1996. S.E.C. FORM 10-Q
September 30, 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
Chairman of the Board and
Chief Executive Officer
Date: ______________________ ________________________________
Joseph P. O'Connell, Jr.
Vice President and
Chief Financial Officer