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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, 1997 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)
7600-West 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, 1997, the registrant had 1,614,257
shares of Common Stock outstanding, par value $.05 per share.
QuesTech, Inc. and Subsidiaries
I N D E X
March 31, 1997
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
Officers' Signatures 13
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
Mar. 31 Dec. 31
1997 1996
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents ................ $ 36,400 $ 54,300
Accounts receivable ...................... 8,647,600 9,625,400
Inventories .............................. 60,400 170,400
Prepaid expenses and other ............... 369,800 350,200
Deferred income taxes .................... 900,300 900,300
Total current assets ................ $10,014,500 $11,100,600
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - at
cost less accumulated depreciation and
amortization of $7,132,500 and $6,967,600,
respectively ............................. 5,021,800 4,952,600
GOODWILL less accumulated amortization of
$1,610,300 and $1,571,600, respectively .. 1,326,300 1,365,000
DEFERRED INCOME TAXES, net of valuation
allowance of $262,000 .................... 1,315,600 1,315,600
OTHER ASSETS ............................... 1,991,400 1,884,300
TOTAL ASSETS $19,669,600 $20,618,100
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
1997 1996
(Unaudited)
CURRENT LIABILITIES
Line of Credit ........................... $ -- $ 1,227,400
Current maturities of long-term
obligations payable .................... 415,600 374,000
Accounts payable ......................... 1,290,600 1,940,300
Accrued liabilities ...................... 6,556,600 5,627,300
Income taxes
Currently payable ...................... 31,800 --
Total current liabilities ........... $ 8,294,600 $ 9,169,000
LONG-TERM OBLIGATIONS ...................... 1,583,700 1,721,800
INDEBTEDNESS TO RELATED PARTIES ............ 1,460,600 1,417,100
ACCRUED POST-RETIREMENT BENEFIT COST ....... 1,244,700 1,267,300
OTHER LONG-TERM OBLIGATIONS ................ 918,500 1,010,500
Total Liabilities ................... $13,502,100 $14,585,700
STOCKHOLDERS' EQUITY
Common stock - authorized 3,000,000
shares of $.05 par value, issued
1,653,304 and 1,649,904 shares,
outstanding 1,614,257 and
1,610,857 shares at March 31, 1997
and December 31, 1996 ................ 82,700 82,500
Additional paid in capital ............... 2,848,900 2,835,600
Retained earnings ........................ 3,773,600 3,652,000
Less Treasury Stock at cost .............. <193,100> <193,100>
Due from SECT ............................ <344,600> <344,600>
Total Stockholders' Equity .......... $ 6,167,500 $ 6,032,400
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,669,600 $20,618,100
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended March 31,
1997 1996
Revenues ...................................... $19,812,700 $14,507,100
Operating expenses
Salaries, wages and employee benefits ....... 10,186,800 7,966,700
Other operating expenses .................... 9,275,400 6,235,900
Total operating expenses .............. $19,462,200 $14,202,600
Income from operations ................ 350,500 304,500
Other expense
Interest expense ............................ <139,500> <106,700>
Earnings before income taxes ........... $ 211,000 $ 197,800
Provision for income taxes .................... <89,400> <87,100>
Net earnings ........................... $ 121,600 $ 110,700
Earnings per share:
Primary ................................ $ .08 $ .07
Fully diluted .......................... $ .08 $ .07
Weighted Average Number of common shares
outstanding:
Primary ................................ 1,507,847 1,516,707
Fully diluted .......................... 1,509,610 1,516,508
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
1997 1996
Increase <Decrease> in Cash and Cash Equivalents
Cash flows from operating activities:
Net earnings ................................ $ 121,600 $ 110,700
Adjustments to reconcile net earnings to
Net cash provided by operating activities:
Depreciation and amortization ............. 272,700 196,900
Increase in fund value of nonqualifying
plan assets ............................. <50,000> <45,000>
Changes in assets and liabilities ......... 1,296,600 80,700
Net cash provided by operating
activities ............................ 1,640,900 343,300
Cash flows from investing activities:
Capital expenditures ........................ <327,600> <928,900>
Net cash used in investing activities ... <327,600> <928,900>
Cash flows from financing activities:
<Decrease>Increase in Line of Credit ........ <1,227,400> 545,200
Cash proceeds from exercise of stock options 13,600 34,700
Repayment of long-term debt ................. <97,400> <14,600>
Indebtedness to Related Parties ............. -- <14,100>
Repayment of Other Long-Term Obligations .... <20,000> <18,500>
Net cash <used in> provided by financing
activities ............................ <1,331,200> 532,700
Net <decrease> in cash ........................ <17,900> <52,900>
Cash, beginning of period ..................... 54,300 178,300
Cash, end of period ........................... $ 36,400 $ 125,400
Cash payments for:
Interest .................................... $ 133,600 $ 14,400
Income taxes ................................ 268,300 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
1997 1996
Common Stock:
Balance at March 31,
Issued 1,653,304 and 1,578,000 shares ... $ 82,700 $ 78,900
Additional paid in capital .................. 2,848,900 2,735,700
Retained Earnings:
Balance at January 1 ...................... 3,652,000 2,833,700
Net Earnings .............................. 121,600 110,700
Balance at March 31 ....................... 3,773,600 2,944,400
Cost of Treasury Stock (including 39,047 and
41,539 shares in 1997 and 1996):
Balance at March 31 ....................... <193,100> <227,300>
Due from SECT (including 176,131 and 183,392
shares in 1997 and 1996) .................. <344,600> <338,500>
Total Stockholders' Equity .................. $6,167,500 $5,193,200
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1997 and 1996
(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, 1997, a total of 228,000 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 $4.00 to $7.25 per share. The bid price of the Company's
stock at March 31, 1997 was $6.88 per share. Recently, the Financial
Standards Board issued Statement No. 128, "Earnings per share," which is
effective for financial statements issued after December 15, 1997. Although
earlier application is not permitted, pro forma disclosures may be provided.
Under the Statement, basic earnings per share is calculated based on the
weighted average number of common shares outstanding during the period.
Similarly, diluted earnings per share is calculated using the weighted
average number of shares computed for the purpose of basic earnings per
share, plus the dilutive impact of common stock equivalents. Using the
prescribed calculation methods under the new standard, basic earnings per share
for the first quarter's net income of $121,600 would have been $.085 on
1,436,862 shares; diluted earnings per share would be $.08 on 1,507,847 shares.
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
1997 1996
Revenues 100.00% 100.00%
Operating Expenses 98.23% 97.90%
Income from operations 1.77% 2.10%
Interest <.70%> <.74%>
Provision for income taxes <.45%> <.60%>
Net Earnings .62% .76%
Revenues
During the first quarter of 1997, the government contracting segment
consisting of QuesTech Research Division and the QuesTech Service Company
accounted for all of the increase in the Company's revenues. A major Army
contract provided 45% of QTRD's revenues. Increased tasking on other contracts
also contributed to further growth. As of March 31 last year, approximately the
same percentage of revenues was provided by another contract vehicle, to which
this contract was a follow-on. The packaging segment, QuesTech Packaging Inc.,
has not had sales since it halted product shipments in September, 1996 as a
result of a contract dispute. Recently, it was released from further
performance on its sole contract. Although discussions are underway with
potential new customers, management is not able to provide assurance on when
sales can be realized.
Expenses
Operating expenses increased by 37% in the aggregate, compared to last year.
Salaries, wages and employee benefits increased primarily as a result of
additional direct labor staffing required on contract task orders. Other
operating expenses increased because of continuing customer requirements for
subcontract work which has become a significant element of billable costs.
Maintenance of information systems and other activities to support growth such
as increased staff recruitment and advertisement also contributed to higher
costs. The costs of operating the commercial packaging segment declined and
consisted primarily of fixed overhead. No variable manufacturing costs were
incurred as a result of production stoppage.
Income from Operations
Income from Operations improved 15% over 1996. The growth in operating margins
was softened by a slightly higher pace of expense increase compared to revenue
growth. Contract profitability had mixed results, with margins on various
delivery orders outperforming larger contracts. Favorable margins from
government contracts were further impacted by continuing losses in the packaging
segment due to the absence of sales.
Interest
Interest expense was $139,500, up 31%. The increase in interest expense arose
from the interest cost associated with a long-term lease on capital equipment.
Earnings before Income Taxes
Pre-tax earnings for the first quarter was $211,000, up 6.7% over last year.
The growth in income from operations was partially offset by increased interest
costs.
Net Earnings
Net earnings were $121,600, up 9.85%, benefiting from a slight decrease in the
effective income tax rate compared to the first quarter of 1996.
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, 1996
(in thousands of dollars except for ratios):
3/31/97 12/31/96 NET CHANGES
Working capital $ 1,720 $ 1,932 $ <212>
Current assets 10,015 11,101 <1,086>
Current liabilities 8,295 9,169 <874>
Working capital ratio (1) 1.21 1.21 --
(1) Current assets over current liabilities.
During the first quarter, the Company used cash flows from operations
consisting primarily of expedited collections of receivables to pay down its
line of credit and acquire capital assets related to information technology
enhancements.
Management expects to continue to use cash flows from operations to cover
increasing subcontractor commitment costs, which during the first quarter of
1997, were up $1.5 million over last year. A capital lease facility is being
used to finance purchases of new office equipment. 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 during May, 1997.
EMERGING TRENDS
QuesTech continues to increase its presence in the rapidly expanding
Information Technology (IT) market. Through our government oriented Information
Warfare Group and commercially focused Information Sciences Corporation (QTISC),
a newly formed subsidiary, we have developed new services along the lines of the
fastest growing segment of the IT Market-Information Security. Our recent
qualification as a National Computer Security Association affiliate channel
provider offers us even more opportunities and presence in the IT market.
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, 1997 and March 31, 1996.
Funded Backlog Unfunded Backlog
March 31 March 31
1997 1996 1997 1996
$37,117,900 $34,746,200 $360,272,800 $421,444,200
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 March, the lawsuit captioned 7600 Limited Partnership and Guy Beatty v.
QuesTech, Inc., which claimed damages against the Company for breach of contract
and various tort claims was settled in entirety and the case was dismissed.
QTPI, the Company's manufacturing subsidiary, has resolved all of its
outstanding contract disputes and withdrawn the declaratory judgment action
filed by the Company against Munchkin, Inc., its former distributor of
disposable monolayer baby bottle liners. The terms of the settlement, while
confidential, permit the Company to sell product and technology to third
parties without limitation.
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 routine litigation,
if any, incidental to the business and against which the Company is either
adequately insured, or which is not material.
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, 1997 through March 31, 1997.
S.E.C. FORM 10-Q
March 31, 1997
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