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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 June 30, 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
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 August 1, 1997, the registrant had 1,614,957
shares of Common Stock outstanding, par value $.05 per share.
QuesTech, Inc. and Subsidiaries
I N D E X
June 30, 1997
Page No.
PART I. Financial Information
Item 1 Financial Statements (Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS - June 30, 1997
and December 31, 1996 2
CONSOLIDATED STATEMENTS OF EARNINGS - Three Months
ended June 30, 1997 and 1996; Six Months ended June 30,
1997 and 1996 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Six
Months ended June 30, 1997 and 1996 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Six
Months ended June 30, 1997 and 1996 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - June 30,
1997 and June 30, 1996 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. Other Information
Item 1 Legal Proceedings 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
Officers' Signatures 16
EXHIBIT 10 - AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT DATED
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30 Dec. 31
1997 1996
(Unaudited) (Note)
CURRENT ASSETS
Cash and cash equivalents ................. $ 115,800 $ 54,300
Accounts receivable ....................... 8,660,600 9,625,400
Inventories ............................... 60,400 170,400
Prepaid expenses and other ................ 287,700 350,200
Deferred income taxes ..................... 900,300 900,300
Total current assets .................. $10,024,800 $11,100,600
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - at
cost less accumulated depreciation and
amortization of $5,777,800 and
$6,967,600, respectively .................. 5,239,500 4,952,600
GOODWILL, less accumulated amortization of
$1,648,900 and $1,571,600, respectively ... 1,287,700 1,365,000
DEFERRED INCOME TAXES, net of valuation
allowance of $262,000 ..................... 1,317,700 1,315,600
OTHER ASSETS ................................ 2,194,800 1,884,300
TOTAL ASSETS $20,064,500 $20,618,100
NOTE: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date.
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30 Dec. 31
1997 1996
(Unaudited) (Note)
CURRENT LIABILITIES
Line of Credit ............................ $ 315,900 $ 1,227,400
Current maturities of long-term
obligations ............................. 416,800 374,000
Accounts payable .......................... 3,331,500 1,940,300
Accrued liabilities ....................... 4,003,900 5,627,300
Income taxes - Currently payable .......... 210,100 --
Total current liabilities ............. $ 8,278,200 $ 9,169,000
LONG-TERM OBLIGATIONS ....................... 1,604,200 1,721,800
INDEBTEDNESS TO RELATED PARTIES ............. 1,485,200 1,417,100
ACCRUED POST-RETIREMENT BENEFIT COST ........ 1,383,900 1,267,300
OTHER LONG TERM OBLIGATIONS ................. 972,900 1,010,500
Total Liabilities .................... $13,724,400 $14,585,700
STOCKHOLDERS' EQUITY
Common stock - authorized 3,000,000 shares
of $.05 par value, issued 1,653,804
and 1,649,904 shares, outstanding
1,614,957 shares at June 30, 1997 and
1,610,857 shares at December 31, 1996 . 82,700 82,500
Additional paid in capital ................ 2,850,400 2,835,600
Retained earnings ......................... 3,943,700 3,652,000
Less Treasury Stock at cost ............... <192,100> <193,100>
Due from SECT ............................. <344,600> <344,600>
Total Stockholders' Equity ........... $ 6,340,100 $ 6,032,400
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,064,500 $20,618,100
NOTE: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date.
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
Revenues ................................ $19,354,300 $19,833,800 $39,167,000 $34,340,900
Operating expenses
Salaries, wages and employee benefits . 10,244,400 8,492,800 20,431,200 16,459,500
Other operating expenses .............. 8,656,500 10,909,600 17,931,900 17,145,500
Total operating expenses ........ $18,900,900 $19,402,400 $38,363,100 $33,605,000
Income from operations .......... 453,400 431,400 803,900 735,900
Interest expense ...................... <158,000> <131,600> <297,500> <238,300>
Earnings before income taxes .... $ 295,400 $ 299,800 $ 506,400 $ 497,600
Provision for income taxes .............. 125,300 131,900 214,700 219,000
Net earnings .................... 170,100 $ 167,900 291,700 $ 278,600
Earnings per share:
Primary .............................. $ .11 $ .11 $ .19 $ .18
Fully diluted ........................ $ .11 .11 .19 .18
Weighted average number of common shares
outstanding:
Primary .............................. 1,512,956 1,517,314 1,510,428 1,517,011
Fully diluted ........................ 1,537,421 1,518,925 1,536,521 1,517,773
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months
Ended June 30
1997 1996
Increase <Decrease> in Cash and Cash Equivalents
Cash flows from operating activities:
Net Earnings .................................. $ 291,700 $ 278,600
Adjustments to reconcile net earnings to
net cash flows from operating activities:
Depreciation and amortization ........... 526,100 419,200
Increase in fund values of nonqualifying
plan assets ........................... <88,700> <122,900>
Changes in assets and liabilities ....... 1,312,700 <356,600>
Net cash provided by operating activities $ 2,041,800 $ 218,300
Cash flows from investing activities:
Capital expenditures ...................... <860,900> <2,263,800>
Investment in other assets ................ <128,500> --
Net cash used in investing activities ... <989,400> <2,263,800>
Cash flows from financing activities:
<Decrease>/Increase in Line of Credit ..... <911,500> 2,031,800
Cash proceeds from exercise of stock
options ................................. 16,000 59,500
Repayment of long-term debt ............... <74,800> <28,000>
Repayment of indebtedness
to related parties ...................... -- <28,600>
Repayment of other long-term debt ......... <20,600> <37,400>
Net cash provided by <used in> financing
activities ........................... $ <990,900> $ 1,997,300
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months
Ended June 30
1997 1996
Net increase/<decrease> in cash ............... $ 61,500 $ <48,200>
Cash, Beginning of period ..................... 54,300 178,300
Cash, End of period ........................... $ 115,800 $ 130,100
Cash payments for:
Interest (net) .......................... $ 224,300 $ 75,300
Income taxes (net) ...................... 117,000 411,200
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Six Months
Ended June 30
1997 1996
Common Stock issued 1,653,804 shares in 1997
and 1,649,904 shares in 1996 (Including
38,847 treasury shares in 1997 and 33,700
shares in 1996):
Balance at January 1 ...................... $ 82,500 $ 78,900
Issuance of common stock .................. 200 200
Balance at June 30 ...................... 82,700 79,100
Additional paid in capital:
Balance at January 1 ...................... 2,835,600 2,720,100
Exercise of employee stock options ........ 14,800 <32,000>
Balance at June 30 ...................... $2,850,400 $2,688,100
Retained Earnings:
Balance at January 1 ...................... 3,652,000 2,833,700
Net Earnings .............................. 291,700 278,600
Balance at June 30 ...................... $3,943,700 $3,112,300
Cost of Treasury Stock (including 38,847 and
33,700 shares in 1997 and 1996):
Balance at January 1 ...................... <193,100> <227,300>
Exercise of employee stock options ........ 1,000 78,300
Balance at June 30 ...................... $ <192,100> $ <149,000>
Due from SECT:
Balance at January 1 ...................... <344,600> <357,600>
Issuance of SECT shares ................... -- 13,000
Balance at June 30 ...................... $ <344,600> $ <344,600>
Total Stockholders' Equity .................. $6,340,100 $5,385,900
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
(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 six-month periods
ended June 30, 1997 are not necessarily indicative of the results to be
expected for the full year.
Earnings Per Share
The computation of earnings per share is based on the weighted average
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 June 30, 1997, a total of 227,400 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 June 30, 1997 was $8.375 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
half year's net income of $291,700 would have been $.20 on 1,438,826 shares;
diluted earnings per share would be $.19 on 1,536,521 shares.
New Accounting Standards
The Financial Accounting Standards Board recently issued two new
accounting standards that will affect the Company's financial reporting
methods. Under Statement of Financial Accounting Standards No. 130 ("SFAS
130"), the Company will be required to display an amount representing total
comprehensive income and its components in the financial statements.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Under Statement of Financial Accounting
Standards No. 131 ("SFAS No. 131"), the Company will be required to report
certain information about its operating segments in its interim and annual
financial statements, in addition to certain information about its products
and services, the geographic areas in which it operates and its major
customers. In the initial year of application, comparative information for
earlier years is to be restated. Both statements are effective for the
Company in 1998.
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.
As of June 30, 1997, the Company has written off $1.6 million of fully
depreciated assets, consisting primarily of obsolete MIS equipment. The
disposal of such assets did not have any effect on cash.
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.
Six Months Ended
June 30
1997 1996
Revenues 100.00% 100.00%
Operating Expenses
Salaries, wages and employee benefits 52.17 47.93
Other operating expenses 45.78 49.93
Total operating expenses 97.95 97.86
Income from operations 2.05% 2.14%
Interest <.76> <.69>
Provision for income taxes <.55> <.64>
Net Earnings .74% .81%
For the six months ended June 30, 1997, the Company's revenues were $39.2
million, up 14% over the previous year. The growth was driven primarily by
QuesTech Research Division ("QTRD"), which benefited from increased labor
tasking on its government contracts, particularly two major U.S. Army
contracts which provided over half of the Company's revenues for the period
just ended. In addition, another subsidiary, QuesTech Service Company
("QTSC"), reported revenue gain attributed to increased work with the U.S. Air
Force. Operating expenses were $38.4 million, up 14.16%. An increase in
salaries, wages and employee benefits arose from higher direct labor
utilization associated with contract performance and enhanced efforts towards
proposals and business development. Although direct subcontracts remained a
major cost component of other operating expenses, all other non-labor costs
in the aggregate declined in proportion to total revenues. Income from
operations improved by 9% at $803,900. Margins were slightly impacted by the
absence of sales to offset the carrying costs of the commercial packaging
segment.
Revenues for the quarter declined by 2.4% to $19.4 million when compared
with the same period last year, despite the favorable effect of increased
direct labor billings. Reduced billings for direct materials impacted the
revenues for the quarter. From time to time, the Company's customers change
the allocation or mix of resources required on task orders, thereby affecting
the Company's revenue volume and resultant margins. Operating expenses
decreased by 2.6% to $18.9 million, reflecting a decline in materials-intensive
task orders and reduced allowances for contingencies. Despite the
revenue decline, income from operations increased by 5% to $453,400 as the
Company benefited from the effect of cost recovery from certain contract
completion (close-out) vouchers.
Despite improved operating margins, pre-tax income remained comparable
with last year's levels, at $295,400 for the quarter and $506,400 for the six
months just ended. Gains in income from operations were mitigated by
increased interest cost associated with long-term financing on certain plant
equipment, thereby resulting in nominal changes to pre-tax income and net
earnings compared to 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,
1996: (in thousands of dollars except ratios)
6/30/97 12/31/96 NET CHANGES
Working capital $ 1,747 $ 1,932 $ <185>
Current assets 10,025 11,101 <1,076>
Current liabilities 8,278 9,169 <891>
Working capital ratio (1) 1.21 1.21 --
(1) Current assets over current liabilities.
During the first six months of 1997, the Company applied cash flows from
operations to pay down its obligations and finance continued capital
investment for internal use. A significant portion of the latter costs is
associated with enhanced network and information systems which the Company
requires to maintain its technical advantage and improve internal
communication capabilities. This includes in part a highly secured wide area
network with built-in firewalls and dial-in security ("QuestNet"). Management
believes that capital expenditures may exceed $2 million by year-end. The
Company has reached a confidential stand-still agreement with a major Fortune
500 Company, pending the execution of a mutually satisfactory production
contract to be performed out of QuesTech Packaging, Inc. ("QTPI"), the
commercial packaging segment. Although optimistic, management does not
anticipate sales, if any, to materialize until early next year.
Recently, the line of credit agreement was extended for another year,
with no significant change in covenants. Management believes that cash flow
from operations along with its unused credit commitment will be sufficient to
meet operations requirements.
Forward looking statements contained in this report are made pursuant to
the safe harbor provisions of the Private Securities Litigation Report Act of
1955. Certain factors could cause actual results to differ materially from
the statements. These factors include but are not limited to: continuity of
contract funding and customer relationships; retention of key personnel,
particularly those involved in technical efforts; interest rates; changes in
technology; and potential impact of industry consolidation.
INFLATION
The impact of inflation on the Company's costs should be minimal since
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 four years. The following table reflects the Company's
funded and unfunded backlog as of June 30, 1997 and June 30, 1996.
Funded Backlog Unfunded Backlog
June 30 June 30
1997 1996 1997 1996
$38,608,600 $36,031,500 $367,148,200 $396,272,600
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 beyond funding commitments existing as of the period just
ended.
PART II
Item 1. Legal Proceedings
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
The Annual Meeting of Stockholders was held on May 23, 1997 at the
DoubleTree Hotel, 7801 Leesburg Pike, Falls Church, Virginia 22043. At the
Annual Meeting, 90.5% of all outstanding stock entitled to vote was
represented by persons in attendance or by proxy. All nominees to the Board
of Directors were elected and all of the directors (Vincent L. Salvatori,
Gerald F. Mayefskie, Sebastian P. Musco, Robert B. Costello, Vincent M. Russo
and Edward G. Broenniman), received at least 1,421,098 votes or 88% of the
votes counted. The re-appointment of Grant Thornton LLP, as the independent
auditors of the Company for the fiscal year ended December 31, 1997, was
approved by a vote of 1,441,530 (for) to 1,388 (against), or 89% of the votes
counted, with 18,876 votes abstained.
An amendment to the 1996 Incentive Stock Option Plan was adopted by a
vote of 1,378,510 (for) to 51,927 (against), or 85% of the votes counted, with
31,357 votes abstained.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10. Material Contracts
(t) Amended Loan and Security Agreement between the Company and
Signet Bank of Virginia dated May 31, 1997.
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 second
quarter of 1997.
S.E.C. FORM 10-Q
June 30, 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