UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________
Form 10-Q
[X]Quarterly Report, Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 1997, or
[ ] Transition Report, Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period _____ to_____
Commission File Number 2-88617
_________________
QUESTECH, INC.
(Exact name of registrant as specified in its charter)
__________________
Virginia 54-0844913
(State of Incorporation) (IRS Employer Identification Number)
7600A Leesburg Pike
Falls Church, Virginia 22043
(Address of principal executive offices) (Zip Code)
(703) 760-1000
(Registrant's telephone no., including area code)
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:
Common Stock, $0.05 par value 1,617,257
Class Outstanding as of
October 31, 1997
QuesTech, Inc. and Subsidiaries
I N D E X
September 30, 1997
Page No.
PART I. Financial Information
Item 1 Financial Statements (Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS -
September 30, 1997 and December 31, 1996 2
CONSOLIDATED STATEMENTS OF EARNINGS -
Three Months ended September 30, 1997 and 1996;
Nine Months ended September 30, 1997 and 1996 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
Nine Months ended September 30, 1997 and 1996 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -
Nine Months ended September 30, 1997 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -
September 30, 1997 and September 30, 1996 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. Other Information
Item 1 Legal Proceedings 13
Item 6 Exhibits and Reports on Form 8K 13
Officers' Signatures 14
Index to Exhibits 15
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE 16
EXHIBIT 27 - FINANCIAL DATA SCHEDULE 17
QuesTech, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
Sept. 30 Dec. 31
1997 1996
(Unaudited) (Note)
CURRENT ASSETS
Cash and cash equivalents ................ $ 157,300 $ 54,300
Accounts receivable ...................... 11,339,200 9,625,400
Inventories .............................. 60,400 170,400
Prepaid expenses and other ............... 145,100 350,200
Deferred income taxes .................... 900,300 900,300
Total current assets ................ $12,602,300 $11,100,600
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - at
cost less accumulated depreciation and
amortization of $7,690,500 and $6,967,600,
respectively ............................. 5,404,700 4,952,600
GOODWILL LESS ACCUMULATED AMORTIZATION OF
$1,687,600 and $1,571,600, respectively .. 1,249,000 1,365,000
DEFERRED INCOME TAXES, net of valuation
allowance of $262,000 .................... 1,315,600 1,315,600
OTHER ASSETS ............................... 2,764,800 1,884,300
TOTAL ASSETS $23,336,400 $20,618,100
The accompanying notes are an integral part of these statements.
NOTE: The balance sheet at December 31, 1996 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
1997 1996
(Unaudited) (Note)
CURRENT LIABILITIES
Line of Credit ........................... $ 2,426,900 $ 1,227,400
Current maturities of long-term
obligations payable .................... 850,700 374,000
Accounts payable ......................... 2,898,200 1,940,300
Accrued liabilities ...................... 5,361,500 5,627,300
Income taxes currently payable ........... 233,500 --
Total current liabilities ........... $11,770,800 $ 9,169,000
LONG-TERM OBLIGATIONS ...................... 1,224,000 1,721,800
INDEBTEDNESS TO RELATED PARTIES ............ 1,514,100 1,417,100
ACCRUED POST-RETIREMENT BENEFIT COST ....... 1,526,100 1,267,300
OTHER LONG-TERM OBLIGATIONS ................ 832,600 1,010,500
Total Liabilities ................... $16,867,600 $14,585,700
STOCKHOLDERS' EQUITY
Common stock - authorized 3,000,000
shares of $.05 par value, issued
1,656,104 and 1,649,904 shares,
outstanding 1,617,257 shares and
1,610,857 shares at September 30, 1997
and December 31, 1996, respectively .. 82,800 82,500
Additional paid in capital ............... 2,859,100 2,835,600
Retained earnings ........................ 4,062,900 3,652,000
Less Treasury Stock at cost .............. <191,400> <193,100>
Due from SECT ............................ <344,600> <344,600>
Total Stockholders' Equity .......... $ 6,468,800 $ 6,032,400
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,336,400 $20,618,100
The accompanying notes are an integral part of these statements.
NOTE: The balance sheet at December 31, 1996 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,
1997 1996
Revenues .................................. $19,812,700 $20,377,600
Operating expenses
Salaries, wages and employee benefits ... 10,186,800 8,563,500
Other operating expenses ................ 9,275,400 11,479,000
Total operating expenses .......... $19,462,200 $20,042,500
Income from operations ............ 350,500 335,100
Other expense ........................... -- --
Interest expense ........................ <139,500> <131,600>
Earnings before income taxes ...... $ 211,000 $ 203,500
Provision for income taxes ................ <89,400> <89,500>
Net earnings ...................... $ 121,600 $ 114,000
Earnings per share:
Primary ............................... $ .08 $ .08
Fully diluted ......................... $ .08 $ .08
Weighted average number of common shares
outstanding:
Primary ............................... 1,522,791 1,514,753
Fully diluted ......................... 1,522,791 1,517,746
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Nine Months Ended Sept. 30,
1997 1996
Revenues .................................. $58,986,400 $54,718,500
Operating expenses
Salaries, wages and employee benefits ... 30,844,000 25,023,000
Other operating expenses ................ 26,935,500 28,624,500
Total operating expenses .......... $57,779,500 $53,647,500
Income from operations ............ 1,206,900 1,071,000
Other expense ........................... -- --
Interest expense ........................ <493,400> <369,900>
Earnings before income taxes ...... $ 713,500 $ 701,100
Provision for income taxes ................ <302,600> <308,500>
Net earnings ...................... $ 410,900 $ 392,600
Earnings per share:
Primary ............................... $ .27 $ .26
Fully diluted ......................... $ .27 $ .26
Weighted average number of common shares
outstanding:
Primary ............................... 1,514,549 1,516,246
Fully diluted ......................... 1,536,361 1,519,542
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
1997 1996
Increase <Decrease> in Cash and Cash Equivalents
Cash flows from operating activities:
Net Earnings .................................... $ 410,900 $ 392,600
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization .............. 904,400 658,300
Increase in fund values of non-qualifying
assets under deferred compensation plans . <132,400> <160,100>
Changes in assets and liabilities .......... 227,500 1,771,400
Net cash provided by
operating activities ..................... $ 1,410,400 $ 2,662,200
Cash flows from investing activities:
Capital expenditures .......................... <1,656,000> <2,759,200>
Other assets .................................. <492,900> --
Net cash used in investing activities ...... $<2,148,900> $<2,759,200>
Cash flows from financing activities:
Increase in Line of Credit borrowings ......... 1,199,500 10,500
Cash proceeds from exercise of stock options .. 25,600 153,600
Treasury stock transactions ................... -- 34,200
Repayment of long-term debt ................... <303,200> <42,700>
Repayment of indebtedness to related parties .. <600> <43,400>
Repayment of other long-term debt ............. <79,800> <56,600>
Net cash provided by
financing activities ..................... $ 841,500 $ 55,600
Net <decrease> in cash .......................... $ 103,000 $ <41,400>
Cash, Beginning of period ....................... 54,300 178,300
Cash, End of period ............................. $ 157,300 $ 136,900
Cash payments for:
Interest ................................. $ 360,900 $ 162,500
Income taxes ............................. 133,000 678,900
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
1997 1996
Common Stock issued:
Balance at January 1 ...................... $ 82,500 $ 78,900
Exercise of employee stock options ........ 300 3,600
Balance at September 30 ................. 82,800 82,500
Additional paid in capital:
Balance at January 1 ...................... 2,835,600 2,720,100
Exercise of employee stock options ........ 23,500 85,500
Balance at September .................... $2,859,100 $2,805,600
Retained Earnings:
Balance at January 1 ...................... 3,652,000 2,833,700
Net Earnings .............................. 410,900 392,600
Balance at September 30 ................. $4,062,900 $3,226,300
Cost of Treasury Stock:
Balance at January 1 ...................... <193,100> <227,300>
Exercise of employee stock options ........ 1,700 34,200
Balance at September 30 ................. $ <191,400> $ <193,100>
Due from SECT:
Balance at January 1 ...................... $ <344,600> $ <357,600>
Exercise of employee stock options ........ -- 13,000
Balance at September 30 ................. $ <344,600> $ <344,600>
Total Stockholders' Equity .................. $6,468,800 $5,576,700
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 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 nine-month periods
ended September 30, 1997, 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, 1997 consist of raw materials (plastics)
stored at the Company's packaging plant in Newports News, Virginia.
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 $7.50 per share. As of
September 30, 1997, a total of 237,000 shares are subject to outstanding
stock option agreements and if dilutive, are accounted for as common stock
equivalents under the treasury stock method. The bid price of the Company's
stock at September 30, 1997 was $7.25 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
September 30
1997 1996
Revenues 100.00% 100.00%
Operating Expenses 97.95 98.04
Income from operations 2.05% 1.96%
Other Expense --
Interest <.84> <.68>
Provision for income taxes <.51> <.56>
Net Earnings .70% .72%
Three Months Ended
September 30
1997 1996
Revenues 100.00% 100.00%
Operating Expenses 98.22 98.36
Income from operations 1.78% 1.64%
Other Expense -- --
Interest <.71> <.65>
Provision for income taxes <.45> <.43>
Net Earnings .62% .56%
For the nine months ended September 30, 1997, the Company's revenues
were $59 million, up 7.8% over the same period last year. Most of the
growth was driven by continued funding on labor-intensive task order
contracts within the government contracting business units, QuesTech
Research Division ("QTRD") and QuesTech Service Company ("QTSC"). Revenues
from pass-through costs in proportion to total revenues declined, when
compared with the same period last year. Although most of the revenues
continued to be provided by QTRD, QTSC's percentage share of revenues
doubled compared to the same period last year. Sales from QuesTech
Packaging, Inc. ("QTPI") consisted primarily of reimbursements for product
development samples and were not material to the operations. Recently, it
received an initial award of approximately $600,000 to perform on an Army
Dual Use Appropriation Program ("DUAP"). The contract calls for the design,
development and testing of a polymeric tray kit for the U.S. Army Soldier
Systems Command. Sales are not expected to materialize until the fourth
quarter. Additionally, QTPI was notified by a Fortune 500 company of the
availability of funding for a proposed production contract, which if
consummated, will generate additional sales in 1998. Consolidated operating
expenses rose by 7.7% over the same period last year, primarily as a result
of increased direct labor performance on government contracts. Income from
operations was $1.2 million, up 12.7% over the same period last year.
Margins were favorably impacted by reduced losses at QTPI and contract cost
recoveries.
For the quarter ended September 30, 1997, the Company had $19.8 million
in revenues, down 2.77% from last year's third quarter as a result of
reduced activities from materials-intensive contracts. Within the
government contracting industry, revenues are commonly impacted by changes
in the customers' resource requirements. Revenues and margins can fluctuate
based on the mix of direct labor and materials required on contracts.
Operating expenses for the third quarter ended September 30, 1997, declined
2.9%, when compared with the same period last year, with most of the
decrease attributed to reduced contractual requirements for direct
subcontracts and materials. At $350,500, income from operations for the
third quarter this year, reflected a modest 4.6% increase over last year's
quarter, as the Company benefited from improved margins on certain labor-
intensive task order contracts.
Despite the increased interest costs associated with the long-term
financing of QTPI's plant equipment, pre-tax income showed some improvement
at $211,000 and $713,500 for the third quarter and the nine months ended
September 30, 1997, up 3.7% and 1.8% respectively when compared to the same
periods last year.
Net earnings were $121,600 and $410,900 for the quarter and the nine-month
period, up 6.7% and 4.7%, respectively over comparable periods last
year. Improved contract margins provided impetus to net earnings during the
three months just ended.
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,
1996:
9/30/97 12/31/96 NET CHANGES
Working capital $ 831,500 $ 1,931,600 $<1,100,100>
Current assets 12,602,300 11,100,600 1,501,700
Current liabilities 11,770,800 9,169,000 <2,601,800
Working capital ratio (1) 1.07 1.21 <.14>
(1) Current assets over current liabilities.
During the nine months ended September 30, 1997, the Company's main
sources of cash were cash flows from operations and borrowings against its
line of credit facility. Funds from these sources were used to pay down
long-term borrowings and to finance capital investments. Capital
investments reflect the Company's continued commitment to leading edge
technology in connection with the development of its wide area network and
information systems. Additionally, the Company has acquired certain real
estate associated with the recent relocation of certain of its key employees
to the New Jersey facility. The relocation efforts were necessitated by the
closing of the Vint Hill Farms base and the Company's utilization of
available resources to support the follow-on Army contract ("TEFS") based at
Fort Monmouth.
Subsequent to the date of the financial statements, the Company lost a
recompete of a major U. S. Army contract ("HTRD") which currently provides
10% of its total revenues. Efforts on the subject contract are expected to
wind down by mid-year 1998. During the third quarter, the Company has
stepped up B&P efforts and is actively pursuing large bids requiring its
core competencies. Management is unable to provide assurance on the outcome
of its efforts.
Currently, management is exploring more favorable financing terms to
reduce its interest cost on its borrowings.
Forward looking statements contained in this report are made pursuant
to the safe harbor provisions of the Private Securities Litigation Report
Act of 1995. 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 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, 1997 and
September 30, 1996.
Funded Backlog Unfunded Backlog
September 30 September 30
1997 1996 1997 1996
$26,288,900 $38,837,400 $359,803,400 $389,387,500
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 Company, including its subsidiaries, are not subject to any
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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required in connection with this quarterly report on
Form 10-Q are listed in the Exhibit Index following the
signature page. Certain of such exhibits, which have
heretofore been filed with the Securities and Exchange
Commission and which are designated by reference to their
exhibit numbers in prior filings, are incorporated herein as
exhibits by such reference and made a part hereof.
(b) No reports on Form 8-K were filed during the quarter ended
September 27, 1997.
S.E.C. FORM 10-Q
September 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
Chairman of the Board and
Chief Executive Officer
Date: ______________________ ________________________________
Joseph P. O'Connell, Jr.
Vice President and
Chief Financial Officer
INDEX TO EXHIBITS
Sequential
Exhibit No. Description page numbers
3.3 Articles of Incorporation and Bylaws,
filed on December 27, 1983 with the Company's
Registration Statement on Form S-1 are
incorporated herein by reference. *
3.4 None. *
3.9 None. *
10.a Stock Option Plans. *
10.a.i 1996 Stock Option Plan. *
10.a.ii Stock Option Plan for Non-employee Directors. *
10.b Agreement dated between Vincent L. Salvatori
and QuesTech. *
10.c Agreement dated between Gerald F. Mayefskie
and QuesTech. *
10.d Confidential Settlement Agreement dated
February 2, 1994 between William E. Bigler, Jr.
and Jerome M. Raffel and QuesTech, Inc.
(redacted in part). *
10.e Confidential Settlement Agreement with Oscar E.
Hayes, dated August, 1995. *
10.t Amended Loan and Security Agreement between the
Company and Signet Bank of Virginia dated
May 31, 1997. *
11 Statement Re: Computation of Earnings Per Share 17
27 Financial Data Schedule 18
*Previously filed, incorporated herein by reference.