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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995 Commission File No. 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 Identification No.)
incorporation or organization)
7600-A Leesburg Pike
Falls Church, Virginia 22043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code -- (703) 760-1000
_______________________________
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common Stock ($.05 par value) NASDAQ
_______________________________
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of Common Stock held by non-affiliates of the
registrant at March 6, 1996 -- $9.6 million.
Number of shares of Common Stock outstanding on March 6, 1996 --
1,536,461 shares.
PART I
Item 1. BUSINESS
QuesTech, Inc. (the Company), provides a broad spectrum of
professional services to the uniquely defined requirements of each
customer. Corporate products include scientific, engineering, research,
and management services in electronics, information warfare, information
technology, computer software, systems integration, industrial analysis and
other advanced technologies for customers, primarily in the fields of
command, control and communications, information, aerospace, and industrial
modernization.
The Company's 1995 revenues were derived primarily from competitively
awarded contracts with U. S. Government clients.
Systems Engineering and Scientific Research
The Company performs a broad range of high technology services for
agencies of the Department of Defense ("DOD") and the national security
community. These services are provided through a number of operating
units, each focused on a distinct market and specific customer base.
QuesTech Research Division ("QTRD")
QuesTech Research Division (QTRD) provides diversified, high
technology engineering and management services to various industries and
DOD agencies. QTRD performs engineering services from concept formulation
and systems design, through engineering, technical and program management
support, to research and development. QTRD solves complex problems for its
customers, primarily in the fields of intelligence, electronic warfare,
command, control and communication aerospace, and industrial modernization.
QTRD services also include engineering and management support to
Government and industry in intelligence analysis, tactical and processing
systems, software development, systems integration, industrial base
analysis, technology assessments, manufacturing technology, and electronic
warfare.
QuesTech Service Company ("QTSC")
This wholly-owned subsidiary of the Company provides hands-on
engineering field services, including equipment installation, test
monitoring, and operations and maintenance. QTSC also provides
cost-effective program support services (including system acquisition analyses,
integrated logistics support, equipment procurement, failure analysis,
maintenance provisioning, training and inspections) to customers in the
Department of Defense and intelligence communities. QTSC deploys personnel
to locations from coast to coast and around the world to perform on
programs involving electronic warfare, computer control and communication,
signal intelligence and communications systems.
QuesTech Packaging, Inc. ("QTPI", formerly QuesTech Ventures, Inc.)
This wholly-owned subsidiary changed its name effective January 19,
1996 to mark its transition from an R&D venture to a manufacturing entity.
During 1994, it entered into a supply contract with Munchkin, Inc. to
manufacture a contractually specified quantity of infant bottle liners.
Following the customer's acceptance of a prototype in 1995, it initiated
production efforts towards the end of the fourth quarter. It has since
produced, packaged and delivered millions of liners which have been
accepted by its customer for retail sale. Although producing below full
capacity at year-end, QTPI intends to increase its production level by
bringing other machines in service during 1996.
U. S. Government Contracts
The Company's business is primarily derived from competitively awarded
U. S. Government contracts.
United States Government contracts and related customer orders are
generally subject to termination at the convenience of the United States
Government whenever it believes that such termination would be in its best
interests. Under contracts terminated for the convenience of the United
States Government, the Company is generally entitled to receive payment for
work completed and allowable termination costs. Whether the occurrence of
any such termination would have an adverse effect on the Company would
depend upon the particular contract and the nature of the termination.
The Company's business is conducted pursuant to three types of
contracts: cost reimbursable, time and materials, and fixed price.
Certain of the Company's incurred costs are reimbursable under cost-
reimbursable type contracts. These costs are subject to incurred cost
audits in which the government may disallow some of the costs claimed for
contract costing purposes. Management is not aware of any adjustments that
will result in a material charge to current or future operations, as a
result of these audits.
U. S. Government contracting activity involves procurement by formal
advertising or by sole source procedures. The Government is authorized to
forego formal advertising for the procurement of professional, experi-
mental, developmental or research services when the availability of
supplies or services from only one source or other circumstances render it
impractical to secure competitive bids.
Backlog
The term "backlog" includes the aggregate contract revenues remaining
to be earned at the stated time. The following table reflects the
Company's backlog as of December 31, 1995 and December 31, 1994:
Funded Backlog Unfunded Backlog
December 31, December 31,
1995 1994 1995 1994
$23,592,600 $28,712,100 $427,917,500 $167,224,500
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 cannot provide any assurance that the customer will
authorize funding amounts in addition to funding commitments existing as of
the end of 1995. However, the Company historically has experienced the
funding of a majority of its unfunded backlog.
Personnel
The Company and its subsidiaries, as of December 31, 1995, had 437
employees on a regular full-time and part-time basis.
The nature of the services provided by the Company requires the
employment of large numbers of professional and technical personnel,
including engineers, analysts, scientists, computer software specialists,
computer programmers and skilled technicians. The Company's future success
will depend to a substantial extent on its ability to continue to attract
and retain qualified personnel.
Competition
The Company has many competitors, including large, diversified firms
having greater financial resources and larger technical staffs. Other
competitors, although smaller, are highly qualified in specialized areas
and may offer price advantages or may receive greater benefits under the
Small Business Set-Aside Program, which includes small and disadvantaged
businesses. Furthermore, the U. S. Government's own in-house capabilities
and federally sponsored, not-for profit contract research centers compete
with the Company. The Government contracting industry is faced with
changes such as global and political influences on the DOD budget, changes
in labor conditions, and the emergence of new competing companies, any of
which could have a material effect on the Company's efforts and profits.
Patents
U. S. Patent No. 4,539,625, entitled LIGHTING SYSTEM COMBINING
DAYLIGHT CONCENTRATORS AND AN ARTIFICIAL SOURCE, issued September 3, 1985.
Corresponding foreign patent: Canadian Patent No. 1,236,808 issued May 17,
1988.
U. S. Patent No. 4,767,902, entitled METHOD & APPARATUS FOR THE
MICROWAVE JOINING OF CERAMIC ITEMS, issued August 30, 1988. Corresponding
foreign patents: None. However, applications have been filed in seven
foreign countries: Canada, Japan, France, Great Britain, Italy, Sweden and
Germany.
U. S. Patent No. 4,964,591, entitled PROJECTILE HAVING NONELECTRONIC
INFRARED HEAT TRACKING DEVICE, issued October 23, 1990. European Patent
No. 392,306 granted on December 28, 1994.
U. S. Patent No. 4,757,172, entitled METHOD & APPARATUS FOR THE
MICROWAVE JOINING OF NON-OXIDE CERAMIC ITEMS, issued July 12, 1988.
European Patent No. 308,593 granted February 26, 1992.
U. S. Patent No. 4,836,734, entitled MELT-PHASE THERMAL PRESSURE
APPARATUS FOR FORMING OF PLASTIC BLANKS INTO RETORTABLE CONTAINERS, issued
June 6, 1989. European Patent No. 330,721 granted on January 22, 1992.
U. S. Patent No. 4,997,691, entitled RETORTABLE CONTAINER, issued
March 5, 1991. European Patent No. 363,918 granted on May 24, 1995.
U. S. Patent No. 5,091,231, entitled RETORTABLE CONTAINER, issued
February 25, 1992. Corresponding foreign patents: None. However,
applications have been filed in fifteen foreign countries: Australia,
Canada, Austria, Belgium, France, Germany, Greece, Italy, Luxembourg,
Netherlands, Spain, Sweden, Switzerland, Liechtenstein, and the United
Kingdom.
Service Mark:
U. S. Service Mark Reg. No. 1,531,368, QuesTech, Inc., issued March
21, 1989.
U. S. Service Mark Reg. No. 1,931,615 issued on October 31, 1995.
Trademark
QuesTech, Inc. was issued U.S. Trademark Registration No. 1,531,368 on
March 21, 1989, and U.S. Trademark Registration No. 1,933,165 on November
7, 1995.
Item 2. PROPERTIES
As of the date of this report, the Company maintains leases throughout
the United States, which includes the Falls Church, Virginia headquarters'
lease for 25,939 square feet. In addition, there are material leases in
five other locations totaling approximately 70,000 square feet. Management
believes that its existing leases are suitable and adequate.
Item 3. LEGAL PROCEEDINGS
The following information is furnished regarding pending litigation
involving the Company:
Limited Partnership and Guy Beatty v. QuesTech, Inc.
In January 1996 the Company was named as a defendant in a lawsuit
captioned 7600 Limited Partnership and Guy Beatty v. QuesTech, Inc. The
plaintiffs (the Company's former landlord, a partnership, and its general
partner) seek attorneys' fees incurred in two earlier landlord/tenant cases
(a contract claim). In addition, plaintiffs have claimed damages for five
torts: abuse of process, malicious prosecution, tortious interference with
business relationship, intentional infliction of emotional distress, and a
"generalized tort." One or more of the tort claims is covered by the
Company's general liability insurer, which is providing the counsel for
defense for the entire lawsuit at its cost. The insurer does not have any
liability for the contract claim for attorneys' fees. The amount of
damages to which the Company is exposed is not expected to exceed the
amount which the Company had previously accounted for, based on exposure to
the same claim for contract fees in the two prior landlord-tenant cases.
The Company, including any of 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters shall be submitted to a vote of security holders
at the Company's Annual Meeting on May 24, 1996:
1. The election of six directors of the Company;
2. The ratification of the selection of Grant Thornton LLP as
the Company's independent public accountants for its fiscal year
ending December 31, 1996; and
3. The proposed adoption of a new Incentive Stock Option Plan to
replace the Company's 1994 Incentive Stock Option Plan.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's authorized capital stock consists of 3,000,000 shares at
a par value of $0.05 per share, of which, 1,578,000 are issued, 1,536,461
are outstanding and 41,539 shares are in Treasury. Of the shares
outstanding, 183,392 shares are held by the Company's Stock Employee
Compensation Trust. The Company's common stock is traded on NASDAQ. Set
forth below are the high and low selling price 1 for the common stock for
each full quarter of 1995 and 1994, during which the common stock has been
publicly traded as reported by NASDAQ.
Period High Low
1st fiscal quarter - 1995 4.75 3.75
2nd fiscal quarter - 1995 9.75 4.63
3rd fiscal quarter - 1995 8.63 7.00
4th fiscal quarter - 1995 9.75 5.75
1st fiscal quarter - 1994 2.63 2.13
2nd fiscal quarter - 1994 4.00 2.50
3rd fiscal quarter - 1994 3.75 3.25
4th fiscal quarter - 1994 3.88 3.63
As of December 31, 1995 there were approximately 287 stockholders of
record, including individuals and persons whose stock is held in street
name by stockbrokers.
The Company has not paid dividends on its Common Stock since its
inception. The payment of dividends in the future, if any, will be
determined by the Board of Directors.
1/ The high and low over-the-counter market quotation reflects inter-
dealer prices, without retail mark-up, mark-down, or commission, and
may not necessarily reflect actual transactions.
PART II
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data
with respect to the Company and is qualified by reference to the
Consolidated Financial Statements and Notes thereto included in Part IV.
Years Ended December 31,
Operations Statements Data: 1995 1994 1993 1992 1991
(In thousands, except
earnings/loss per share):
Revenues .................... $57,951 $54,696 $52,649 $48,653 $39,130
Income from operations before
other income<expense> and
income taxes .............. 2,028 1,877 1,431 1,315 1,011
Charges arising from settle-
ments of litigation ....... 722 843 1,754 224 --
Earnings<loss> before income
taxes ..................... 910 647 <630> 848 571
Extraordinary gain .......... -- -- -- 372 --
Net earnings<loss> .......... 520 318 <286> 438 304
Earnings<loss> per common
share and common equivalent
share:
Primary earnings<loss>
per share ................. $ .35 $ .23 $ <.18> $ .28 $ .19
Fully diluted earnings/<loss>
per share ................. $ .34 $ .23 $ <.18> $ .28 $ .19
Weighted average number of
shares outstanding (net of
183,392, 221,792 and
221,792 shares held by
SECT) during 1995, 1994
and 1993:
Primary .................. 1,485 1,397 1,567 1,568 1,568
Fully diluted ............ 1,540 1,411 1,567 1,568 1,568
Balance Sheet Data:
Total Assets ................ $16,424 $15,759 $17,610 $14,896 $16,001
Long-term debt .............. 156 213 274 78 290
Other long-term obligations . 1,137 831 884 -- --
Stockholders' equity ........ $ 5,048 $ 4,653 $ 4,335 $ 5,065 $ 4,612
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: 1995 Compared With 1994
Revenues
During 1995, the Company's revenues were $57.9 million, up 6% over
1994. The Company's business base is made up of the government contract
segment and the commmercial packaging segment. The government contract
segment consists of QuesTech Research Division ("QTRD") and QuesTech
Service Company ("QTSC"); the packaging segment consists of QuesTech
Packaging, Inc. ("QTPI"). The growth during 1995 was due to a 10% increase
in revenues at QTRD, which sustained the same growth rate during each of
the last two years, despite continued business contraction at QTSC. QTPI
posted sales during late December, 1995, as a result of an initial shipment
to its customer under a supply contract.
Government Contracts
In the aggregate, revenues from Department of the Army contracts
account for a significant portion of the Company's revenue base.
Specifically, one such contract accounted for over 40% of the Company's
revenues during each of the last three years. During 1995, however, most
of the growth arose primarily from increased efforts on Air Force
contracts.
QTRD continued to contribute 95% towards consolidated revenues.
During 1995, it successfully recompeted a major Department of the Army
contract, which has an award value of $300 million over a performance
period of five years. However, QTRD did not commence performance under the
new award, pending a resolution of a bid protest filed by a competitor.
The GAO Inspector General subsequently ruled in favor of the Company,
resulting in the issuance of delivery orders during 1996. Thus, the new
contract did not impact 1995 revenues.
Commercial Packaging
QTPI manufactures thermoformed infant bottle liners, which are
marketed under the "1-Step" Munchkin brand. In December 1995, QTPI made an
initial shipment to Munchkin, Inc. based on a small production lot. At
year end, manufacturing facilities were first placed in service and were
operating significantly below capacity. Increased sales are principally
dependent on the ability of QTPI to increase its production during 1996.
Operating Expenses
The Company's operating expenses during 1995 rose to $56 million, up
5.88% over 1994. Salaries, wages and employee benefits remained constant
as a percentage of sales, primarily as a result of heightened direct labor
activity on government contracts. The increase in other operating expenses
also included the cost of subcontract teaming efforts and travel related to
performance on government contracts, and start-up production and
engineering costs at QTPI. Excluding corporate expense allocations, the
cost of maintaining QTPI's operations was approximately $1.2 million, up
from approximately $546,000 during 1994. Most of the cost increase was
related to technical management and engineering support (not associated
with equipment fabrication), prior to the manufacturing equipment being
placed in service.
Income from Operations
Income from operations for 1995 was approximately $2.0 million, up 8%
over 1994, as a result of favorable margins and increased billable hours on
government contracts. Favorable margins from the government contracts
business segment allowed the Company to support the start-up operations of
QTPI, and achieve modest growth in operating income.
Interest Expense
Interest expense increased 2% over 1994, primarily because of
increased borrowings under the line of credit. The line of credit interest
expense was partially mitigated by reduced interest cost associated with
curtailments of other long-term borrowings.
Charges Arising from Settlements of Litigation
During 1995, other expense was $722,100, down from $843,100 during
1994, resulting from cost savings made possible by the conclusion of
significant litigation activities, including a re-structuring of its case
planning and strategy. Based on its assessment of the expected outcome of
outstanding litigation, management believes that it has provided adequate
allowances in the financial statements.
Taxes
During 1995, the Company's effective tax rate was 42.8% of pre-tax
income, compared to 50.9% during 1994. For tax purposes, the Company
benefited from an increase in certain non-taxable income.
Net Earnings
For 1995, primary and fully diluted earnings per share were $.35 and
$.34 on earnings of $520,100; these amounts reflected a 52% and 48%
increase over per share earnings of $.23 (primary and fully diluted,
respectively) during 1994. The increase in per share amounts was less than
the 64% net earnings growth due to the dilutive impact of common stock
equivalents.
LIQUIDITY AND SOURCES OF CAPITAL
Liquidity and Cash Flows
The following table compares selected financial data that measure the
Company's liquidity and capital resources at December 31, 1995, 1994 and
1993 (in thousands of dollars, except for ratios):
1995 1994 1993
Working capital $ 1,995 $ 2,903 $ 2,877
Current assets 9,595 10,799 11,870
Current liabilities 7,600 7,896 8,993
Availability under
line of credit 3,606 3,746 2,465
Working capital ratio (1) 1.26 1.37 1.32
(1) Current assets over current liabilities.
During 1995, the principal use of cash flow was to fund capital
expenditures of $2.0 million. Of this amount, $1.1 million was related to
QTPI's manufacturing equipment and build-out costs. The remaining amount
was expended towards the following: leasehold improvements at the
headquarters' office (as a result of the renegotiated lease) and QTRD field
offices; purchases/upgrades of office equipment, primarily computers; and
the development of a new management information system. The Company also
paid its current landlord $1,000,000, to re-negotiate the headquarters
lease and permit reduced occupancy expenses for the duration of the lease.
The use of cash for financing activities included a cash advance to a
former founder as initial payment towards the cost of acquiring his shares.
At the end of 1995, the Company acquired inventories which consisted of
rolls of plastic sheets and unpackaged liners at QTPI. Management expects
to shorten the lead time between production and shipment, thereby
minimizing work in process. However, inventories in the aggregate can be
expected to increase in 1996 due to anticipated growth in levels of
production. Cash to defray these transactions was principally provided by
income from operations.
During 1994, the principal use of cash flow was to fund financing
activities, including cash advance to the Stock Employee Compensation Trust
("SECT") for acquisition of stock from former founders, and repayments made
under the line of credit. Cash applied toward capital expenditures was
$355,000.
During 1993, cash flows were applied towards capital expenditures in
the amount of $559,500 and financing transactions, consisting of line of
credit curtailments and payments under various agreements with former
founders.
Capital expenditures in excess of $3.0 million are planned for 1996.
A significant portion of this amount is allocated towards expanding QTPI's
production equipment and facilities. The remaining amount is intended for
the following: new furniture and office equipment slated for newly opened
sites to support government contract requirements; and the installation of
a wide area network. Management is evaluating its options for financing
certain of its manufacturing equipment expected to be placed in service
during 1996.
Long-term Capital Requirements
At December 31, 1995, the Company had long-term obligations amounting
to $3.8 million, which consisted of the following:
- - - installment payments on several capital leases for office equipment,
expiring in 1997 and 1999;
- - - sums owed to former founders as a result of a Confidential Settlement
Agreement;
- - - sums owed to certain related parties in connection with their employment
agreements, the major portion of which remains non-executory until the
subject employees' retirement or termination.
In addition to the accrued postretirement benefit cost of $1.2
million, the Company has an unrecognized transition obligation of $2.0
million in connection with its postretirement benefit plans. The
obligation was deferred upon the Company's adoption of SFAS 106 during
1993.
FUTURE IMPACT OF KNOWN TRENDS, DEMANDS, COMMITMENTS, EVENTS OR
UNCERTAINTIES
Defense Industry
The current business environment for the defense contracting industry
continues to be characterized by a general atmosphere of uncertainty. This
uncertainty is the result of several factors including: 1) defense budget
cuts; 2) base closures and consolidations; and 3) increased competitive
pressures. These factors will continue to shape the defense contracting
industry over the next several years. However, given the emergence of
unforeseen threats, there is the possibility these trends may be curtailed
or reversed. In addition, several segments within the industry, such as
the area of Information Warfare, will provide growth opportunities for
contractors.
Management anticipates that there will be little impact on the
Company's existing contracts during 1996 due to base closures. Vint Hill
Farms Station, the site of QTRD's major Army support contract, is one of
the bases scheduled to be closed by the DOD in late 1997. However,
management believes the mission being supported at Vint Hill -- high
technology engineering services -- will be relocated to another base, and
will not go away. The Company will provide support to this mission under
its newly awarded contract. The Company recently won a large Army high
technology engineering services contract. Consequently, it is anticipated
that Army work will continue to remain a significant percentage of the
Company's overall business over the next several years.
As the result of the decreased defense appropriations, competition
among contractors has increased considerably. Large contractors who
typically targeted only large programs now pursue programs of any size.
Therefore, bigger contractors have become the Company's direct competitors.
Further, competitive pressures have caused many firms to merge with other
companies. The competitors who remain often gain increased expertise and
experience through the mergers, resulting in formidable competition for the
Company. Management believes the Company is positioned well to withstand
the rigors of the current environment through a superior technical track
record and competitive pricing.
RESULTS OF OPERATIONS: 1994 Compared With 1993
Revenues
During 1994, the Company experienced revenue growth of 4% over 1993,
compared with 8% between 1993 and 1992. Consolidated revenues increased
$2.1 million, from $52.6 million to $54.7 million. The growth in 1994 was
due to a 10% increase in revenue in QuesTech Research Division ("QTRD"),
which sustained the same growth rate during each of the last two years.
QuesTech Service Company and QuesTech Packaging, Inc. experienced
reductions in revenues.
QuesTech Research Division (QTRD): QTRD contributed towards 92% of
the Company's consolidated revenues, up from 87% the previous year. This
increase was due to new contract awards. In 1994, 41% of the division's
revenues were provided by a major Army contract based at Vint Hill Farms
Station, down from 48% of the division's revenues in 1993. The contract
was subject to re-competition at the end of 1994. The decline in this
contract's contributions to QTRD's total revenues was offset by increased
tasking in other contracts.
QuesTech Service Company (QTSC - O&M): During 1994, QTSC's revenues
were $4.3 million, down from $6.5 million in 1993. The decline in revenues
was due mainly to the loss of a follow-on contract as a result of the
closing of a Navy facility. However, QTSC won two new contracts in the
latter half of 1994. It was expected that revenues from these contracts
would sustain QTSC revenues in 1995.
QuesTech Packaging, Inc. (QTPI): During most of 1994, QTPI
aggressively marketed its patented technology (i.e., a billet forming
system which produces laminate barrier plastic containers) in several trade
shows. In September 1994, it entered into a contract with a major bottle
supplier, Munchkin Bottling Inc. (now Munchkin, Inc.), to produce a large
number of infant bottle liners over five years. During the remaining part
of the year, it developed the prototype according to specifications and
started to outfit its facility to accommodate mass-scale production runs.
No significant revenues were recognized by QTPI during 1994, compared to
$150,000, derived during 1993 from a contract with Shell Internationale,
which was not renewed.
Operating Expenses
The Company's operating expenses rose to $52.8 million, up 3.1%, but
slightly less than the rate of revenue growth. Salaries, wages and
employee benefits remained practically at the same level as 1993. Other
operating expenses increased from $24.5 million to $26.1 million, up 6.5%
over 1993. Most of this increase was due to direct costs associated with
materials-intensive government contracts. Additionally, the Company
increased spending on bids and proposals in connection with major recompete
and solicitation efforts. Overhead expenses, consisting mostly of the
costs of support staff for technical personnel and facility-related
expenses, remained at the same level during 1994 and 1993, thereby
mitigating the cost increase. The cost of maintaining QTPI's operations
was approximately $700,000 during 1994, compared to $600,000 during 1993.
QTPI's increased costs reflected the costs of prototype development
pursuant to customer specification, prior to mass production. During 1994,
the Company had reserves which were adequate and did not set aside any
reserves for contract cost disallowances. The Company had reserved
approximately $600,000 for cost disallowances during 1993. Based on
existing circumstances and internal controls, management believes that its
current reserves for potential cost disallowances are adequate.
Income from Operations
Income from operations for 1994 was $1.9 million, compared to $1.4
million in 1993. The 31.2% increase, compared to a 9% increase between
1993 and 1992, was made possible through the following:
a) favorable margins on existing contracts due to the optimal
realignment of project resources and advantageous rates;
b) management's continued cost containment efforts and controls,
which have been in place since 1989;
c) re-engineering of operations, with a focus on consolidation, or
maximization of use, of existing corporate resources.
Interest Expense
Interest expense increased during 1994 due to a higher effective
borrowing rate on the line of credit and accrued interest associated with
discounted long-term obligations.
Charges Arising from Settlement of Litigation
During 1994, the Company was a defendant in two cases involving former
officers alleging entitlement to postretirement benefits under the
Company's Officers and Managers Deferred Compensation Plan. The Denzler
case is still on appeal. Management expects that the legal outcome will
not have a material impact on the statements. The Baptiste case was
settled. The cost of the settlement was deferred as a component of the
unrecognized plan loss, in line with the amortization criteria for such
loss, as prescribed by SFAS 106, "Accounting for Postretirement Benefits
Other Than Pensions." Costs related to the legal proceedings, including
attorneys' fees, were charged to Other Expense (non-operating charges),
consistent with the treatment of similar costs in 1993. Additionally,
during 1994, the Company was engaged in litigation with its former
landlord, 7600 Limited Partnership regarding (a) release of the Company
from 9,250 square feet on the second floor of the Headquarters Building as
a result of the Company's sublease in April, 1992, and (b) mis-measurement
of the Company's leased space on the first and second floors by the
landlord. The courts found in favor of the landlord in both of these cases
during 1995. The attorneys' fees and costs connected with these cases were
charged to Other Expense.
As a result of the Company's litigation with its present landlord,
John Hancock Life Insurance Company ("John Hancock"), a settlement was
entered into providing for, among others, the termination of the Company's
current Lease and Lease Amendment for its second floor space in the
Headquarters Building of 28,817 square feet, a New Lease Agreement for the
first floor of the Headquarters containing the same economic terms as the
Original Lease, and providing a complete release between the parties for
all prior claims under the original Lease and Lease Amendment. These
litigation costs with John Hancock were reported as Other Expense during
1994 and 1993. The higher amount of Other Expense reported in 1993
included the cost of settling the claims of two former founders.
Taxes
During 1994, the Company's effective tax rate was 50.9% of net
earnings compared to a tax benefit rate of 54.7% of the 1993 loss. The tax
benefit during 1993 was enhanced by the Company's recovery of alternative
minimum tax credits paid in prior years. Each period's effective tax rate
was higher than the statutory rate as a result of the effect of goodwill
amortization which is non-deductible.
Net Income/Loss
For 1994, earnings per share were $.23 on earnings of $317,800,
compared to 1993's loss per share of $<0.18> on net loss of $<285,600>.
Excluding non-operating charges for both years, earnings per share were
$.52 for 1994, up 60% over $.32 in 1993.
IMPACT OF INFLATION
The impact of inflation on the Company's costs is minimal due to the
fact that increased costs are normally included in its pricing structure or
otherwise recovered through reimbursement of contract costs incurred.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUESTECH, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
December 31, 1995, 1994 and 1993
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1995
AND 1994 4
CONSOLIDATED STATEMENTS OF OPERATIONS - YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 7
CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS
ENDED DECEMBER 31, 1995, 1994 AND 1993 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11-38
SUPPLEMENTAL INFORMATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 40
Report of Independent Certified Public Accountants
Stockholders
QuesTech, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of QuesTech, Inc.
(a Virginia corporation) and Subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, stockholder's equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of QuesTech, Inc. and Subsidiaries
as of December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
We have also audited Schedule II as of December 31, 1994 and for each of the
three years then ended. In our opinion, this schedule presents fairly the
information required to be set forth therein.
Grant Thornton LLP
Vienna, Virginia
February 12, 1996
QuesTech, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
1995 1994
CURRENT ASSETS
Cash and cash equivalents ................. $ 178,300 $ 261,900
Accounts receivable
Trade ................................... 8,341,900 9,114,600
Other ................................... 16,500 118,300
Inventories ............................... 81,500 --
Prepaid expenses and other ................ 225,500 335,500
Deferred income taxes ..................... 751,300 968,500
Total current assets ................. 9,595,000 10,798,800
EQUIPMENT AND LEASEHOLD IMPROVEMENTS - at
cost less accumulated depreciation and
amortization .............................. 2,256,500 938,500
GOODWILL, less accumulated amortization of
$1,417,000 and $1,262,500, respectively
........................................... 1,519,600 1,674,100
DEFERRED INCOME TAXES, net of valuation
allowance of $148,000 ..................... 1,218,100 805,200
OTHER ASSETS ................................ 1,834,500 1,542,700
TOTAL ASSETS ................................ $16,423,700 $15,759,300
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
CURRENT LIABILITIES
Line of credit ............................ $ 394,100 $ 254,200
Current maturities of long-term
obligations .............................. 57,100 51,100
Accounts payable ........................... 2,268,800 2,126,900
Accrued liabilities and deferred
credits .................................. 4,834,300 5,344,300
Income taxes
Currently payable ........................ 45,200 119,900
Total current liabilities ............ 7,599,500 7,896,400
LONG-TERM OBLIGATIONS ........................ 156,200 213,300
INDEBTEDNESS TO RELATED PARTIES .............. 1,321,900 1,188,800
ACCRUED POSTRETIREMENT BENEFIT COST .......... 1,161,000 976,800
OTHER LONG TERM OBLIGATIONS .................. 1,137,300 831,300
Total liabilities .................... 11,375,900 11,106,600
COMMITMENTS AND CONTINGENCIES ................ -- --
STOCKHOLDERS' EQUITY
Common stock - authorized 3,000,000 shares
of $.05 par value, issued 1,578,000
shares, outstanding 1,536,461 and
1,568,000 at December 31, 1995 and
1994, respectively ....................... 78,900 78,900
Additional paid in capital ................. 2,720,100 2,722,700
Retained earnings .......................... 2,833,700 2,313,600
Less: Treasury Stock at cost .............. <227,300> <30,000>
Due from SECT .............................. <357,600> <432,500>
Total stockholders' equity ........... 5,047,800 4,652,700
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $16,423,700 $15,759,300
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1995 1994 1993
Revenues ............................. $57,951,200 $54,696,400 $52,649,400
Operating expenses
Salaries, wages and
employee benefits ................ 28,269,100 26,719,900 26,665,700
Other operating expenses ........... 27,653,800 26,099,600 24,552,800
Total Operating Expenses ............. 55,922,900 52,819,500 51,218,500
Income from operations ........... 2,028,300 1,876,900 1,430,900
Other expense
Interest expense ................... <395,800> <386,400> <307,400>
Charges arising from settlements
of litigation .................... <722,100> <843,100> <1,753,600>
Earnings/<loss> before
income taxes ................... 910,400 647,400 <630,100>
Income tax <expense>/benefit ......... <390,300> <329,600> 344,500
NET EARNINGS/<LOSS> ........... $ 520,100 $ 317,800 $ <285,600>
Weighted average number of common
shares outstanding:
Primary .......................... 1,484,680 1,396,594 1,567,392
Fully diluted .................... 1,540,208 1,410,902 1,567,392
Earnings/<loss> per share:
Primary ............................ $ .35 $ .23 $ <.18>
Fully diluted ...................... $ .34 $ .23 $ <.18>
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31,
1995 1994 1993
Common Stock:
Issued (including treasury shares): .. $ 78,900 $ 78,900 $ 78,900
Additional paid in capital:
Beginning balance .................. 2,722,700 2,722,700 2,722,700
Exercise of options ................ <2,600> -- --
Ending balance ..................... 2,720,100 2,722,700 2,722,700
Retained Earnings:
Beginning balance .................... 2,313,600 1,995,800 2,281,400
Net Earnings/<loss>................... 520,100 317,800 <285,600>
Ending balance ....................... 2,833,700 2,313,600 1,995,800
Treasury Shares:
Beginning balance (10,000 shares) .... <30,000> <30,000> <30,000>
Purchase of shares (31,539
shares during 1995) ................ <197,300> -- --
Ending balance (41,539 shares) ....... <227,300> <30,000> <30,000>
Due from SECT:
Beginning balance .................... 432,500 432,500 432,500
Exercise of options .................. <74,900> -- --
Ending balance ....................... <357,600> <432,500> <432,500>
Foreign Currency Translation Adjustment:
Beginning balance .................... -- -- 11,900
Current year adjustments ............. -- -- <11,900>
Ending balance ....................... -- -- --
Total Stockholders' Equity ............. $5,047,800 $4,652,700 $4,334,900
Shares of Common stock authorized ...... 3,000,000 3,000,000 3,000,000
Shares of Common stock issued .......... 1,578,000 1,578,000 1,578,000
Shares of Treasury stock:
Beginning balance .................... 10,000 10,000 10,000
Acquisition of Treasury stock ........ 31,539 -- --
Ending balance ....................... 41,539 10,000 10,000
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31,
1995 1994 1993
Shares held by the SECT:
Beginning balance .................... 221,792 221,792 221,792
Release of Shares .................... <38,400> -- --
Ending balance ....................... 183,392 221,792 221,792
The accompanying notes are an integral part of these statements.
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1995 1994 1993
Increase (Decrease) in Cash and
Cash Equivalents
Cash flows from operating activities:
Net earnings ..................... $ 520,100 $ 317,800 $ <285,600>
Adjustments to reconcile net
earnings to net cash from
operating activities:
Depreciation and Amortization .. 677,300 695,800 759,000
Amortization of deferred credits -- -- <217,100>
Reserve for unrecovered contract
costs and doubtful accounts .. 185,000 -- 630,000
Provision for lease settlement . -- <626,400> --
Increase in fund values of
nonqualifying plan assets .... <197,200> <152,100> <339,600>
Changes in assets and liabilities:
Accounts receivable .......... 689,500 1,467,900 <1,251,900>
Inventories .................. <81,500> 46,400 11,200
Prepaid expenses and other
assets ..................... 194,500 <274,300> <564,600>
Accounts payable and accrued
expenses.................... <175,400> <21,000> 1,023,000
Income taxes payable ......... <74,700> <325,800> 185,600
Deferred taxes payable ....... <195,700> 136,100 <1,024,500>
Indebtedness to related parties
and other long-term
obligations .................. 559,100 108,100 1,386,300
Accrued postretirement benefits 184,200 <113,900> 1,090,700
Net cash provided by
operating activities 2,285,200 1,258,600 1,402,500
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1995 1994 1993
Cash flows from investing activities:
Capital expenditures ............ <2,019,900> <355,100> <559,500>
Proceeds from return on investment
in whole life policies ........ -- 250,300 --
Net cash used in
investing activities <2,019,900> <104,800> <559,500>
Cash flows from financing activities:
Increase/<Decrease> in line of
credit ........................ 139,900 <281,000> <211,700>
Cash advance to SECT for stock
acquisition .................... -- <432,500> --
Cash proceeds from exercise of
stock options .................. 51,700 -- --
Repayment of long-term debt ..... <51,100> <97,400> <214,900>
Repayment of indebtedness to
related parties ............... <242,300> <192,000> <332,200>
Repayment of other long-term debt <70,400> <61,500> --
Purchase of Treasury Stock ...... <176,700> -- --
Net cash used in
financing activities <348,900> <1,064,400> <758,800>
Effect of Exchange Rate Changes
on cash .......................... -- -- <11,900>
Net increase<decrease> in cash ..... <83,600> 89,400 72,300
Cash, beginning of period .......... 261,900 172,500 100,200
Cash, end of period ................ $ 178,300 $ 261,900 $ 172,500
Cash payments for:
Interest ......................... 147,300 140,600 90,500
Income taxes ..................... 671,200 519,100 494,400
The accompanying notes are an integral part of these financial statements.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF ACCOUNTING POLICIES
1. Nature of Operations
The Company performs a broad range of high technology services for industry and
agencies of the United States Department of Defense ("DOD") and the national
security community. These services are provided through two business units,
QuesTech Research Division ("QTRD") and QuesTech Service Company ("QTSC").
QTRD accounts for 95% of the Company's revenues. Towards the end of 1995, a
third subsidiary, QuesTech Packaging, Inc. ("QTPI", formerly QuesTech Ventures,
Inc.), transitioned from an R&D concern to a manufacturing entity, producing
thermoformed infant bottle liners pursuant to a supply agreement with Munchkin,
Inc., a supplier for a major retailer of infant products.
2. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany transactions have
been eliminated in consolidation.
4. Income Recognition
The Company provides services, primarily for the United States Government,
under three types of contracts: cost-reimbursement, fixed price and time-and-
materials. Substantially all of the Company's revenue is derived from these
contracts. Approximately 40% of the Company's consolidated revenues during
each of the last three years was generated by a major contract with the
Department of the Army. Income is recognized for cost-reimbursement and fixed-
price type contracts using the percentage-of-completion method based on costs
incurred; for time-and-materials contracts, income is based on contractually
defined billing rates applied to services performed and materials delivered.
Anticipated losses on contracts are recognized as soon as they become known.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Certain of the Company's contracts include provisions permitting the government
to withhold a defined amount or percentage of a contract price until certain
conditions have been satisfactorily met. These conditions primarily relate to
uncompleted indirect cost rate negotiations and substantial completion of
contract performance. The inclusion of these amounts in income is consistent
with the revenue recognition policy stated above. The inclusion of the
retainages and costs subject to audit in income is consistent with common
industry practice.
A portion of the Company's revenues related to performance on certain cost-
reimbursement type contracts is subject to audit by the United States Defense
Contract Audit Agency (DCAA). Such contract audits have been completed through
December 31, 1991, except for a discontinued segment (Dynamic Engineering
Incorporated) whose costs have been audited through 1987. Contract costs for
1992 through 1994 are expected to be audited during 1996. Contract revenue has
been recorded in amounts that are expected to be realized upon final
settlement.
Any amounts owed to the customer following contract close-outs are charged to
the reserve for unrecoverable contract costs and doubtful accounts. During
DCAA's recent audits, the Company had minimal cost disallowances and therefore
has not significantly increased reserves against its receivables. Any excess
reserves remaining from audited years are generally reallocated to open years.
5. Operating Expenses
Operating expenses presented in the accompanying statements of operations
reflect the allocation of overhead and general and administrative expenses.
6. 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.
7. Inventories
Inventories consist principally of raw materials and are stated at the
lower of cost or market. Cost is determined principally under the average cost
method.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
8. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
o Cash and cash equivalents, accounts receivable, accounts payable, line of
credit, and other accrued liabilities - The carrying amounts approximate
fair value because of the short maturity of these instruments. The
Company's receivables arise primarily in connection with its performance
on government contracts and therefore have negligible credit risk.
Additionally, the receivable balance includes rate variances on cost plus
contracts amounting to $451,000, which are unbilled pending DCAA's audit
of the Company's incurred costs from 1992 and forward, and the Company's
completion of contract close-outs.
o Investment in a partnership - Disclosure of fair value is not required on
the $175,100 of investment, which is accounted for using the equity method
of accounting for investments.
o Cash Values of Insurance Policies - The fair value is based on the cash
values accumulated in these policies, net of borrowings. Surrender
charges are not reflected in the fair value amount unless cash withdrawals
or loans are made against these policies. On August 12, 1994, Confeder-
ation Life Insurance Company (CLIC), one of the insurance carriers for
these policies, became subject to an Order of Rehabilitation and was
placed under the regulatory supervision of the Michigan Commissioner of
Insurance. As a result, Confederation Life policies will be subject to
certain restrictions, one of which is a limitation on access to cash
values during the lifetime of the insured. Surrenders, loans and other
withdrawals are limited to the lesser of the net cash flow paid into a
policy since August 12, 1994, or the net cash value of the policy. At
December 31, 1995, the carrying amount of the cash values of the Company's
policies invested in CLIC's COLI was approximately $434,900.
o Letter of credit - The fair value is based on the estimated cost to
terminate or otherwise settle these obligations with the counter-parties.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
Following is a summary of the estimated fair value at December 31, 1995, of the
Company's financial instruments other than those on which the carrying amount
approximates fair value.
Carrying Fair
Amount Value
Investment is a partnership,
for which it is not practicable
to estimate fair value $ 175,100 $ --
Cash values of Insurance policies 1,218,300 1,218,300
Letter of credit -- 395,600
9. Property, Plant and Equipment and Related Depreciation
Property, plant and equipment are recorded at cost. Cost includes expenditures
for major improvements and replacements and the net amount of interest cost
associated with significant capital additions. Construction in progress costs
and specialized manufacturing equipment in service are stated at the lower of
cost or fair value, based on expected future cash flows from the capital
investment. During 1995, interest cost associated with construction in
progress was not material and was expensed. The cost of properties held under
capital leases is equal to the lower of the net present value of the minimum
lease payments or the fair value of the leased property at the inception of the
lease.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives (generally
five to ten years), using both the straight-line and declining-balance methods.
Amortization of computer software costs developed for internal use acquired
after 1987 is made over five years, based on a double-declining balance method.
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements, whichever is the shorter period.
Amortization of capitalized leases is included with depreciation expense.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
During 1995, the Financial Accounting Standards Board issued SFAS 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed of," effective for financial statements with fiscal years
beginning after December 15, 1995. In accordance with the Statement, the
Company is required to review long-lived assets and certain intangibles for
impairment whenever events or changes in circumstances indicate that the
related carrying amount may not be recoverable. The initial application of
this statement in 1996 is not expected to have any material impact on the
financial statements.
10. Goodwill
The excess of the acquisition costs over the fair value of the net assets of
the businesses acquired is being amortized on a straight-line basis over
periods ranging from 19 to 20 years.
The Company regularly performs a reassessment of the continuing value of the
acquired goodwill associated with the acquisitions of American Defense Systems,
Inc. (ADSI) and DHR, Inc. which at December 31, 1995 aggregated $1.5 million.
The carrying amount of the goodwill consists of $1.4 million and $120,000 for
ADSI and DHR, Inc., respectively, subject to amortization over the remaining
periods of 11 years and four and one-half years. Management believes that the
continuing value of the product lines acquired from the former business units,
manifested by customers' renewed solicitation for similar efforts in follow-on
awards, demonstrates the long-term value of the goodwill asset and the absence
of an impairment condition. To the extent that the future cash flows based on
the contracts' expected operating profits will exceed the carrying cost of the
asset, an impairment loss is not recognized. Contract termination or non-
renewal of the contract are events or changes in circumstances that indicate
that the carrying amount of the goodwill asset may not be recoverable, thereby
requiring the recognition of an impairment loss at that time.
11. Accounting for Postretirement Benefits
Effective in 1993, the Company adopted "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106) and elected to
recognize the transition obligation on a delayed recognition basis. The
transition obligation represents the unfunded portion of the accrued
postretirement benefit obligation (the "APBO") as of the transition date less
any accrued postretirement benefit cost. The accrued postretirement benefit
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
cost as of the balance sheet date reflects the net periodic cost attributed to
the current year, net of benefit payments, plus the accrued amount as of the
beginning of the year. The cost measurement principles and required
disclosures of SFAS 106 are applied separately to each identifiable
postretirement benefit plan. The accrued postretirement benefit cost
obligation is reported as an aggregate amount in the financial statements.
12. Accounting for Post-Employment Benefits
The Company periodically re-evaluates its projected obligations under post-
employment agreements when the subject officers receive compensation increases
during their years of active employment. The projected cost of additional
compensation payable during the post-employment years is discounted at present
value and charged to operations. Periodic increases in the balances due each
of the officers also reflect the accrued interest on the discounted cost of the
liability.
13. Accounting for Stock-based Compensation
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation," effec-
tive for fiscal years that begin after December 15, 1995. The new standard
encourages all entities to adopt a fair value based method of accounting for
all employee stock option plans. Under this method, compensation cost is
measured at the grant date based on the value of the stock option award and is
recognized over the service period, which is usually the vesting period.
Optionally, a company may continue to use the intrinsic value based method, as
prescribed by Opinion 25, that measures compensation cost only to the extent
that the option price is lower than the quoted market price of the stock at the
date of the award. During 1996, the Company expects to continue the
application of Opinion 25, but will comply with the pro forma disclosures of
net income, and earnings per share, as if the fair value based method of
accounting defined in SFAS 123 had been applied.
14. Reclassifications
Certain amounts in the 1994 and 1993 financial statements have been
reclassified to conform to the presentation in the 1995 financial statements.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
15. Earnings per share
The computation of earnings per common share is based on the weighted average
number of common shares outstanding. When dilutive, stock options are included
as share equivalents using the treasury stock method. At December 31, 1995 and
1994, the Company's Stock Employee Compensation Trust (SECT), which had
acquired 221,792 shares of the Company's stock from its previous founders, held
183,392 and 221,792 shares, respectively. Although outstanding, the SECT shares
are excluded from the base of the earnings per share calculation.
NOTE B - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
December 31
1995 1994
Accounts receivable
Current
U.S. Government
Billed $ 5,821,600 $ 5,123,300
Unbilled (including retentions
and indirect cost rate
variances of $1,288,800 and
$451,100 in 1995 and
$1,376,300 and $310,400
in 1994, respectively) 4,573,400 5,844,600
10,395,000 10,967,900
Less reserve for unrecoverable
contract costs and doubtful
accounts <2,053,100> <1,853,300>
$ 8,341,900 $ 9,114,600
Of the December 31, 1995 billed and unbilled amounts, approximately $8.4
million is expected to be collected in 1996 and the remainder in subsequent
years.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE B - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS -
Continued
December 31
1995 1994
Equipment and leasehold improvements
Furniture and fixtures $ 2,741,500 $ 2,852,700
Machinery and equipment 2,926,700 2,283,500
Computer software 1,709,100 1,709,100
Equipment held under capital lease 312,600 312,600
Construction in progress 479,800 --
Leasehold improvements 618,300 284,400
8,788,000 7,442,300
Less accumulated depreciation and
amortization <6,531,500> <6,503,800>
$ 2,256,500 $ 938,500
Other assets
Cash value of life insurance
policies $ 1,218,300 $ 1,082,500
Patents less accumulated
amortization of $50,800 and
$35,300, respectively 252,200 187,500
Investment in a limited partnership 175,100 175,100
Deposits 61,700 84,800
Deferred costs 127,200 12,800
$ 1,834,500 $ 1,542,700
Other assets include cash values of corporate-owned participating life
insurance policies which the Company purchased as a means of investing salary
deferrals of the employees covered under the Officers and Managers' Deferred
Compensation Plan.
The Company expects to hold the related life insurance policies through terms
varying between 10 to 20 years. Earlier surrender of these policies could cost
the Company approximately $340,000 pre-tax, as a result of surrender charges.
See also Note A8.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE B - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS -
Continued
Deferred costs include advance payments towards a new management information
system and costs associated with its testing and implementation.
Included in accounts payable are $1,470,200 and $1,501,300, resulting
principally from the Company's use of zero balance bank accounts where funds
are transferred to these accounts from the Company's line of credit when
disbursements are presented for payment.
December 31
1995 1994
Accrued liabilities and
deferred credits
Accrued compensation and withholdings $ 1,393,800 $ 1,247,900
Accrued vacation 1,105,800 998,900
Amounts owed to certain subcontractors
and suppliers 945,600 1,004,900
Accrued legal expenses and commitments 547,300 1,242,500
Deferred compensation 235,900 227,700
Accrued other taxes 208,100 198,800
Amounts due to related parties 164,000 201,300
Other 233,800 222,300
Total accrued liabilities and
deferred credits $ 4,834,300 $ 5,344,300
NOTE C - LINE OF CREDIT
At December 31, 1995, the Company's remaining available line of credit (LOC)
through Signet Bank of Virginia was $3.6 million. The underlying credit
agreement permits borrowings up to $4.0 million. The Company was in compliance
with various financial covenants, which require the maintenance of a maximum
debt-to-net worth ratio of 5.0 and a minimum tangible net worth of $2.2
million. The Company's borrowing rate at December 31, 1995 was 9.75% which was
one percentage point above the bank's prime rate. All borrowings are secured
by a first lien security interest in all receivable accounts, contract rights,
chattel paper, instruments, general intangibles, equipment, inventory, and
documents now owned and hereafter acquired by the Company.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE C - LINE OF CREDIT - Continued
During 1995, the weighted interest rate under the Company's line of credit was
9.92% and the weighted average borrowings were $679,400.
As part of the borrowing arrangements, the Company is required to pay a
commitment fee of 3/8 of one percent of the average daily amount of the unused
portion of the credit facility.
The agreement provides for the issuance of letters of credit by the bank on the
Company's behalf. At December 31, 1995, the Company had an outstanding
irrevocable standby letter of credit, in the amount of $145,600 contingent on
the outcome of a decision from the Court of Appeals in Denzler v. QuesTech,
Inc. Additionally, in conjunction with the negotiation of the corporate
headquarters' new lease, the Company posted a $250,000 letter of credit, which
is renewed annually, as a form of deposit on the new lease.
The current agreement expires on March 31, 1996. Management expects the
commitment to be extended in a subsequent amendment.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
1995 1994
Notes payable
Non-interest bearing note payable, due
based on the Company's proportionate
share of cash available for distribution
as defined in a related partnership
agreement, due in full by December 31,
1996 10,600 10,600
Capitalized lease obligations
Amounts due under capitalized lease
obligations, payable in monthly
installments through 1998,
collateralized by certain equipment 202,700 253,800
213,300 264,400
Less current maturities <57,100> <51,100>
Total long-term obligations $ 156,200 $ 213,300
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE D - LONG-TERM OBLIGATIONS - Continued
The following is a schedule of future minimum lease payments under capitalized
lease obligations together with the present value of the net minimum lease
payments:
Year ending December 31,
1996 $67,800
1997 65,600
1998 63,900
1999 26,600
Total minimum lease payments $223,900
Less amount representing interest
and taxes <21,200>
Present value of minimum lease payments $202,700
Current portion $ 57,100
Noncurrent portion 145,600
Capitalized lease obligations $202,700
At December 31, 1995, the cost of all equipment held under capital leases was
$312,600 which had an accumulated amortization of $191,800.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE E - INCOME TAXES
A reconciliation of the effective tax rate and the Federal statutory income tax
rate applied to income from continuing operations follows:
1995 1994 1993
Statutory Federal income tax rate 34.0% 34.0% <34.0>%
State income taxes, net of Federal
income tax benefit 4.0 4.0 <0.1>
Amortization of goodwill 5.8 8.0 7.7
Effect of tax credits -- -- <29.5>
Other <0.9> 4.9 1.2
Effective income tax rate 42.9% 50.9% <54.7>%
Income tax expense (benefit) consists of the following for the year ended
December 31,
1995 1994 1993
Current $ 586,000 $ 193,500 $ 655,000
Deferred <195,700> 136,100 <999,500>
Income tax expense/
<benefit> $ 390,300 $ 329,600 $ <344,500>
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE E - INCOME TAXES - Continued
The tax effect of significant temporary differences that gave rise to year-end
tax balances since the adoption of SFAS 109 are as follows:
Deferred Tax Deferred Tax
Asset Liability
Depreciation $ -- $ 56,800
Retentions -- 489,800
Reserves against accounts
receivables 748,900 --
Deferred post-employment benefit 564,600 --
Deferred postretirement benefits 488,400 --
Legal settlements 557,200 --
Accrued vacation 332,800 --
Miscellaneous 86,400 114,300
Subtotal 2,778,300 660,900
Valuation allowance <148,000> --
Deferred Tax $2,630,300 $ 660,900
Based on an analysis of future operating income for the purpose of realizing
deferred tax assets, management believes that its net deferred tax asset will
be recoverable in future returns and that its valuation allowance requires no
further adjustment.
To date, none of the Company's Federal income tax returns for years open under
the statute of limitations have been examined by the Internal Revenue Service.
NOTE F - EMPLOYEE BENEFIT PLANS
1. Profit-Sharing and Pension Plan
The Company has a profit-sharing plan pursuant to Section 401 of the Internal
Revenue Code, whereby participants may contribute up to 20% of their
compensation, but not in excess of a ceiling amount determined by the Secretary
of the Treasury during each year. Under the plan, the Company may make two
types of contributions subject to the discretion of the Board of Directors:
(1) Employer matching contributions and (2) Profit-Sharing contributions. In
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE F - EMPLOYEE BENEFIT PLANS - Continued
order to share in either contribution, an employee must complete 1,000 hours of
service during the Plan Year when the contribution is made. Generally,
contributions vest in the employees' accounts based on their length of service.
During 1995, the employer contribution under the profit-sharing pension plan
was $72,200. No employer contribution was made by the Company during 1994 and
1993.
2. Discretionary Bonus Plan
Under the Officers and Managers Discretionary Bonus Plan for QuesTech and
subordinate units ("the Bonus Plan"), officers and managers of the Company and
its subsidiaries are selected by management for participation in the Bonus
Plan. Bonuses are apportioned as a percentage of the recipient's salary and
are based upon the Company's overall performance and upon the performance of
the business unit to which the recipient is assigned, subject to review and
approval by the Chairman and Chief Financial Officer and Board of Directors.
Amounts charged to expense under this plan were $393,500, $292,500, $150,000 at
December 31, 1995, 1994 and 1993, respectively.
3. Postretirement Benefits
The company has identified three separate postretirement benefit plans which
fall within the purview of SFAS 106: the Group Health Plan, the Executive Life
Insurance Plan, and the Deferred Compensation Plan.
a. Group Health Plan
The Group Health Plan extends medical and dental benefit coverage to employees,
who upon retirement at the age of 65, have completed 20 years of full-time
employment with the Company, or retire with an individual employment agreement
which specifically grants coverage approved by the insurance carrier of the
subject group health policy. The Plan is contributory and contains cost-saving
features, such as deductibles and coinsurance. The accumulated postretirement
benefit obligation represents the present value of insurance claims expected to
be presented by eligible employees during their retirement years, based on the
net premiums paid by the Company on behalf of active employees.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE F - EMPLOYEE BENEFIT PLANS - Continued
For measurement purposes, the annual health care cost trend for 1995 benefits
was 10%, grading down to 5% over six years. The 1% increase in health care
cost trend was 11% in 1995, grading down to 7% over nine years. During 1994, a
13% medical inflation rate was assumed, grading down to 6% over nine years.
The discount rate used for 1995 and 1994 was 7.5% and 8.0%, respectively.
b. Executive Life Insurance
The Company maintains life insurance policies, covering certain of its
officers, both former and active, through their lifetime, in accordance with
their respective employment agreements. The cost of the insurees' premiums is
treated as compensation expense.
c. Officers and Managers Deferred Compensation Plan (DEF COM)
DEF COM allows eligible employee participants to defer current compensation and
provides supplemental postretirement benefits along with certain specified
death benefits to the participants' beneficiaries. Postretirement benefits
under DEF COM are payable upon the participant's termination of employment
(including retirement), and are paid in equal installments over a period equal
to the length of time the employee deferred compensation, but no longer than
ten years. Termination or retirement benefits are based upon the employee's
actual deferrals plus interest credited annually, as set by the Administrator.
Supplemental death benefits are payable in some cases over a period of ten
years provided death occurs while the employee participant is actively employed
with the Company.
The Company invests the amounts deferred by employees in life insurance
policies. Since DEF COM is a defined contribution plan, the accumulated
postretirement benefit obligation as of the transition date has been based on
the actual balances in each participant's account, which consists of
contributions and accrued interest.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE F - EMPLOYEE BENEFIT PLANS - Continued
The following tables present the funded status of the Company's benefit plans
and the 1995 periodic expense:
Group Executive Deferred
Health Life Comp.
Plan Insurance Plan 1995
Accumulated Postretirement
Benefit Obligation:
Retirees $ <322,600> $<290,300> $<1,200,200> $<1,813,100>
Fully eligible
active plan participants <26,300> -- -- <26,300>
Other Active Plan
participants <130,900> -- <1,568,200> <1,699,100>
Total <479,800> <290,300> <2,768,400> <3,538,500>
Fair Value of Plan Assets -- -- -- --
APBO in excess of
plan assets: <479,800> <290,300> <2,768,400> <3,538,500>
Unrecognized net gain/<loss> <146,300> <1,200> 291,100 143,600
Unrecognized Transition
Obligation 499,800 225,100 1,273,100 1,998,000
Accrued postretirement
benefit cost in the
balance sheet $ <126,300> $ <66,400> $<1,204,200> $<1,396,900>
Reconciliation of accrued
postretirement
benefit cost:
Accrued postretirement
benefit cost,
at January 1, 1995 $ <92,200> $ <48,200> $<1,064,100> $<1,204,500>
Net periodic cost <66,500> <34,500> <420,600> <521,600>
Benefit payments 32,400 16,300 280,500 329,200
Accrued postretirement
benefit cost
at December 31, 1995 $ <126,300> $ <66,400> $<1,204,200> $<1,396,900>
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE F - EMPLOYEE BENEFIT PLANS - Continued
Group Executive Deferred
Health Life Comp.
Plan Insurance Plan 1995
Current portion <32,400> <16,300> <187,200> <235,900>
Long-term portion <93,900> <50,100> <1,017,000> <1,161,000>
<126,300> <66,400> <1,204,200> <1,396,900>
The following tables present the funded status of the Company's benefit plans
and the 1994 periodic expense:
Group Executive Deferred
Health Life Comp.
Plan Insurance Plan 1994
Accumulated Postretirement
Benefit Obligation:
Retirees and
Terminated participants $<405,300> $<379,300> $<1,111,100> $<1,895,700>
Other Active Plan
participants <152,700> -- <1,592,400> <1,745,100>
Total <558,000> <379,300> <2,703,500> <3,640,800>
Fair Value of Plan Assets -- -- -- --
APBO in excess of
plan assets: <558,000> <379,300> <2,703,500> <3,640,800>
Unrecognized net gain<loss> <63,400> 600 291,000 228,200
Unrecognized Transition
Obligation 529,200 330,500 1,348,400 2,208,100
Accrued postretirement
benefit cost in the
balance sheet $ <92,200> $ <48,200> $<1,064,100> $<1,204,500>
Of the $1.2 million in accrued postretirement benefit cost, approximately
$227,700 was estimated as a 1995 pay-out and reclassed as a component of
Accrued Other Liabilities in the Financial Statements.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE F - EMPLOYEE BENEFIT PLANS - Continued
Group Executive Deferred
Health Life Comp.
Plan Insurance Plan 1994
Reconciliation of accrued
postretirement
benefit cost:
Accrued postretirement
benefit cost,
at January 1, 1994 $ <46,100> $ <20,000> $<1,024,600> $<1,090,700>
Net periodic cost <79,800> <44,500> <355,700> <480,000>
Benefit payments 33,700 16,300 316,200 366,200
Accrued postretirement
benefit cost
at December 31, 1994 $ <92,200> $ <48,200> $<1,064,100> $<1,204,500>
The following tables represent the net periodic postretirement benefit cost
components for 1995, 1994 and 1993:
Group Executive Deferred
Health Life Comp.
Plan Insurance Plan 1995
Service cost $ 9,200 $ 4,000 $ 236,800 $ 250,000
Interest cost 33,900 17,200 106,400 157,500
Amortization -
transition obliga. 29,400 13,200 75,300 117,900
Amortization - gain
or loss <6,000> -- 2,100 <3,900>
Net periodic post-
retirement
benefit cost $ 66,500 $ 34,400 $ 420,600 $ 521,500
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE F - EMPLOYEE BENEFIT PLANS - Continued
Group Executive Deferred
Health Life Comp.
Plan Insurance Plan 1995
Impact of One Percent
Increase in Medical
Trend Rate:
Aggregate impact on
1995 service cost
and interest cost $ 46,400
Group Executive Deferred
Health Life Comp.
Plan Insurance Plan 1994
Service cost $ 9,000 $ 3,700 $ 188,700 $ 201,400
Interest cost 41,900 22,500 91,700 156,100
Amortization -
transition obliga. 29,400 18,300 75,300 123,000
Amortization - gain
or loss <500> -- -- <500>
Net periodic post-
retirement
benefit cost $ 79,800 $ 44,500 $ 355,700 $ 480,000
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE F - EMPLOYEE BENEFIT PLANS - Continued
Group Executive Deferred
Health Life Comp.
Plan Insurance Plan 1994
Impact of One Percent
Increase in Medical
Trend Rate:
Aggregate impact on
1994 service cost
and interest cost $ 4,500
Group Executive Deferred
Health Life Comp.
Plan Insurance Plan 1993
Service cost $ 10,100 $ 3,600 $ 230,000 $ 243,700
Interest cost 45,600 22,300 92,800 160,700
Amortization 29,400 18,400 82,300 130,100
Net periodic post-
retirement
benefit cost $ 85,100 $ 44,300 $ 405,100 $ 534,500
Impact of One Percent
Increase in Medical
Trend Rate:
Aggregate impact on
1993 service cost
and interest cost $ <9,100>
4. Stock Employee Compensation Trust
On February 1, 1994, the Company established a Stock Employee Compensation
Trust ("SECT") and financed the SECT's repurchase of 221,792 shares of common
stock owned by two of the Company's former founders. The Company's loan to the
SECT will be paid down from time to time as the employees exercise and pay for
their options under the Company's Incentive Stock Option Plan. At December 31,
1995, there were 183,392 unallocated and uncommitted shares held by the SECT.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE G - OTHER LONG-TERM OBLIGATIONS
Amounts due to former founders, under a Confidential Settlement Agreement, are
included in Other Long-Term Obligations. Payments under the agreements will
continue until 2004. During 1995, the Company entered into a similar agreement
with another former founder. Amounts under the latter agreement payable
through 2006 are included in Other Long-Term Obligations as well. The cost of
the latter agreement was included in Other Expense of the financial statements.
NOTE H - COMMITMENTS AND CONTINGENCIES
1. Future Minimum Rental Commitments
The following is a schedule by years of the approximate future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms of one year or more as of December 31, 1995:
Year ending December 31,
1996 1,406,200
1997 1,151,600
1998 969,400
1999 and thereafter 1,015,900
Future minimum rental payments $4,543,100
Net rent expense under operating leases amounted to approximately $1,739,900,
$2,042,600, and $2,009,100 for the years ended December 31, 1995, 1994 and
1993, respectively, after being reduced by rental income which was not material
during the last three years.
2. Litigation
The following information is furnished regarding pending litigation involving
the Company as well as litigation which was terminated during the fourth
quarter of the fiscal year covered by this report:
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE H - COMMITMENTS AND CONTINGENCIES - Continued
Limited Partnership and Guy Beatty v. QuesTech, Inc.
In January 1996 the Company was named as a defendant in a lawsuit captioned
7600 Limited Partnership and Guy Beatty v. QuesTech, Inc. The plaintiffs (the
Company's former landlord, a partnership, and its general partner) seek
attorneys' fees incurred in two earlier landlord/tenant cases (a contract
claim). In addition, plaintiffs have claimed damages for five torts: abuse of
process, malicious prosecution, tortious interference with business relation-
ship, intentional infliction of emotional distress, and a "generalized tort."
One or more of the tort claims is covered by the Company's general liability
insurer, which is providing the counsel for defense for the entire lawsuit at
its cost. The insurer does not have any liability for the contract claim for
attorneys' fees. The amount of damages to which the Company is exposed is not
expected to exceed the amount which the Company has previously accounted for,
based on exposure to the same claim for contract fees in the two prior
landlord-tenant cases.
The Company, including any of 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.
3. Employment Agreements
The Company has employment agreements with two executive officers which
stipulate salary continuation for a period of five years and two years, as a
result of voluntary or involuntary termination, regardless of the change in
control of the Company. Accrued interest and the present value of compensation
changes for these agreements aggregated $191,600 and $82,000 during 1995 and
1994, respectively. None of these costs will be paid until the subject
officers terminate their employment with the Company.
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE I - STOCK OPTIONS
The Company has two stock option plans, a 1982 Plan and a 1994 Plan. The 1982
Plan, which provided for the granting of 200,000 shares of the Company's common
stock expired January 2, 1992, except as to options then outstanding.
The Company's 1994 Incentive Stock Option Plan, which covers officers and
certain key employees, provides for the granting of stock options to purchase
200,000 shares of the Company's common stock, based on the stock's bid price as
of the date of the grant. The 1994 Plan was amended to adopt certain technical
changes. Currently, there are no options available for future grants under the
1994 Plan.
Options generally vest at a rate of 20% per year and are exercisable to the
extent of shares vested. Details of stock options are as follows:
Options outstanding
and exercisable
Shares Prices per share
Balance
January 1, 1993 173,500 $1.750 - $6.000
Options granted -- -- --
Options exercised -- -- --
Options canceled <32,000> 1.750 - 6.000
Balance
January 1, 1994 141,500 1.750 - 6.000
Options granted -- -- --
Options exercised -- -- --
Options canceled <45,000> 5.000 - 6.000
Balance
January 1, 1995 96,500 1.75 - 2.06
Options granted 219,000 4.00 - 8.125
Options exercised <31,400> 1.75 - 2.06
Options canceled <6,600> 1.75 - --
December 31, 1995 277,500 $ 1.75 - 8.125
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE I - STOCK OPTIONS - Continued
The Company has also provided for the grant of non-qualified stock options to
the Company's non-employee directors. These options were granted to purchase
3,000 and 20,000 shares during 1990 and 1991, at the stock's then fair market
value, which was $1.875 and $1.75 respectively. Of these options, 16,000
shares were outstanding and exercisable at December 31, 1995; and 23,000
shares, at year-end during each of the previous two years.
NOTE J - SUPPLEMENTAL CASH FLOWS INFORMATION
1. Supplemental Disclosures of Cash Flows Information
The Company paid the following amounts for interest and income taxes during the
year ended December 31,
1995 1994 1993
Interest $ 147,300 $ 140,600 $ 90,500
Income taxes $ 671,200 $ 519,100 $ 494,400
2. Supplemental Schedule of Non-cash Investing and Financing
Activities
Information about the Company's investing and financing activities during the
years ended December 31, that affected the recognized assets and liabilities
but did not result in cash receipts or cash payments in the period is reported
as follows:
1995 1994 1993
New Capital Lease Commitments,
net of property trade-in -- -- $300,700
Accrued cost of financing
the SECT's stock repurchase -- -- $432,500
Treasury shares acquired in
consideration for the exercise
of stock options 20,600 -- --
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE K - FINANCIAL INFORMATION FOR BUSINESS SEGMENTS
The Company derived all of its revenues under contracts with agencies of the
United States Government, either as a prime contractor or as a subcontractor.
However, during 1995, QuesTech Packaging, Inc. went into the production phase,
following years of research and development in thermoforming technology.
Currently, the Company operates in two industry segments: government
contracting and commercial packaging. Performance under government contracts
includes scientific, engineering, and program management services, primarily in
the defense and intelligence arenas. Operations in the commercial packaging
segment are in fulfillment of a multi-year supply contract with Munchkin, Inc.
for thermoformed infant bottle liners. Munchkin, Inc. is currently the only
customer for the segment's product line.
Operating Profit/Loss is income from operations before general corporate
expense. General corporate expense consists primarily of headquarters
administrative costs and provisions for reserves and other allowances.
Identifiable assets by industry segment are those assets that are used in the
Company's operations in each industry segment. Corporate assets are princi-
pally cash and cash equivalents, the deferred income tax asset, certain fixed
assets and leasehold improvements in the corporate office, patents, and cash
values of corporate-owned life insurance policies. In the commercial packaging
segment, some manufacturing equipment were placed in service during 1995; how-
ever, a significant portion remained under construction in progress as of year-
end.
A summary of the Company's operations by industry segment follows:
Government
1995 Contracts Commercial Corporate Consolidated
Operating revenues $57,902,600 $ 48,600 $ -- $ 57,951,200
Operating Profit $ 6,309,100 $<1,176,100> $<3,104,700> $ 2,028,300
Other income/expense -- -- <722,100> <722,100>
Interest -- -- <395,800> <395,800>
Earnings before
income taxes $ 6,309,100 $<1,176,100> $<4,222,600> $ 910,400
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE K - FINANCIAL INFORMATION FOR BUSINESS SEGMENTS - Continued
Government
1995 Contracts Commercial Corporate Consolidated
Identifiable assets $11,389,500 $ 1,135,400 $ 3,898,800 $ 16,423,700
Depreciation and
amortization of
property, plant
and equipment $ 250,700 $ 57,500 $ 199,100 $ 507,300
Amortization of
goodwill and other
intangibles $ 154,500 $ -- $ 15,500 $ 170,000
Capital Expenditures $ 339,200 $ 1,212,800 $ 467,900 $ 2,019,900
Government
1994 Contracts Commercial Corporate Consolidated
Operating revenues $54,676,400 $ 20,000 $ -- $ 54,696,400
Operating Profit $ 4,562,800 $ <546,100> $<2,139,800> $ 1,876,900
Other income/expense -- -- <843,100> <843,100>
Interest -- -- <386,400> <386,400>
Earnings before
income taxes $ 4,562,800 $ <546,100> $<3,369,300> $ 647,400
Identifiable assets $12,449,700 $ 168,100 $ 3,141,500 $ 15,759,300
Depreciation and
amortization of
property, plant
and equipment $ 300,100 $ 50,700 $ 179,600 $ 530,400
Amortization of
goodwill and other
intangibles $ 154,600 $ -- $ 10,800 $ 165,400
Capital Expenditures $ 235,400 $ 77,800 $ 41,900 $ 355,100
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
NOTE K - FINANCIAL INFORMATION FOR BUSINESS SEGMENTS - Continued
Government
1993 Contracts Commercial Corporate Consolidated
Operating revenues $52,498,600 $ 150,800 $ -- $ 52,649,400
Operating Profit $ 4,472,900 $ <300,300> $<2,741,700> $ 1,430,900
Other income/expense -- -- <1,753,600> <1,753,600>
Interest -- -- <307,400> <307,400>
Earnings before
income taxes $ 4,472,900 $ <300,300> $<4,802,700> $ <630,100>
Identifiable assets $13,221,700 $ 70,900 $ 4,317,200 $ 17,609,800
Depreciation and
amortization of
property, plant
and equipment $ 212,700 $ 20,800 $ 361,100 $ 594,600
Amortization of
goodwill and other
intangibles $ 154,500 $ -- $ 9,900 $ 164,400
Capital Expenditures $ 329,000 $ 140,500 $ 90,000 $ 559,500
SUPPLEMENTAL INFORMATION
QuesTech, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
Reserve for unrecovered
contract costs and
doubtful accounts
Balance at Beginning of
Period $1,853,300 $2,199,400 $1,433,000
Additions:
Charged to Costs and
Expenses 185,000 -- 630,000
Charged to Other
Accounts 17,600 22,900 794,900
Deductions: <2,800> <369,000> <658,400>
Balance at End of
Period $2,053,100 $1,853,300 $2,199,400
Current $2,053,100 (1) $1,853,300 (1) $2,199,400 (1)
Non-current $ -- $ -- $ --
Valuation allowance for
deferred tax asset
Balance at Beginning of
Period $ 148,000 $ 148,000 $ 148,000
Additions:
Charged to Costs and
Expenses -- -- --
Charged to Other
Accounts -- -- --
Deductions:
Balance at End of
Period $ 148,000 $ 148,000 $ 148,000
Current $ -- $ -- $ --
Non-current $ 148,000 $ 148,000 $ 148,000 (2)
(1) Included in accounts receivable - trade.
(2) Included in deferred tax asset - long-term.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
During 1995, two of the Company's Directors, Ms. Geraldine A. Ferraro and
Mr. Vincent M. Russo, filed Form 3 with the SEC after the time period for such
filings had expired. In addition, three of the Company's executive officers,
Messrs. Vincent L. Salvatori, Gerald F. Mayefskie and Joseph P. O'Connell, as
well as Mr. Russo, filed SEC Form 4 after the required due date in 1995.
Item 11. EXECUTIVE COMPENSATION
Reference is made to the material under the caption, "Remuneration of
Directors and Officers" in the Registrant's definitive Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the material under the captions, "Stock Ownership"
and "Additional Inside Interests of Beneficial Security Ownership" in the
Registrant's definitive proxy statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements.
Attached.
2. Financial Statement Schedules.
Attached.
3. Exhibits
(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.
(4) None
(9) None
(22) Subsidiaries of registrant --
Name of State of
Subsidiary Incorporation
QuesTech Service Company Virginia
QuesTech Packaging, Inc. Virginia
QuesTech Model Company (inactive) Virginia
(10) Material Contracts
(a) Incentive Stock Option Plan filed December 27, 1983 with
the Company's Registration Statement on Form S-1 is
incorporated herein by reference.
(b) QuesTech Variable Deferral Plan. Incorporated herein by
reference.
(c) Limited Partnership Agreement with the Kitty Hawk Office
Center. Incorporated herein by reference.
(d) Agreement dated June 13, 1991 between Vincent L.
Salvatori and QuesTech. Incorporated herein by reference.
(e) Agreement dated November 18, 1991 between Gerald F.
Mayefskie and QuesTech. Incorporated herein by reference.
(f) Amended Officers and Managers Deferred Compensation
Plan. Incorporated herein by reference.
(g) Confidential Settlement Agreement dated August 20, 1993
between Radford W. Klotz and Oscar E. Hayes and the Company
(redacted in part). Incorporated herein by reference.
(h) Confidential Settlement Agreement dated February 2, 1994
between William E. Bigler, Jr. and Jerome M. Raffel and
QuesTech, Inc. (redacted in part). Incorporated herein by
reference.
(i) Lease Agreement between the Company and Louis Esposito
dated November 24, 1993 effective March, 1994 regarding the
Company's subsidiary, QuesTech Packaging, Inc. Incorporated
herein by reference.
(j) QuesTech, Inc. Employee Benefit Stock Ownership Trust
effective December 31, 1993. Incorporated herein by
reference.
(k) 1994 Incentive Stock Option Plan. Incorporated herein
by reference.
(l) Confidential Settlement Agreement with Oscar E. Hayes,
dated August, 1995. Incorporated herein by reference.
(m) Lease Agreement between the Company and John Hancock
Life Insurance Company. Incorporated herein by reference.
(n) Confidential Settlement Agreement with J. Baron Baptiste
(redacted in part). Incorporated herein by reference.
(o) Agreement with Munchkin, Inc. (redacted in part).
Incorporated herein by reference.
(p) Amendment to 1994 Incentive Stock Option Plan.
(q) Amendment to QuesTech's Stock Employment Compensation
Trust.
11. Earnings per share: Reference is made to Registrant's
financial statements.
12. Statement re computation of ratios: Reference is made to
Registrant's financial statements.
13. Reference is made to Registrant's definitive 1996 proxy
statement to be filed in connection with the Annual
Stockholders' Meeting.
(b) Reports on Form 8-K.
No reports on Form 8-K were required to be filed during 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: ________________________ By: ____________________________________
Vincent L. Salvatori
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
CEO and Chairman of
________________________ the Board (Principal ______________________
Vincent L. Salvatori Executive Officer)
President,
________________________ Chief Operating Officer ______________________
Gerald F. Mayefskie and Director
Chief Financial Officer
________________________ (Principal Financial and ______________________
Joseph P. O'Connell, Jr. Accounting Officer)
________________________ Director ______________________
Robert B. Costello
________________________ Director ______________________
Vincent M. Russo
Supplemental Information to be Furnished with Reports Filed Pursuant to Section
15(d) of the Act
The registrant shall furnish to the Commission, its annual report to security
holders covering the registrant's last fiscal year, and the proxy statement,
form of proxy, or other proxy soliciting material sent to more than ten of the
registrant's security holders with respect to its 1996 Annual Stockholders'
Meeting.