Exhibit 13
ANNUAL REPORT ON FORM 10-K
ITEM 14 (a) (1), (2), (3), (10), (11)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1997
QuesTech, Inc.
FALLS CHURCH, VIRGINIA
QuesTech, Inc. and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
December 31, 1997, 1996 and 1995
C O N T E N T S
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS-- DECEMBER 31, 1997
AND 1996 4
CONSOLIDATED STATEMENTS OF EARNINGS--YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -YEARS
ENDED DECEMBER 31, 1997, 1996 AND 1995 7
CONSOLIDATED STATEMENTS OF CASH FLOWS--YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11-42
SUPPLEMENTAL INFORMATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS 44
[Letterhead]
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, 1997 and
1996, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
We have also audited Schedule II as of December 31, 1997, and for each of
the three years in the period then ended. In our opinion, this schedule
presents fairly the information required to be set forth therein.
/s/GRANT THORNTON LLP
Vienna, Virginia
February 6, 1998
3
QuesTech, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
1997 1996
---------- -------------
CURRENT ASSETS
Cash and cash equivalents......................... $ 108,500 $ 54,300
Accounts receivable
Trade.......................................... 12,134,800 9,030,900
Income taxes and other......................... 867,200 594,500
Inventories....................................... 69,200 170,400
Prepaid expenses and other........................ 165,300 350,200
Deferred income taxes............................. 239,500 900,300
------------ -------------
Total current assets........................... 13,584,500 11,100,600
EQUIPMENT AND LEASEHOLD IMPROVEMENTS--at
cost less accumulated depreciation and
amortization....................................... 5,434,400 4,952,600
GOODWILL, less accumulated amortization of
$1,726,200 and $1,571,600, respectively............ 1,210,400 1,365,000
DEFERRED INCOME TAXES, net of valuation
allowance of $262,000.............................. 1,369,900 1,315,600
OTHER ASSETS......................................... 2,369,600 1,884,300
------------- -------------
TOTAL ASSETS......................................... $ 23,968,800 $ 20,618,100
------------- -------------
------------- -------------
The accompanying notes are an integral part of these statements.
4
QuesTech, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
------------- ------------
CURRENT LIABILITIES
Line of credit..................................... $ 3,919,800 $ 1,227,400
Current maturities of long-term
obligations...................................... 511,900 374,000
Accounts payable..................................... 2,195,400 1,940,300
Accrued liabilities and deferred
credits............................................ 5,095,800 5,627,300
------------- ------------
Total current liabilities...................... 11,722,900 9,169,000
LONG-TERM OBLIGATIONS, net of current
maturities......................................... 1,527,800 1,721,800
INDEBTEDNESS TO RELATED PARTIES...................... 1,542,900 1,417,100
ACCRUED POSTRETIREMENT BENEFIT COST.................. 1,577,000 1,267,300
OTHER LONG TERM OBLIGATIONS.......................... 894,300 1,010,500
------------- ------------
Total liabilities............................ 17,264,900 14,585,700
------------- ------------
COMMITMENTS AND CONTINGENCIES........................
STOCKHOLDERS' EQUITY
Common stock-- authorized 3,000,000 shares
of $.05 par value, issued 1,657,304 and
1,649,904 shares, outstanding 1,618,557
and 1,610,857 and at December 31, 1997 and
1996, respectively................................. 82,800 82,500
Additional paid in capital.......................... 2,878,300 2,835,600
Retained earnings................................... 4,297,900 3,652,000
Less: Treasury Stock at cost....................... (210,500) (193,100)
Due from SECT....................................... (344,600) (344,600)
------------- ------------
Total stockholders' equity.................... 6,703,900 6,032,400
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $23,968,800 $20,618,100
------------- ------------
------------- ------------
The accompanying notes are an integral part of these statements.
5
QuesTech, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996 1995
------------- ------------- -------------
Revenues.............................................. $ 78,476,100 $ 72,370,100 $ 57,951,200
Operating expenses
Salaries, wages and
employee benefits................................ 41,538,000 34,594,600 28,269,100
Other operating expenses............................ 35,167,800 36,192,700 27,653,800
------------- ------------- -------------
Total Operating Expenses.............................. 76,705,800 70,787,300 55,922,900
------------- ------------- -------------
Income from operations............................ 1,770,300 1,582,800 2,028,300
Other expense
Interest expense.................................... (719,800) (578,300) (395,800)
Charges arising from settlements
of litigation..................................... -- -- (722,100)
------------- ------------- -------------
Earnings before income taxes...................... 1,050,500 1,004,500 910,400
Provision for income taxes............................ (404,600) (186,200) (390,300)
------------- ------------- -------------
NET EARNINGS................................... $ 645,900 $ 818,300 $ 520,100
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common
shares outstanding:
Basic............................................... 1,439,193 1,395,397 1,349,331
------------- ------------- -------------
Diluted............................................. 1,521,755 1,517,521 1,540,318
------------- ------------- -------------
------------- ------------- -------------
Earnings per share:
Basic................................................... $ .45 $ .59 $ .39
------------- ------------- -------------
------------- ------------- -------------
Diluted................................................. $ .42 $ .54 $ .34
------------- ------------- -------------
------------- ------------- -------------
The accompanying notes are an integral part of these statements.
6
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31,
1997 1996 1995
------------ ------------ ------------
Common Stock:
Beginning balance.................................... $ 82,500 $ 78,900 $ 78,900
Exercise of options.................................. 300 3,600 --
------------ ------------ ------------
Ending balance....................................... 82,800 82,500 78,900
------------ ------------ ------------
------------ ------------ ------------
Additional paid in capital:
Beginning balance.................................. 2,835,600 2,720,100 2,722,700
Exercise of options................................ 42,700 85,500 (2,600)
Tax benefit associated with exercise of options.... -- 30,000 --
------------ ------------ ------------
Ending balance..................................... 2,878,300 2,835,600 2,720,100
------------ ------------ ------------
------------ ------------ ------------
Retained Earnings:
Beginning balance.................................... 3,652,000 2,833,700 2,313,600
Net Earnings......................................... 645,900 818,300 520,100
------------ ------------ ------------
Ending balance....................................... 4,297,900 3,652,000 2,833,700
------------ ------------ ------------
------------ ------------ ------------
Treasury Shares:
Beginning balance.................................... (193,100) (227,300) (30,000)
Purchase of shares................................... (17,400) -- (197,300)
Exercise of options.................................. -- 34,200 --
------------ ------------ ------------
Ending balance....................................... (210,500) (193,100) (227,300)
------------ ------------ ------------
------------ ------------ ------------
Due from SECT:
Beginning balance.................................... (344,600) (357,600) (432,500)
Exercise of options.................................. -- 13,000 74,900
------------ ------------ ------------
Ending balance....................................... (344,600) (344,600) (357,600)
------------ ------------ ------------
------------ ------------ ------------
Total Stockholders' Equity............................. $ 6,703,900 $ 6,032,400 $ 5,047,800
------------ ------------ ------------
------------ ------------ ------------
7
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31,
1997 1996 1995
------------ ------------ ------------
Shares of Common stock authorized...................... 3,000,000 3,000,000 3,000,000
------------ ------------ ------------
------------ ------------ ------------
Shares of Common stock issued:
Beginning balance.................................... 1,649,904 1,578,000 1,578,000
Exercise of options.................................. 7,400 71,904 --
------------ ------------ ------------
Ending balance....................................... 1,657,304 1,649,904 1,578,000
------------ ------------ ------------
------------ ------------ ------------
Shares of Treasury stock:
Beginning balance.................................... 39,047 41,539 10,000
Acquisition (Reissue) of Treasury stock.............. (300) (2,492) 31,539
------------ ------------ ------------
Ending balance....................................... 38,747 39,047 41,539
------------ ------------ ------------
------------ ------------ ------------
Shares held by the SECT:
Beginning balance.................................... 176,131 183,392 221,792
Release of Shares.................................... -- (7,261) (38,400)
------------ ------------ ------------
Ending balance....................................... 176,131 176,131 183,392
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
8
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1997 1996 1995
------------ ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net earnings......................................... $ 645,900 $ 818,300 $ 520,100
Adjustments to reconcile net earnings to net cash
from operating activities:
Depreciation and Amortization........................ 1,176,900 940,900 677,300
Reserve for unrecovered contract costs and
doubtful accounts................................... -- 337,500 185,000
Increase in fund values of nonqualifying plan
assets.............................................. (244,600) (234,900) (197,200)
Changes in assets and liabilities:
Accounts receivable................................ (3,376,600) (1,267,000) 689,500
Inventories........................................ 101,200 (88,900) (81,500)
Prepaid expenses and other assets.................. (58,300) 56,000 194,500
Accounts payable and accrued expenses.............. (193,100) 464,500 (175,400)
Income taxes payable............................... -- (45,200) (74,700)
Deferred taxes payable............................. 606,500 (246,500) (195,700)
Indebtedness to related parties and other
long-term obligations............................. 181,000 114,300 559,100
Accrued postretirement benefits...................... 309,700 106,300 184,200
------------ ------------ ------------
Net cash (used in) provided by operating
activities...................................... (851,400) 955,300 2,285,200
------------ ------------ ------------
9
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1997 1996 1995
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures................................. $(1,501,600) $(3,815,500) $(2,019,900)
------------ ------------ ------------
Net cash used in investing activities............ (1,501,600) (3,815,500) (2,019,900)
Cash flows from financing activities:
Borrowings on line of credit......................... 2,692,400 833,300 139,900
Cash proceeds from exercise of stock options......... 25,600 166,300 51,700
Proceeds from lease financing........................ -- 2,041,900 --
Repayment of long-term debt.......................... (194,000) (131,800) (51,100)
Repayment of indebtedness to related parties......... (600) (58,600) (242,300)
Repayment of other long-term debt.................... (116,200) (114,900) (70,400)
Purchase of Treasury Stock........................... -- -- (176,700)
------------ ------------ ------------
Net cash provided by (used in) financing
activities........................................ 2,407,200 2,736,200 (348,900)
------------ ------------ ------------
Net increase (decrease) in cash........................ 54,200 (124,000) (83,600)
Cash, beginning of period.............................. 54,300 178,300 261,900
------------ ------------ ------------
Cash, end of period.................................... $ 108,500 $ 54,300 $ 178,300
------------ ------------ ------------
------------ ------------ ------------
Cash payments for:
Interest............................................. $ 540,600 $ 355,900 $ 147,300
Income taxes......................................... $ 250,300 $ 916,400 $ 671,200
The accompanying notes are an integral part of these financial statements.
10
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
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, revenues from government contracts account for 99% of the Company's
revenues. A third subsidiary, Questech Packaging, Inc. ("QTPI") is in the
business of manufacturing plastic containers.
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.
11
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
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, 1995 for QTRD and December 31, 1991 for QTSC.
DCAA audits of contract costs for the government contract segment of QTSC for
fiscal years 1992 through 1995 are expected to be completed during 1998.
Contract revenue has been recorded in amounts that are expected to be
realized upon final settlement.
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 certain finished goods
and are stated at the lower of cost or market. Cost is determined principally
under the average cost method.
12
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
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.
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.
o Letter of credit--The fair value is based on the estimated cost to
terminate or otherwise settle these obligations with the counter-parties.
Following is a summary of the estimated fair value at December 31, 1997, of
the Company's financial instruments other than those on which the carrying
amount approximates fair value.
Carrying Fair
Amount Value
------------ ------------
Cash values of Insurance policies $ 1,697,800 $ 1,697,800
Letter of credit -- $ 250,000
The letter of credit, which was outstanding at December 31, 1997 was released
on February 5, 1998.
13
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
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 1997 and 1996, interest cost associated with
construction in progress was expensed due to immaterial amounts. 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 developed for
internal use is 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 leased assets is included with depreciation
expense.
In accordance with SFAS 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of," long-lived assets and
certain intangibles, including goodwill, are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying amount
may not be recoverable. The Company has determined that no impairment loss
need be recognized for applicable assets of continuing operations.
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.
14
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
The Company regularly performs a reassessment of the continuing value of the
acquired goodwill associated with the acquisitions. 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
The Company applies the provisions of SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and has 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 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.
15
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
13. Accounting for Stock-based Compensation
As permitted by SFAS 123, "Accounting for Stock-based Compensation," the
Company uses 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. Pro
forma disclosures of net income, and earnings per share are presented in Note
I as if the fair value based method of accounting defined in SFAS 123 had
been applied.
14. Earnings per share
In 1997 the Financial Accounting Standards Board issued Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share." This Statement replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly
to fully diluted EPS pursuant to Opinion 15. In complying with the
requirements of SFAS No. 128, the Company has restated all prior period EPS
data.
For purposes of computing the diluted EPS, the Company has dilutive stock
options as share equivalents using the treasury stock method. At December 31,
1997 and 1996, the Company's Stock Employee Compensation Trust (SECT), held
176,131 shares. These SECT shares have been excluded from the base of the EPS
calculations since they have not been allocated to individuals.
16
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
The following table reconciles basic and diluted EPS:
Year Ended December 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
Numerator
Net income $ 645,900 $ 818,300 $ 520,100
---------- ---------- ----------
---------- ---------- ----------
Denominator
Denominator for basic EPS-weighted
average shares 1,439,193 1,395,397 1,349,331
Effect of Dilutive Securities
Stock options (1) 82,562 122,124 190,987
---------- ---------- ----------
Denominator for diluted EPS 1,521,755 1,517,521 1,540,318
---------- ---------- ----------
---------- ---------- ----------
(1) Options to purchase 42,000 shares of common stock at prices ranging from
$7.50-$7.70 per share were outstanding during the second half of 1997 but
were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common
shares.
15. New Accounting Standards
Reporting Comprehensive Income
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. This
Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS 130
does not require a specific format for that
17
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. The Statement requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement
of financial position. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company will
comply with the disclosure requirements of SFAS 130 in fiscal year 1998.
Disclosures about Segments of an Enterprise and Related Information
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information," effective for periods
beginning after December 15, 1997. This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers.
This Statement requires that a public business enterprise report financial
and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. This
Statement requires that a public business enterprise reports a measure of
segment profit or loss, certain specific revenue and expense items, and
segment assets and certain other related information; information about the
revenues derived from the enterprise's products or services (or groups of
similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of
whether that information is used in making operating decisions.
18
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
However, this Statement does not require an enterprise to report information
that is not prepared for internal use if reporting it would be impracticable.
The Company will comply with the disclosure requirements of SFAS 131 in
fiscal year 1998.
NOTE B--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
December 31
----------------------------
1997 1996
------------- -------------
Accounts receivable
Current
U.S. Government
Billed $ 8,393,900 $ 9,403,800
Unbilled (including retentions
and indirect cost rate
variances of $1,392,300 and
$382,700 in 1997 and
$1,197,000 and $82,400
in 1996, respectively) 5,225,200 1,739,900
------------- -------------
13,619,100 11,143,700
Less reserve for unrecoverable
contract costs and doubtful
accounts (1,484,300) (2,112,800)
------------- -------------
$ 12,134,800 $ 9,030,900
------------- -------------
------------- -------------
Of the December 31, 1997 billed and unbilled amounts, approximately $10 million
is expected to be collected in 1998 and the remainder in subsequent years.
19
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE B--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS--Continued
DECEMBER 31
----------------------------
1997 1996
------------- -------------
Equipment and leasehold improvements
Furniture and fixtures $ 2,858,600 $ 2,811,300
Machinery and equipment 3,975,900 3,486,300
Computer software 994,900 2,053,300
Equipment held under capital lease 586,600 312,600
Construction in progress 2,333,700 2,351,400
Leasehold improvements 982,900 905,300
------------- -------------
11,732,600 11,920,200
Less accumulated depreciation and
amortization (6,298,200) (6,967,600)
------------- -------------
$ 5,434,400 $ 4,952,600
------------- -------------
------------- -------------
Included in machinery and equipment, and construction in progress above is
equipment with a carrying value of approximately $4.0 million which is to be
used in the Company's plastics manufacturing business. These carrying values
are based upon the Company's plans and intentions to expand its business in
this area by attracting new customers for various applications of its
patented container forming technology. If future economic conditions result
in changes in management's plans or intentions, the carrying values of the
affected assets will be reviewed and adjustments, if necessary, will be made.
Computer software consists primarily of costs associated with development of
software for internal use by the Company in its accounting and finance
function and its wide area network. Included in the amount capitalized is
approximately $575,000 in internal labor costs.
As of December 31, 1997, the aggregate net book value of leased office
equipment and certain leased assets included in construction in progress was
$2.3 million.
20
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE B--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS--Continued
DECEMBER 31
--------------------------
1997 1996
------------ ------------
Other assets
Cash value of life insurance
policies $ 1,697,800 $ 1,453,200
Patents less accumulated amortization
of $99,200 and $82,700, respectively 216,000 224,200
Investment in a limited partnership 87,600 87,600
Deposits 77,000 67,700
Other 291,200 51,600
------------ ------------
$ 2,369,600 $ 1,884,300
------------ ------------
------------ ------------
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 $382,200 pre-tax, as a result of surrender
charges. See also Note A8.
Accounts Payable
During 1997 and 1996, included in accounts payable are $1,913,400 and
$1,879,900, 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.
21
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE B--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS--Continued
December 31
--------------------------
1997 1996
------------ ------------
Accrued liabilities and Deferred credits
Accrued compensation and withholdings $ 1,821,200 $ 1,924,900
Accrued vacation 1,404,200 1,334,400
Amounts owed to certain subcontractors
and suppliers 1,093,400 1,324,300
Accrued legal expenses and commitments -- 505,600
Amounts due to related parties 428,700 373,500
Other 348,300 164,600
------------ ------------
Total accrued liabilities and deferred credits $ 5,095,800 $ 5,627,300
------------ ------------
------------ ------------
NOTE C--LINE OF CREDIT
At December 31, 1997, the Company's remaining available line of credit (LOC)
through First Union Bank (formerly Signet Bank of Virginia) was $2.1 million.
The underlying credit agreement permits borrowings up to $6.0 million. The
Company has the option of paying interest on the principal amount of the
prime rate or at LIBOR (London Interbank Offered Rate) plus 2.70%. The
Company's borrowing rate at December 31, 1997 was 8.5% which was the 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. The Company was in compliance with various financial
covenants, which require the maintenance of a maximum debt-to-net worth ratio
of 5 to 1 and a minimum tangible net worth of $3.0 million.
In addition to its revolving credit agreement, the Company has at its
disposal a $750,000 term loan facility which expires on March 31, 1998. As of
December 31, 1997, the Company had not borrowed any amounts on this facility.
The proceeds of the term loan are intended for the purchase of houses of
employees relocated by the Company. The entire principal amount
22
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE C--LINE OF CREDIT--Continued
of each term loan shall be due on the first to occur of (i) the sale of the
house securing such term loan and the (ii) maturity date.
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.
The current agreement expires on May 31, 1998. Management expects the
commitment to be extended by an amendment at that time.
NOTE D--LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
1997 1996
------------ ------------
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
upon demand $ 10,600 $ 10,600
Capitalized lease obligations
Amounts due under capitalized lease obligations, payable in monthly installments
through 2001, collateralized by certain equipment 2,029,100 2,095,000
------------ ------------
2,039,700 2,105,600
Less current maturities (511,900) (373,200)
------------ ------------
Total long-term obligations $ 1,527,800 $ 1,732,400
------------ ------------
------------ ------------
23
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
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,
- ------------------------
1998 $ 670,400
1999 613,600
2000 603,300
2001 484,800
2002 29,900
------------
Total minimum lease payments $ 2,402,000
Less amount representing interest
and taxes (372,900)
------------
Present value of minimum lease payments $ 2,029,100
------------
------------
Current portion $ 511,900
Noncurrent portion 1,517,200
------------
Capitalized lease obligations $ 2,029,100
------------
------------
During 1996, the Company refinanced certain construction in progress in its
Newport News manufacturing plant under a sale/leaseback arrangement. The
machines were sold for a sum amount in excess of $2 million. The transaction
was accounted for as lease financing, wherein the property remains on the
books subject to depreciation. A financing obligation representing the
proceeds was recorded and is reduced based on payments under the lease.
24
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE E--INCOME TAXES
A reconciliation of the effective tax rate and the Federal statutory income
tax rate applied to pretax income follows:
1997 1996 1995
--------- --------- ---------
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of Federal
income tax benefit .4 1.0 4.0
Amortization of goodwill 5.0 5.2 5.8
Other (.9) (3.3) (0.9)
Depreciation -- (13.0) --
Investment in a foreign subsidiary -- (5.4) --
--------- --------- ---------
Effective income tax rate 38.5% 18.5% 42.9%
--------- --------- ---------
--------- --------- ---------
Income tax expense consists of the following for the year ended
December 31,
1997 1996 1995
------------ ----------- -----------
Current $ (201,900) $ 432,700 $ 586,000
Deferred 606,500 (246,500) (195,700)
------------ ----------- -----------
Income tax expense $ 404,600 $ 186,200 $ 390,300
------------ ----------- -----------
------------ ----------- -----------
25
NOTE E--INCOME TAXES--CONTINUED
The tax effect of significant temporary differences that gave rise to
deferred income taxes as of December 31, 1997:
DEFERRED TAX DEFERRED TAX
ASSET LIABILITY
------------ ------------
Depreciation and Amortization $ $ 37,600
Retentions 537,200
Reserves against accounts
receivables 243,600
Deferred post-employment benefit 974,300
Deferred postretirement benefits 694,400
Accrued vacation 409,200
Miscellaneous 124,700
------------ ------------
Subtotal 2,446,200 574,800
Valuation allowance (262,000) --
------------ ------------
Deferred Tax $2,184,200 $ 574,800
------------ ------------
------------ ------------
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.
The Company's federal income tax return for 1995 is currently being
examined by the Internal Revenue Service. Management does not believe that
this or subsequent audits will have a material effect on the Company's
financial statements.
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. Under the plan, the Company may make two types of
26
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
contributions subject to the discretion of the Board of Directors: (1)
Employer matching contributions and (2) Profit-Sharing contributions. In
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 1997, the employer contribution to the 401k plan was $221,500
compared to $103,700 for 1996. No employer contribution was made by the
Company during 1995.
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 Chief Executive Officer and/or Chief Operating Officer
and the Board of Directors.
Amounts charged to expense under this plan were $98,000, $452,200 and
$393,500 at December 31, 1997, 1996 and 1995, respectively.
3. POSTRETIREMENT BENEFITS
The Company has 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.
27
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
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 (APBO) 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.
For measurement purposes, the annual health care cost trend for 1997
benefits was 8%, grading down to 5% over four years. The 1% increase in health
care cost trend was 9% in 1997, grading down to 6% over four years. During 1995,
a 10% medical inflation rate was assumed, grading down to 5% over six years. The
measurement of the APBO for 1997 and 1996 was based on an assumed discount rate
of 7.5%.
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
28
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
The following tables present the funded status of the Company's benefit
plans and the 1997 periodic expense:
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1997
---------- ------------ ------------- -------------
Accumulated Postretirement
Benefit Obligation:
Retirees $ (283,100) $ (295,400) $ (923,500) $ (1,502,000)
Fully eligible active
plan participants (65,200) -- -- (65,200)
Other Active Plan
participants (107,200) -- (1,970,900) (2,078,100)
----------- ----------- ------------- --------------
Total (455,500) (295,400) (2,894,400) (3,645,300)
Fair Value of Plan
Assets -- -- -- --
----------- ----------- ------------- --------------
APBO in excess of
plan assets: (455,500) (295,400) (2,894,400) (3,645,300)
Unrecognized
net gain/
(loss) (199,100) (4,900) 259,900 55,900
Unrecognized
Transition
Obligation 441,000 198,500 1,122,500 1,762,000
------------ ------------- ------------- --------------
Accrued postretirement
benefit cost in
the balance sheet $ (213,600) $ (101,800) $ (1,512,000) $ (1,827,400)
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
29
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1997
------------ ------------- -------------- --------------
Reconciliation of accrued
postretirement
benefit cost:
Accrued postretirement
benefit cost, at January 1, 1997 $ (174,300) $ (85,500) $ (1,251,900) $ (1,511,700)
Net periodic cost (60,000) (32,500) (473,600) (566,100)
Benefit payments 20,700 16,200 213,500 250,400
------------ ------------- -------------- --------------
Accrued postretirement benefit cost at
December 31, 1997 $ (213,600) $ (101,800) $ (1,512,000) $ (1,827,400)
------------ ------------- -------------- --------------
------------ ------------- -------------- --------------
Current portion (20,700) ( 16,200) (213,500) (250,400)
Long-term portion (192,900) ( 85,600) (1,298,500) (1,577,000)
------------ ------------- -------------- --------------
(213,600) (101,800) (1,512,000) (1,827,400)
------------ ------------- -------------- --------------
------------ ------------- -------------- --------------
30
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
The following tables present the funded status of the Company's benefit
plans and the 1996 periodic expense:
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1996
------------ ------------ -------------- --------------
Accumulated Postretirement
Benefit Obligation:
Retirees $ (314,400) $ (298,800) $ (987,800) $ (1,601,000)
Fully eligible active plan participants (13,200) -- -- (13,200)
Other Active Plan participants (139,700) -- (1,761,900) (1,901,600)
------------ ------------ -------------- --------------
Total (467,300) (298,800) (2,749,700) (3,515,800)
Fair Value of Plan Assets -- -- -- --
------------ ------------ -------------- --------------
APBO in excess of plan assets: (467,300) (298,800) (2,749,700) (3,515,800)
Unrecognized net gain/ /loss) (177,400) 1,500 300,000 124,100
Unrecognized Transition Obligation 470,400 211,800 1,197,800 1,880,000
------------ ------------ -------------- --------------
Accrued postretirement benefit
cost in the balance sheet $ (174,300) $ (85,500) $ (1,251,900) $ (1,511,700)
------------ ------------ -------------- --------------
------------ ------------ -------------- --------------
31
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1996
------------ ----------- -------------- --------------
Reconciliation of accrued postretirement
benefit cost:
Accrued postretirement benefit cost,
at January 1, 1996 $ (126,300) $ (66,400) $ (1,204,200) $ (1,396,900)
Net periodic cost (64,000) (35,200) (491,600) (590,800)
Benefit payments 16,000 16,100 443,900 476,000
------------ ----------- -------------- --------------
Accrued postretirement benefit cost
at December 31, 1996 $ (174,300) $ (85,500) $ (1,251,900) $ (1,511,700)
------------ ----------- -------------- --------------
------------ ----------- -------------- --------------
32
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
The following tables represent the net periodic postretirement benefit cost
components for 1997, 1996 and 1995:
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1997
---------- ----------- ---------- -----------
Service cost $ 10,100 $ 1,300 $ 265,000 $ 276,400
Interest cost 30,400 18,000 130,800 179,200
Amortization -transition obliga. 29,400 13,200 75,300 117,900
Amortization--gain or loss (9,900) -- 2,500 (7,400)
---------- ----------- ----------- -----------
Net periodic post-retirement
benefit cost $60,000 $ 32,500 $ 473,600 $ 566,100
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Impact of One Percent
Increase in Medical
Trend Rate:
Aggregate impact on
1997 service cost and
interest cost $ 2,500
---------
---------
33
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1996
----------- ----------- ---------- ----------
Service cost $ 10,400 $ 4,300 $ 287,800 $ 302,500
Interest cost 31,800 17,700 127,100 176,600
Amortization --
transition obliga. 29,400 13,200 75,300 117,900
Amortization--gain or loss (7,600) -- 1,400 (6,200)
----------- ----------- ---------- ----------
Net periodic post-retirement
benefit cost $ 64,000 $ 35,200 $ 491,600 $ 590,800
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Impact of One Percent
Increase in Medical Trend Rate:
Aggregate impact on
1996 service cost and
interest cost $ 2,100
-----------
-----------
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
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
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Impact of One Percent
Increase in Medical Trend
Rate:
Aggregate impact on
1995 service cost and
interest cost $ 3,300
----------
----------
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, 1997 and 1996, there were 176,131 unallocated and uncommitted shares held
by the SECT.
35
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE G--OTHER LONG-TERM OBLIGATIONS
Amounts due to certain founders (no longer affiliated with the Company),
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 in the 1995 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, 1996:
Year Ending December 31,
------------------------
1997 1,809,100
1998 1,723,200
1999 1,034,400
2000 884,800
2001 607,200
----------
Future minimum rental payments $6,058,700
==========
Net rent expense under operating leases amounted to approximately $2,053,400,
$1,744,000, and $1,739,900 for the years ended December 31, 1997, 1996 and
1995, respectively, after being reduced by rental income which was not
material during the last three years.
36
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE H--COMMITMENTS AND CONTINGENCIES - Continued
2. 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. The cost of accrued interest and the present value of
compensation changes for these agreements aggregated ($115,353 and $106,700)
during 1997 and 1996, respectively. None of these costs will be paid until
the subject officers change their employment status with the Company.
NOTE I--STOCK OPTIONS
The Company accounts for its incentive stock options under APB No. 5. The
Company has two incentive stock option plans--1994 and 1996. The 1994 and
1996 Stock Option Plans authorize the grant of up to 200,000 and 268,132
shares of the Company's common stock, respectively. These options which have
five-year terms vest at a rate of 20% per year from the date of grant. The
option price of all options granted to date represents the fair market value
of the Company's common stock at the date of grant. Options to purchase
10,000 and 72,882 shares are available for future grants under the 1994 and
1996 Plans, respectively.
Accordingly, no compensation cost has been recognized for the plan. Had
compensation cost for the plan been determined based on the fair value of the
options at the grant dates consistent with the method of SFAS 123, the
Company's net income and earnings per share would have been:
1997 1996 1995
---- ---- ----
Net Income As reported $ 645,900 $ 818,300 $ 520,100
Pro forma 527,100 705,600 419,000
Basic EPS As reported 0.45 0.59 0.39
Pro forma 0.37 0.48 0.28
Diluted EPS As reported 0.42 0.54 0.34
Pro forma 0.36 0.48 0.28
37
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE I -- STOCK OPTIONS - Continued
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995: expected
volatility of 67%, 71% and 71%, respectively; risk free interest rate of 6%;
and expected lives of four years. The pro forma effect on net income for
1997, 1996 or 1995 is not representative of the pro forma effect on net
income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1995.
A summary of the status of the Company's Incentive Stock Option Plans as of
December 31, 1997, 1996 and 1995, and changes during the years ending on
those dates is presented below.
1997 1996 1995
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
-------------------- -------------------- --------------------
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of year 220,200 $ 4.63 277,500 $ 3.88 96,500 $ 1.82
Granted 175,500 6.99 44,000 6.90 219,000 4.41
Exercised (7,600) 4.00 (71,100) 2.21 (31,400) 1.75
Forfeited (13,800) 6.36 (30,200) 6.73 (6,600) 2.28
Outstanding at year-end 374,300 5.68 220,200 4.63 227,500 4.41
Options exercisable at year end 83,400 4.50 25,000 4.10 58,500 1.82
Weighted-average fair value of
options granted during the year 3.85 4.13 2.57
38
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE I -- STOCK OPTIONS - Continued
The following information applies to options outstanding at December 31, 1997:
Number outstanding 374,300
Range of exercise prices $4.00 to $7.70
Weighted-average exercise price $5.68
Weighted-average remaining contractual life 3.61
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
15,000 during 1996 at the stock's then fair market value, which was $7.25. Of
these options, 15,000 shares were outstanding at December 31, 1997.
39
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE J--FINANCIAL INFORMATION FOR BUSINESS SEGMENTS
The Company derived substantially all of its revenues under contracts with
agencies of the United States Government, either as a prime contractor or as
a subcontractor.
Currently, the Company operates in two industry segments: government
contracting and commercial (plastic container manufacturing). Performance
under government contracts includes scientific, engineering, and program
management services, primarily in the defense and intelligence arenas. Sales
provided by the commercial segment during 1997 were for reimbursable costs
under a small government contract and for pre-production costs reimbursable
under a contract with a Fortune 100 company.
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
principally 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. Assets in the
commercial segment consist primarily of plant equipment and construction in
progress.
40
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE J--FINANCIAL INFORMATION FOR BUSINESS SEGMENTS (CONTINUED)
A summary of the Company's operations by industry segment follows:
GOVERNMENT
1997 CONTRACTS COMMERCIAL CORPORATE CONSOLIDATED
- ---- ----------- ----------- ----------- -----------
Operating revenues $77,789,400 $ 686,700 $ -- $78,476,100
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Operating Profit/loss $ 5,603,500 (823,000) $(3,010,200) $ 1,770,300
Other income/expense -- -- -- --
Interest -- -- (719,800) (719,800)
----------- ----------- ----------- -----------
Earnings/loss before income
taxes $ 5,603,500 (823,000) ($3,730,000) $ 1,050,500
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Identifiable assets $17,263,600 $ 3,704,100 $ 3,001,100 $23,968,800
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Depreciation and amortization of
property, plant and equipment $ 392,200 $ 182,800 $ 430,800 $ 1,005,800
Amortization of goodwill and
other intangibles $ 143,800 $ -- $ 27,300 $ 171,100
Capital Expenditures $ 592,700 $ -- $ 908,900 $ 1,501,600
GOVERNMENT
1996 CONTRACTS COMMERCIAL CORPORATE CONSOLIDATED
- ---- ----------- ----------- ----------- -----------
Operating revenues $71,693,000 $ 677,100 $ -- $72,370,100
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Operating Profit/loss $ 6,290,500 $(1,813,900) $(2,893,800) $ 1,582,800
Other income/expense -- -- -- --
Interest -- -- (578,300) (578,300)
----------- ----------- ----------- -----------
Earnings/loss before income
taxes $ 6,290,500 $(1,813,900) $(3,472,100) $ 1,004,500
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Identifiable assets $12,236,700 $ 3,586,700 $ 4,794,700 $20,618,100
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
41
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE J--FINANCIAL INFORMATION FOR BUSINESS SEGMENTS - Continued
Depreciation and
amortization of property,
plant and equipment $ 371,400 $ 183,000 $ 200,000 $ 754,400
Amortization of goodwill and
other intangibles $ 154,500 $ -- $ 32,000 $ 186,500
Capital Expenditures $ 470,100 $ 2,615,100 $ 730,300 $ 3,815,500
GOVERNMENT
1995 CONTRACTS COMMERCIAL CORPORATE CONSOLIDATED
- ---- ----------- ----------- ----------- -----------
Operating revenues $57,902,600 $ 48,600 $ -- $57,951,200
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Operating Profit/loss $ 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/loss before income
taxes $ 6,309,100 $(1,176,100) $(4,222,600) $ 910,400
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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
42
SUPPLEMENTAL INFORMATION
43
QuesTech, Inc. and Subsidiaries
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ ------------
Reserve for unrecovered contract costs
and doubtful accounts
Balance at Beginning of Period $ 2,112,800 $ 2,053,100 $ 1,853,300
Additions:
Charged to Costs and Expenses -- 59,700 185,000
Charged to Other Accounts -- -- 17,600
Deductions: (628,500) -- (2,800)
------------ ------------ ------------
Balance at End of Period $ 1,484,300 $ 2,112,800 $ 2,053,100
------------ ------------ ------------
------------ ------------ ------------
Current $ 1,484,300(1) $ 2,112,800(1) $ 2,053,100(1)
------------ ------------ ------------
------------ ------------ ------------
Non-current $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
Valuation allowance for deferred
tax asset
Balance at Beginning of Period $ 262,000 $ 148,000 $ 148,000
Additions:
Charged to Income Tax Expense -- 114,000 --
Charged to Other Accounts -- -- --
Deductions:
Balance at End of Period $ 262,000 $ 262,000 $ 148,000
------------ ------------ ------------
------------ ------------ ------------
Current $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
Non-current $ 262,000 $ 262,000 $ 148,000(2)
------------ ------------ ------------
------------ ------------ ------------
(1) Included in accounts receivable--trade.
(2) Included in deferred tax asset--long-term.
44