-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IUH2UtoXCYCO4ND5POj37o6Ts2Wr5e9s3Lc4x/HAYsH1OiMRU66Jv5lzljM4SXt4 lXroSjo3PaaXePSvWOCIlg== 0000737033-97-000002.txt : 19970320 0000737033-97-000002.hdr.sgml : 19970320 ACCESSION NUMBER: 0000737033-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970319 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUESTECH INC CENTRAL INDEX KEY: 0000737033 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 540844913 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13390 FILM NUMBER: 97559415 BUSINESS ADDRESS: STREET 1: 7600A LEESBURG PK CITY: FALLS CHURCH STATE: VA ZIP: 22043 BUSINESS PHONE: 7037601000 MAIL ADDRESS: STREET 1: 7600 A LEESBURG PK CITY: FALLS CHURCH STATE: VA ZIP: 22043 10-K 1 =========================================================================== 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, 1996 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 7, 1997 -- $6.7 million. Number of shares of Common Stock outstanding on March 7, 1997 -- 1,610,957 shares. PART I Item 1. BUSINESS QuesTech, Inc. (the Company), provides a broad spectrum of professional services to customers within several high technology communities. Corporate products include scientific, engineering, research, and management services in electronics, information warfare, information technology, computer software, systems integration, and industrial analysis. A major portion of the Company's 1996 revenues were derived from competitively awarded contracts with U. S. Government clients, primarily within the Department of Defense. 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 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 engineering field services, including equipment installation, test monitoring, and operations and maintenance. QTSC also provides cost-effective program support services, including system 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.) QuesTech Packaging, Inc. is a wholly-owned subsidiary which manufactures plastic containers utilizing scrapless, melt-phase thermoforming technology. Its main product line consists of drop-in, thermoformed infant bottle liners, which are another alternative to bag-type liners produced by its competitors. 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 may be 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, 1996 and December 31, 1995: Funded Backlog Unfunded Backlog December 31, December 31, 1996 1995 1996 1995 $38,608,600 $23,592,600 $367,148,200 $427,917,500
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 1996. However, the Company historically has received the funding for substantially all of its unfunded backlog. Personnel The Company and its subsidiaries, as of December 31, 1996, had approximately 600 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 I, issued March 5, 1991. European Patent No. 363,918 granted on May 24, 1995. U. S. Patent No. 5,091,231, entitled RETORTABLE CONTAINER II, 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. Service Mark Registration No. 1,531,368 on March 21, 1989, No. 1,931,615 on October 31, 1995; 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 67,400 square feet. Management believes that its existing leases are suitable and adequate. Item 3. LEGAL PROCEEDINGS The following information is furnished regarding litigation involving the Company: On January 2, 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 and its general partner) sought attorneys' fees incurred in two earlier landlord/tenant cases (a contract claim) plus damages for the tort of malicious prosecution, plus punitive damages. In February 1997, the Company agreed to a settlement which has been accounted for in the financial statements. The settlement, which is subject to final documentation, disposes of all issues raised in the litigation and had no material impact on the Company's financial statements. The Company has no other litigation pending which involves potential liability in excess of $10,000. Other Claims Since September 1996, the Company has been involved in a dispute with Munchkin, Inc., the sole customer at that time of its QTPI subsidiary. The dispute involved an alleged breach of contract and warranty issues, as well as claims for payment by QTPI. In addition, in February, the Company filed a declaratory judgment action seeking to clarify the nature of the exclusivity granted to Munchkin under its contract. The Company is currently in negotiations which if successful would resolve all outstanding disputes with Munchkin, Inc. The Company has no other claims pending which involves potential liability in excess of $10,000. 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 23, 1997: Election of six directors to the Company's Board of Directors; Ratification of the appointment of the Company's independent auditor; and Amendment of the Company's Incentive Stock Option Plan (ISOP). 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. At December 31, 1996, there were 1,649,904 shares issued, of which 1,610,857 were outstanding and 39,047 shares were in Treasury. Of the shares outstanding, 176,131 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 1996 and 1995, during which the common stock has been publicly traded as reported by NASDAQ. Period High Low 1st fiscal quarter - 1996 9.00 7.50 2nd fiscal quarter - 1996 9.25 7.00 3rd fiscal quarter - 1996 8.25 6.25 4th fiscal quarter - 1996 8.00 7.25 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
As of December 31, 1996 there were 275 accounts of record, representing approximately 800 beneficial stockholders, 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: 1996 1995 1994 1993 1992 (In thousands, except earnings/loss per share): Revenues .................... $72,370 $57,951 $54,696 $52,649 $48,653 Income from operations before other income and income taxes .............. 1,583 2,028 1,877 1,431 1,315 Charges arising from settle- ments of litigation ....... -- 722 843 1,754 224 Interest expense ............ 578 396 386 307 243 Earnings before income taxes ..................... 1,005 910 647 <630> 848 Extraordinary gain .......... -- -- -- -- 372 Net earnings .......... 818 520 318 <286> 438 Earnings per common share and common equivalent share: Primary earnings per share ................. $ .54 $ .35 $ .23 $ <.18> $ .28 Fully diluted earnings/ per share ................. $ .54 $ .34 $ .23 $ <.18> $ .28 Weighted average number of shares outstanding during 1996, 1995 and 1994: Primary .................. 1,518 1,485 1,397 1,567 1,568 Fully diluted ............ 1,525 1,540 1,411 1,567 1,568
Years Ended December 31, 1996 1995 1994 1993 1992 Balance Sheet Data: Total Assets ................ $20,618 $16,424 $15,759 $17,610 $14,896 Long-term debt .............. 1,722 156 213 274 78 Indebtedness to related parties ................... 1,417 1,322 1,189 1,281 1,111 Accrued postretirement benefit cost .............. 1,267 1,161 977 1,091 -- Other long-term obligations . 1,011 1,137 831 884 -- Deferred gain and rent credits ................... -- -- -- 751 954 Stockholders' equity ........ $ 6,032 $ 5,048 $ 4,653 $ 4,335 $ 5,065
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: 1996 Compared With 1995 Revenues During 1996, the Company's revenues were $72.4 million, up 25% over 1995. Both the government contracting and the commmercial packaging segments reported business growth compared to last year. The government contracting segment, which provides 99% of the Company's revenues, consists of two operating business units: QuesTech Research Division and QuesTech Service Company ("QTRD" and "QTSC" respectively). A significant portion of the revenues are derived from two major contracts with the Department of the Army. The commercial packaging segment has only one operating business unit, QuesTech Packaging, Inc. ("QTPI"). During 1996, QTPI had only one customer. Government Contracts Revenues from a large Army contract and its follow-on effort which commenced performance during 1996 have accounted for over 40% of the Company's revenue during each of the last four years. A significant portion of the revenue increase was derived from materials and subcontract-intensive work orders. Revenues from increased efforts on Navy contracts and a new 5-year $25 million Air Force contract also contributed to growth. Commercial Packaging During the first half of 1996, QTPI produced thermoformed infant bottle liners which were marketed under the "1-Step" Munchkin brand. Following a dispute on pricing terms and product specifications, QTPI drastically cut back its production and halted customer shipments during the third quarter. No sales were posted during the fourth quarter. Operating Expenses The Company's operating expenses during 1996 rose to $70.8 million, up 27% over 1995. Salaries, wages and employee benefits increased primarily as a result of increased direct labor staffing on government contracts. A major portion of the increase in operating expenses arose from materials-intensive delivery orders and subcontracting activities. Additionally, manufacturing costs increased during the production stages. Income from Operations Income from operations for 1996 was approximately $1.6 million, which declined by 22% compared to 1995. Operating income was negatively impacted by reduced margins arising from the costs of certain contractual requirements. Continuing losses at QTPI, which included unabsorbed production overhead in the absence of sales, and reserves for inventory and receivable write-downs, contributed to the decrease in operating income. Interest Expense Interest expense increased 46% over 1995. Interest costs associated with construction in progress at the manufacturing plant were charged to operations, instead of capitalized. Taxes The Company's 1996 effective tax rate declined to 18.5% from 42.8% during 1995. The decrease in tax rate resulted from a tax benefit arising from non-recurring adjustments to deferred taxes associated with depreciation and other favorable tax deductions. Net Earnings For 1996, primary and fully diluted earnings per share were $.54 on earnings of $818,300; these amounts reflected a 54% increase over per share earnings of $.35 during 1995. Financial Condition The following table compares selected financial data that measure the Company's liquidity and capital resources at December 31, 1996, 1995 and 1994 (in thousands of dollars, except for ratios): 1996 1995 1994 Working capital $ 1,932 $ 1,995 $ 2,903 Current assets 11,101 9,595 10,799 Current liabilities 9,169 7,600 7,896 Availability under line of credit 4,773 3,606 3,746 Working capital ratio (1) 1.21 1.26 1.37
(1) Current assets over current liabilities. The Company's financial condition improved through continued profitability on consolidated operations. Working capital remained at $1.9 million, which was approximately the same as last year, despite highly leveraged activities. Operating cash flows provided by the government contract segment were consumed by the commercial packaging segment's operating cash requirements. Inventories, which were twice last year's levels despite a write-down, increased pending shipment of finished goods that are subject to a contract dispute. The increase in accounts receivable resulted mainly from revenue growth. Capital expenditures, primarily related to manufacturing build-out, were financed initially by the line of credit facility, and subsequently refinanced with $2.1 million of proceeds from a long-term capital lease. During the next two years, the Company will incur costs associated with the relocation of its contract efforts from Vint Hill to Fort Monmouth. Some of these amounts may be mitigated through certain state grants. The Company intends to implement a wide-area network covering twelve sites. The cost of setting up three pilot sites is expected to exceed $300,000. Of this amount, approximately $60,000 was expended in 1996. Outlook Forward looking statements contained in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Report Act of 1995. Certain factors could cause actual results to differ materially from the statements. These factors include but are not limited to: continuity of contract funding and customer relationships; retention of key personnel, particularly those involved in technical efforts; interest rates; changes in technology; and potential impact of industry consolidation. 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 regional threats and ease with which leading edge technologies can be acquired by potential adversaries, there is the possibility these trends may be curtailed or reversed. In addition, several segments within the industry, such as the area of application programming and Information Warfare, will provide growth opportunities for contractors. Management anticipates that there will be little impact on the Company's existing contracts during 1997 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, the mission being supported at Vint Hill -- high technology engineering services -- has been relocated to Fort Monmouth. The Company will continue to provide support to this mission under its current contract. 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 a 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. The Company has invested over $3 million in manufacturing equipment, plant build-out and refitting costs at its Newport News facility. Marketing efforts have elicited interest from prospective customers, one of which has provided funding for a prototype mold to produce samples for testing. Based on internal cash flow forecasts, management has determined that no impairment has occurred for its plant equipment and manufacturing technology. Results of operations, financial condition, and liquidity for 1997 may be negatively affected by factors such as: the timing of the execution of any new agreements, and the lead time for machine retooling and testing in accordance with new customer specifications. The Company is unable to provide assurance that actual sales to other customers will be in line with forecasts. 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 the result of 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. 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, 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 in 1995 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 in 1995 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 believed that it had 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. 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 Included under Item 14. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors Vincent L. Salvatori - Chairman of the Board and Chief Executive Officer, QuesTech, Inc. Dr. Robert B. Costello - Chairman, Costello Group Edward G. Broenniman - President and Chief Executive Officer, Piedmont Group, Chief Operating Officer and Chief Financial Officer, Hemex, Inc. Gerald F. Mayefskie - President and Chief Operating Officer, QuesTech, Inc. Sebastian P. Musco - Chairman of the Board and Chief Executive Officer, Gemini Industries, Inc. Lt. General Vincent M. Russo (Ret.) - Independent Consultant in Logistics Executive Officers Vincent L. Salvatori - Chairman of the Board and Chief Executive Officer Gerald F. Mayefskie - President and Chief Operating Officer Joseph P. O'Connell - Vice President and Chief Financial Officer Christina M. Burkholder - Vice President and General Counsel 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 (10) Material Contracts (a) Stock Option Plans. (i) 1996 Stock Option Plan (ii) Stock Option Plan for Non-Employee Directors (b) Agreement dated between Vincent L. Salvatori and QuesTech. Incorporated herein by reference. (c) Agreement dated between Gerald F. Mayefskie and QuesTech. Incorporated herein by reference. (d) 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. (e) Confidential Settlement Agreement with Oscar E. Hayes, dated August, 1995. Incorporated herein by reference. 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 1997 proxy statement to be filed in connection with the Annual Stockholders' Meeting. 21. Subsidiaries of the registrant Name of Subsidiary State of Incorporation QuesTech Service Company Virginia QuesTech Packaging Inc. Virginia QuesTech Model Company Virginia (inactive) QuesTech Information Virginia Sciences Corporation (newly formed)
27. Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were required to be filed during 1996. 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. 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, 1996 QUESTECH, INC. FALLS CHURCH, VIRGINIA QUESTECH, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS December 31, 1996, 1995 and 1994 C O N T E N T S REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1996 AND 1995 4 CONSOLIDATED STATEMENTS OF EARNINGS - YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 7 CONSOLIDATED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11-42 SUPPLEMENTAL INFORMATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 44 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, 1996 and 1995, and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. We have also audited Schedule II as of December 31, 1996 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. Grant Thornton LLP Vienna, Virginia February 6, 1997 QuesTech, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, ASSETS 1996 1995 CURRENT ASSETS Cash and cash equivalents ................. $ 54,300 $ 178,300 Accounts receivable Trade ................................... 9,030,900 8,341,900 Income taxes and other................... 594,500 16,500 Inventories ............................... 170,400 81,500 Prepaid expenses and other ................ 350,200 225,500 Deferred income taxes ..................... 900,300 751,300 Total current assets ................. 11,100,600 9,595,000 EQUIPMENT AND LEASEHOLD IMPROVEMENTS - at cost less accumulated depreciation and amortization .............................. 4,952,600 2,256,500 GOODWILL, less accumulated amortization of $1,571,600 and $1,417,000, respectively ........................................... 1,365,000 1,519,600 DEFERRED INCOME TAXES, net of valuation allowance of $262,000 and $148,000 respectively .............................. 1,315,600 1,218,100 OTHER ASSETS ................................ 1,884,300 1,834,500 TOTAL ASSETS ................................ $20,618,100 $16,423,700
The accompanying notes are an integral part of these statements. QuesTech, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 CURRENT LIABILITIES Line of credit ............................ $ 1,227,400 $ 394,100 Current maturities of long-term obligations .............................. 374,000 57,100 Accounts payable ........................... 1,940,300 2,268,800 Accrued liabilities and deferred credits .................................. 5,627,300 4,834,300 Income taxes Currently payable ........................ -- 45,200 Total current liabilities ............ 9,169,000 7,599,500 LONG-TERM OBLIGATIONS, net of current maturities ................................. 1,721,800 156,200 INDEBTEDNESS TO RELATED PARTIES .............. 1,417,100 1,321,900 ACCRUED POSTRETIREMENT BENEFIT COST .......... 1,267,300 1,161,000 OTHER LONG TERM OBLIGATIONS .................. 1,010,500 1,137,300 Total liabilities .................... 14,585,700 11,375,900 COMMITMENTS AND CONTINGENCIES ................ -- -- STOCKHOLDERS' EQUITY Common stock - authorized 3,000,000 shares of $.05 par value, issued 1,649,904 and 1,578,000 shares, outstanding 1,610,857 and 1,536,461 at December 31, 1996 and 1995, respectively ....................... 82,500 78,900 Additional paid in capital ................. 2,835,600 2,720,100 Retained earnings .......................... 3,652,000 2,833,700 Less: Treasury Stock at cost .............. <193,100> <227,300> Due from SECT .............................. <344,600> <357,600> Total stockholders' equity ........... 6,032,400 5,047,800 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $20,618,100 $16,423,700
The accompanying notes are an integral part of these statements. QuesTech, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS Year ended December 31, 1996 1995 1994 Revenues ......................... $72,370,100 $57,951,200 $54,696,400 Operating expenses Salaries, wages and employee benefits ............ 34,594,600 28,269,100 26,719,900 Other operating expenses ....... 36,192,700 27,653,800 26,099,600 Total Operating Expenses ......... 70,787,300 55,922,900 52,819,500 Income from operations ....... 1,582,800 2,028,300 1,876,900 Other expense Interest expense ............... <578,300> <395,800> <386,400> Charges arising from settlements of litigation ................ -- <722,100> <843,100> Earnings before income taxes . 1,004,500 910,400 647,400 Provision for income taxes ....... <186,200> <390,300> <329,600> NET EARNINGS .............. $ 818,300 $ 520,100 $ 317,800 Weighted average number of common shares outstanding: Primary ...................... 1,518,374 1,484,680 1,396,594 Fully diluted ................ 1,524,757 1,540,208 1,410,902 Earnings per share: Primary ........................ $ .54 $ .35 $ .23 Fully diluted .................. $ .54 $ .34 $ .23
The accompanying notes are an integral part of these statements. QuesTech, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Year ended December 31, 1996 1995 1994 Common Stock: Beginning balance ................... $ 78,900 $ 78,900 $ 78,900 Exercise of options ................. 3,600 -- -- Ending balance ...................... 82,500 78,900 78,900 Additional paid in capital: Beginning balance ................. 2,720,100 2,722,700 2,722,700 Exercise of options ............... 85,500 <2,600> -- Tax benefit associated with exercise of options ............. 30,000 -- -- Ending balance .................... 2,835,600 2,720,100 2,722,700 Retained Earnings: Beginning balance ................... 2,833,700 2,313,600 1,995,800 Net Earnings ........................ 818,300 520,100 317,800 Ending balance ...................... 3,652,000 2,833,700 2,313,600 Treasury Shares: Beginning balance ................... <227,300> <30,000> <30,000> Purchase of shares -- <197,300> -- Exercise of options ................. 34,200 -- -- Ending balance ...................... <193,100> <227,300> <30,000> Due from SECT: Beginning balance ................... <357,600> <432,500> <432,500> Exercise of options ................. 13,000 74,900 -- Ending balance ...................... <344,600> <357,600> <432,500> Total Stockholders' Equity ............ $6,032,400 $5,047,800 $4,652,700
QuesTech, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Year ended December 31, 1996 1995 1994 Shares of Common stock authorized .... 3,000,000 3,000,000 3,000,000 Shares of Common stock issued: Beginning balance ................... 1,578,000 1,578,000 1,578,000 Exercise of options ................. 71,904 -- -- Ending balance ...................... 1,649,904 1,578,000 1,578,000 Shares of Treasury stock: Beginning balance ................... 41,539 10,000 10,000 Acquisition of Treasury stock ............................. <2,492> 31,539 -- Ending balance ...................... 39,047 41,539 10,000 Shares held by the SECT: Beginning balance ................... 183,392 221,792 221,792 Release of Shares ................... <7,261> <38,400> -- Ending balance ...................... 176,131 183,392 221,792
The accompanying notes are an integral part of these statements. QuesTech, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 1996 1995 1994 Increase (Decrease) in Cash and Cash Equivalents Cash flows from operating activities: Net earnings ..................... $ 818,300 $ 520,100 $ 317,800 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and Amortization .. 940,900 677,300 695,800 Reserve for unrecovered contract costs and doubtful accounts .. 337,500 185,000 -- Provision for lease settlement . -- -- <626,400> Increase in fund values of nonqualifying plan assets .... <234,900> <197,200> <152,100> Changes in assets and liabilities: Accounts receivable ..........<1,267,000> 689,500 1,467,900 Inventories .................. <88,900> <81,500> 46,400 Prepaid expenses and other assets ..................... 56,000 194,500 <274,300> Accounts payable and accrued expenses.................... 464,500 <175,400> <21,000> Income taxes payable ......... <45,200> <74,700> <325,800> Deferred taxes payable ....... <246,500> <195,700> 136,100 Indebtedness to related parties and other long-term obligations .................. 114,300 559,100 108,100 Accrued postretirement benefits 106,300 184,200 <113,900> Net cash provided by operating activities 955,300 2,285,200 1,258,600
QuesTech, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 1996 1995 1994 Cash flows from investing activities: Capital expenditures ............ $<3,815,500> $<2,019,900> $ <355,100> Proceeds from return on investment in whole life policies ........ -- -- 250,300 Net cash used in investing activities <3,815,500> <2,019,900> <104,800> Cash flows from financing activities: Increase/ in line of credit ........................ 833,300 139,900 <281,000> Cash advance to SECT for stock acquisition .................... -- -- <432,500> Cash proceeds from exercise of stock options .................. 166,300 51,700 -- Proceeds from lease financing ... 2,041,900 -- -- Repayment of long-term debt ..... <131,800> <51,100> <97,400> Repayment of indebtedness to related parties ............... <58,600> <242,300> <192,000> Repayment of other long-term debt <114,900> <70,400> <61,500> Purchase of Treasury Stock ...... -- <176,700> -- Net cash used in financing activities 2,736,200 <348,900> <1,064,400> Net increase in cash ..... <124,000> <83,600> 89,400 Cash, beginning of period .......... 178,300 261,900 172,500 Cash, end of period ................ $ 54,300 $ 178,300 $ 261,900 Cash payments for: Interest ......................... 355,900 147,300 140,600 Income taxes ..................... 916,400 671,200 519,100
The accompanying notes are an integral part of these financial statements. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 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"). Revenues from government contracts account for 99% of the Company's revenues. A third subsidiary, QuesTech Packaging, Inc. ("QTPI", formerly QuesTech Ventures, Inc.), 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 QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued 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. 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. Contract costs for the government contract segment for 1992 through 1995 are expected to be audited during 1997. 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. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued 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. 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: 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. Investment in a partnership - The fair value is based on the maximum amount of proceeds expected to be realized by the Company, upon liquidation of the partnership. 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, Confederation 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, 1996, the QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued carrying amount of the cash values of these policies was approximately $477,400. 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, 1996, of the Company's financial instruments other than those on which the carrying amount approximates fair value. Carrying Fair Amount Value Investment in a partnership, for which it is not practicable to estimate fair value $ 87,500 $ -- Cash values of Insurance policies 1,453,200 1,453,200 Letter of credit -- 250,000
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 1996 and 1995, 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. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued 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 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. 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, long-lived assets and certain intangibles, including goodwill, are required to be reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. An impairment loss is recognized when the estimated undiscounted future cash flows generated by assets held for use are less than the underlying carrying amount. 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. 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, 1996 aggregated $1.4 million. 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 QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued 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 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. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued 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," effective for fiscal years that begin after December 15, 1995. The new standard encourages but does not require 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. The Company has chosen 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. Pro forma disclosures of net income, and earnings per share have been made, as if the fair value based method of accounting defined in SFAS 123 had been applied. Refer to Note I. 14. Reclassifications Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform to the presentation in the 1996 financial statements. 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, 1996 and 1995, the Company's Stock Employee Compensation Trust (SECT), which had acquired 221,792 shares of the Company's stock from its previous founders, held 176,131 and 183,392 shares, respectively. Although outstanding, the SECT shares are excluded from the base of the earnings per share calculation. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE B - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS December 31 1996 1995 Accounts receivable Current U.S. Government Billed $ 9,403,800 $ 8,708,300 Unbilled (including retentions and indirect cost rate variances of $1,197,000 and $82,400 in 1996 and $1,288,800 and $451,100 in 1995, respectively) 1,739,900 1,686,700 11,143,700 10,395,000 Less reserve for unrecoverable contract costs and doubtful accounts <2,112,800> <2,053,100> $ 9,030,900 $ 8,341,900
Of the December 31, 1996 billed and unbilled amounts, approximately $9.7 million is expected to be collected in 1997 and the remainder in subsequent years. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE B - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS - Continued December 31 1996 1995 Equipment and leasehold improvements Furniture and fixtures $ 2,811,300 $ 2,741,500 Machinery and equipment 3,486,300 2,926,700 Computer software 2,053,300 1,709,100 Equipment held under capital lease 312,600 312,600 Construction in progress 2,351,400 479,800 Leasehold improvements 905,300 618,300 11,920,200 8,788,000 Less accumulated depreciation and amortization <6,967,600> <6,531,500> $ 4,952,600 $ 2,256,500
Included in machinery and equipment, and construction in progress above is equipment with a carrying value of approximately $3.5 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. In addition, during 1996, the Company received financing for certain of this equipment in the amount of $2,000,000 as described in Note D. 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. As of December 31, 1996, the aggregate net book value of leased office equipment and certain leased assets included in construction in progress was $2.3 million. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE B - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS - Continued December 31 1996 1995 Other assets Cash value of life insurance policies $ 1,453,200 $ 1,218,300 Patents less accumulated amortization of $82,700 and $50,800, respectively 224,200 252,200 Investment in a limited partnership 87,600 175,100 Deposits 67,700 61,700 Deferred costs 51,600 127,200 $ 1,884,300 $ 1,834,500
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 $442,200 pre-tax, as a result of surrender charges. See also Note A8. Accounts Payable During 1996 and 1995, included in accounts payable are $1,879,900 and $1,470,200, 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. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE B - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS - Continued December 31 Accrued liabilities and 1996 1995 deferred credits Accrued compensation and withholdings $ 1,924,900 $ 1,393,800 Accrued vacation 1,334,400 1,105,800 Amounts owed to certain subcontractors and suppliers 1,324,300 945,600 Accrued legal expenses and commitments 505,600 547,300 Deferred compensation -- 235,900 Accrued other taxes 67,400 208,100 Amounts due to related parties 373,500 164,000 Other 97,200 233,800 Total accrued liabilities and deferred credits $ 5,627,300 $ 4,834,300
NOTE C - LINE OF CREDIT At December 31, 1996, the Company's remaining available line of credit (LOC) through Signet Bank of Virginia was $4.8 million. The underlying credit agreement permits borrowings up to $6.0 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 $3.0 million. The Company's borrowing rate at December 31, 1996 was 8.5% 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. 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. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE C - LINE OF CREDIT - Continued 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, 1997. 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: 1996 1995 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 2,095,000 202,700 2,105,600 213,300 Less current maturities <373,200> <57,100> Total long-term obligations $1,732,400 $ 156,200
QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 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, 1997 $ 562,800 1998 562,300 1999 505,400 2000 498,400 2001 415,300 Total minimum lease payments $2,544,200 Less amount representing interest and taxes <449,200> Present value of minimum lease payments $2,095,000 Current portion $ 373,200 Noncurrent portion 1,721,800 Capitalized lease obligations $2,095,000
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. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 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: 1996 1995 1994 Statutory Federal income tax rate 34.0% 34.0% 34.0% State income taxes, net of Federal income tax benefit 1.0 4.0 4.0 Amortization of goodwill 5.2 5.8 8.0 Other <3.3> <0.9> 4.9 Depreciation <13.0> -- -- Investment in a foreign subsidiary <5.4> -- -- Effective income tax rate 18.5% 42.9% 50.9% Income tax expense (benefit) consists of the following for the year ended December 31,
1996 1995 1994 Current $ 432,700 $ 586,000 $ 193,500 Deferred <246,500> <195,700> 136,100 Income tax expense $ 186,200 $ 390,300 $ 329,600
QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE E - INCOME TAXES - Continued The tax effect of significant temporary differences that gave rise to deferred income taxes as of December 31, 1996: Deferred Tax Deferred Tax Asset Liability Depreciation $ 90,900 Retentions $ 454,900 Reserves against accounts receivables 667,300 Deferred post-employment benefit 433,000 Deferred postretirement benefits 1,184,600 Legal settlements 125,300 Accrued vacation 396,300 Miscellaneous 166,800 131,400 Subtotal 3,064,200 586,300 Valuation allowance <262,000> -- Deferred Tax $2,802,200 $ 586,200
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 QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE F - EMPLOYEE BENEFIT PLANS - Continued 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 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 1996, the employer contribution to the 401K plan was $103,700 compared to $72,200 for 1995. No employer contribution was made by the Company during 1994. 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 $452,200, $393,500 and $292,500 at December 31, 1996, 1995 and 1994, 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. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 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 1996 benefits was 9%, grading down to 5% over five years. The 1% increase in health care cost trend was 10% in 1996, grading down to 6% over five years. During 1995, a 10% medical inflation rate was assumed, grading down to 5% over six years. The measurement of the APBO for 1996 and 1995 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 QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 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 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/ <177,400> 1,500 300,000 124,100 Unrecognized Transition Obligation 470,400 211,800 1,197,800 1,880,000
QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE F - EMPLOYEE BENEFIT PLANS - Continued Group Executive Deferred Health Life Comp. Plan Insurance Plan 1996 Accrued postretirement benefit cost in the balance sheet $ <174,300> $ <85,500> $<1,251,900> $<1,511,700> 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> Current portion <16,000> <16,400> <212,000> <244,400> Long-term portion <158,300> <69,100> <1,039,900> <1,267,300> <174,300> <85,500> <1,251,900> <1,511,700>
QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 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 and Terminated participants $ <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/ <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>
QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE F - EMPLOYEE BENEFIT PLANS - Continued Group Executive Deferred Health Life Comp. Plan Insurance Plan 1995 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> The following tables represent the net periodic postretirement benefit cost components for 1996, 1995 and 1994:
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
QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE F - EMPLOYEE BENEFIT PLANS - Continued Group Executive Deferred Health Life Comp. Plan Insurance Plan 1996 Impact of One Percent Increase in Medical Trend Rate: Aggregate impact on 1996 service cost and interest cost $ 2,100
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 $ 46,400
QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE F - EMPLOYEE BENEFIT PLANS - Continued 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 Impact of One Percent Increase in Medical Trend Rate: Aggregate impact on 1994 service cost and interest cost $ 4,500
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, 1996 and 1995, there were 176,131 and 183,392 unallocated and uncommitted shares respectively held by the SECT. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 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 1,667,600 1998 1,374,200 1999 625,600 2000 631,200 2001 and thereafter 433,800 Future minimum rental payments $4,732,400 Net rent expense under operating leases amounted to approximately $1,744,000, $1,739,900, and $2,042,600 for the years ended December 31, 1996, 1995 and 1994, respectively, after being reduced by rental income which was not material during the last three years. 2. Litigation The following information is furnished regarding litigation involving the Company: QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE H - COMMITMENTS AND CONTINGENCIES - Continued On January 2, 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 and its general partner) sought attorneys' fees incurred in two earlier landlord/tenant cases (a contract claim) plus damages for the tort of malicious prosecution, plus punitive damages. In February 1997, the Company agreed to a settlement which has been accounted for in the financial statements. The settlement, which is subject to final documentation, disposes of all issues raised in the litigation, and had no material impact on the Company's financial statements. The Company has no other litigation pending which involves potential liability in excess of $10,000. Other Claims Since September 1996, the Company has been involved in a dispute with Munchkin, Inc., the sole customer at that time of its QTPI subsidiary. The dispute involved an alleged breach of contract and warranty issues, as well as claims for payment by QTPI. In addition, in February, the Company filed a declaratory judgment action seeking to clarify the nature of the exclusivity granted to Munchkin under its contract. The Company is currently in negotiations which, if successful, would resolve all outstanding disputes with Munchkin. The Company has no other claims pending which involves potential liability in excess of $10,000. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE H - COMMITMENTS AND CONTINGENCIES - Continued 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. The cost of accrued interest and the present value of compensation changes for these agreements aggregated ($106,700 and $191,600) during 1996 and 1995, respectively. None of these costs will be paid until the subject officers terminate their employment with the Company. NOTE I - STOCK OPTIONS The Company accounts for its incentive stock options under APB No. 25. The 1996 Plan allows the Company to grant options to officers and key employees for up to 200,000 shares of common stock. These options, which have five year terms, vest at a rate of 20% per year from the date of grant. The exercise price of each option equals the market price of the Company's stock on the date of grant. At December 31, 1996, the Company had options outstanding for 220,200 shares of common stock. Options to purchase 40,000 shares were issued out of the 1996 Plan. The remainder of the outstanding options were issued under the 1994 Plan. Options to purchase 160,000 shares are available for future grants under the 1996 Plan. There are no options available for future grants under the 1994 Plan. 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: QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE I - STOCK OPTIONS - Continued 1996 1995 Net Income As reported 818,300 520,100 Pro forma 705,600 419,000 Primary earnings per share As reported 0.54 0.35 Pro forma 0.48 0.28 Fully diluted earnings per share As reported 0.54 0.34 Pro forma 0.48 0.28
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 1996 and 1995: expected volatility of 71%; risk free interest rate of 6%; and expected lives of four years.The pro forma effect on net income for 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. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE I - STOCK OPTIONS - Continued A summary of the status of the Company's Incentive Stock Option Plans as of December 31, 1996 and 1995, and changes during the years ending on those dates is presented below. 1996 1995 Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price Outstanding at beginning of year 277,500 $3.88 96,500 1.82 Granted 44,000 6.90 219,000 4.41 Exercised <71,100> 2.21 <31,400> 1.75 Forfeited <30,200> 6.73 <6,600> 2.88 Outstanding at year-end 220,200 4.63 277,000 4.41 Options exercisable at year end 25,000 4.10 58,500 1.82 Weighted-average fair value of options granted during the year 4.13 2.57
The following information applies to options outstanding at December 31, 1996: Number outstanding 224,200 Range of exercise prices $4 to $7.25 Weighted-average exercise price $4.62 Weighted-average remaining contractual life 3.55 QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 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 15,000, 3,000 and 20,000 shares during 1996, 1990 and 1991, at the stock's then fair market value, which were $7.25, $1.875 and $1.75 respectively. Of these options, 15,000 shares were outstanding at December 31, 1996, and 23,000 shares at December 31, 1995. NOTE J - 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. 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 were in fulfillment of a multi- year supply contract for thermoformed infant bottle liners. Since the third quarter, operations were disrupted by a dispute on pricing and technical specifications. 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. In the commercial packaging segment, some manufacturing equipment was placed in service during 1996 and 1995; however, a significant portion remained under construction in progress as of year-end. QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE J - FINANCIAL INFORMATION FOR BUSINESS SEGMENTS - Continued A summary of the Company's operations by industry segment follows: Government 1996 Contracts Commercial Corporate Consolidated Operating revenues $71,693,000 $ 677,100 $ -- $72,370,100 Operating Profit $ 6,290,500 $<1,813,900> $<2,893,800> $ 1,582,800 Other income/expense -- -- -- -- Interest -- -- <578,300> <578,300> Earnings before income taxes $ 6,290,500 $<1,813,900> $<3,472,100> $ 1,004,500
Government 1996 Contracts Commercial Corporate Consolidated Identifiable assets $12,236,700 $ 3,586,700 $ 4,794,700 $20,618,100 Depreciation and amortization of property, plant and equipment $ 371,400 $ 185,000 $ 200,300 $ 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
QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE J - FINANCIAL INFORMATION FOR BUSINESS SEGMENTS - Continued 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 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
QuesTech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE J - FINANCIAL INFORMATION FOR BUSINESS SEGMENTS - Continued 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
SUPPLEMENTAL INFORMATION QuesTech, Inc. and Subsidiaries SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1996, 1995 and 1994 1996 1995 1994 Reserve for unrecovered contract costs and doubtful accounts Balance at Beginning of Period $2,053,100 $1,853,300 $2,199,400 Additions: Charged to Costs and Expenses 59,700 185,000 -- Charged to Other Accounts 17,600 22,900 Deductions: -- <2,800> <369,000> Balance at End of Period $2,112,800 $2,053,100 $1,853,300 Current $2,112,800 (1) $2,053,100 (1) $1,853,300 (1) Non-current $ -- $ -- $ -- Valuation allowance for deferred tax asset Balance at Beginning of Period $ 148,000 $ 148,000 $ 148,000 Additions: Charged to Income Tax Expense 114,000 -- -- Charged to Other Accounts -- -- -- Deductions: Balance at End of Period $ 262,000 $ 148,000 $ 148,000 Current $ -- $ -- $ -- Non-current $ 262,000 $ 148,000 $ 148,000 (2)
(1) Included in accounts receivable - trade. (2) Included in deferred tax asset - long-term. EX-27 2
5 12-MOS DEC-31-1996 DEC-31-1996 54300 0 11143700 2112800 170400 11100600 11920200 6967600 20618100 9169000 1721800 0 0 82500 5949900 20618100 677100 72370100 1284100 70449800 0 337500 578300 1004500 186200 818300 0 0 0 818300 .54 .54
EX-10 3 QUESTECH, INC. 1996 STOCK OPTION PLAN ARTICLE I NAME AND PURPOSE 1.1 Name. The name of this Plan is the "QuesTech, Inc. 1996 Stock Option Plan." 1.2 Purpose. The Company has established this Plan to attract, retain, motivate and reward Employees and other individuals and to encourage ownership of the Company's Common Stock by them. ARTICLE II DEFINITIONS OF TERMS AND RULES OF CONSTRUCTION 2.1 General Definitions. The following words and phrases, when used in the Plan, unless otherwise specifically defined or unless the context clearly otherwise requires, shall have the following respective meanings: (a) Affiliate. A Parent or Subsidiary of the Company. (b) Agreement. The document which evidences the grant of an Option under the Plan and which sets forth the terms, conditions and provisions of, and restrictions relating to, such Option. (c) Board. The Board of Directors of the Company. (d) Change of Control. The acquisition, without the approval of the Board, by any person or entity, other than the Company or a Related Entity, of more than 20% of the outstanding shares of the Company's voting common stock through a tender offer, exchange offer or otherwise; the liquidation or dissolution of the Company following a sale or other disposition of all or substantially all of its assets; a merger or consolidation involving the Company which results in the Company not being the surviving parent corporation; or any time during any two-year period in which individuals who constituted the Board at the start of such period (or whose election was approved by at least two-thirds of the then members of the Board who were members at the start of the two-year period) do not constitute at least 50% of the Board for any reason. A Related Entity is the Parent, a Subsidiary or any employee benefit plan (including a trust forming a part of such a plan) maintained by the Parent, the Company or a Subsidiary. (e) Code. The Internal Revenue Code of 1986, as amended. Any reference to the Code includes the regulations promulgated pursuant to the Code. (f) Company. QuesTech, Inc. (g) Committee. The Committee described in Section 5.1. (h) Common Stock. The Company's common stock which presently has a par value of $0.05 per Share. (i) Effective Date. The date that the Plan is approved by the shareholders of the Company. Any grants of Options prior to the approval by the shareholders of the Company shall be void if such approval is not obtained. (j) Employee. Any person employed by the Employer. (k) Employer. The Company and all Affiliates. (l) Exchange Act. The Securities Exchange Act of 1934, as amended. (m) Fair Market Value. The closing price of a share of Common Stock on the NASDAQ on a given date, or, in the absence of sales on a given date, the closing price on the NASDAQ on the last day on which a sale occurred prior to such date, or, if the Common Stock is not then included on the NASDAQ, such fair market value as the Board may fairly determine. (n) Fiscal Year. The taxable year of the Company which is the calendar year. (o) ISO. An Incentive Stock Option as defined in Section 422 of the Code. (p) NQSO. A Non-Qualified Stock Option, which is an Option that does not qualify as an ISO. (q) Option. An option to purchase Shares granted under the Plan, whether an ISO or an NQSO. (r) Parent. Any corporation (other than the Company or a Subsidiary) in an unbroken chain of corporations ending with the Company, if, at the time of the grant of an Option, each of the corporations (other than the Company or a Subsidiary) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (s) Participant. An individual who is granted an Option under the Plan. (t) Plan. The QuesTech, Inc. 1996 Stock Option Plan and all amendments and supplements to it. (u) Rule 16b-3. Rule 16b-3 promulgated by the SEC, as amended, or any successor rule in effect from time to time. (v) SEC. The Securities and Exchange Commission. (w) Share. A share of Common Stock. (x) Subsidiary. Any corporation, other than the Company, in an unbroken chain of corporations beginning with the Company if, at the time of grant of an Option, each of the corporations, other than the last corporation in the unbroken chain, owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2.2 Other Definitions. In addition to the above definitions, certain words and phrases used in the Plan and any Agreement may be defined in other portions of the Plan or in such Agreement. 2.3 Conflicts in Plan. In the case of any conflict in the terms of the Plan relating to an Option, the provisions in the ARTICLE of the Plan which specifically grants such Option shall control those in a different ARTICLE. ARTICLE III SHARES SUBJECT TO THE PLAN 3.1 Number of Shares. The number of Shares for which Options may be granted under the Plan shall initially be 200,000 Shares. Such Shares may be authorized but unissued Shares, Shares held in the treasury, or both, or may be shares which are held in trust in the Company's Stock Employee Compensation Trust ("SECT"). 3.2 Reusage. If an Option expires or is terminated, surrendered, forfeited, or canceled without having been fully exercised, the Shares with respect to which such Option has not been exercised at the time of termination, surrender, forfeiture, or cancellation shall again be available for use under the Plan. 3.3 Adjustments. If there is any change in the Common Stock of the Company by reason of any stock dividend, spin-off, split-up, spin-out, recapitalization, merger, consolidation, reorganization, combination or exchange of shares, number and class of shares available for Options and the number of Shares subject to outstanding Options, and the price thereof, as applicable, shall be appropriately adjusted by the Committee. ARTICLE IV ELIGIBILITY Options may be granted only to Employees, employees and owners of entities which are not Affiliates but which have a direct or indirect ownership interest in an Employer or in which an Employer has a direct or indirect ownership interest, individuals who, and employees and owners of entities which, are customers and suppliers of an Employer, individuals who, and employees and owners of entities which, render services to an Employer, and individuals who, and employees and owners of entities, which have ownership or business affiliations with any individual or entity previously described. The Participants and the Options they receive under the Plan shall be determined solely by the Committee. In making its determinations, the Committee shall consider past, present and expected future contributions of Participants and potential Participants to the Employer, including, without limitation, the performance of, or the refraining from the performance of, services. ARTICLE V ADMINISTRATION 5.1 Committee. The Plan shall be administered by the Committee. The Committee shall consist of two or more members of the Board. At least two members of the Committee shall be "Non-Employee Directors" as defined in Rule 16b-3 (or shall otherwise meet the requirements for Committee membership under the then effective version of Rule 16b-3) and "outside directors" as defined by Section 162(m)(4)(C)(i) of the Code. The members of the Committee shall be appointed by and shall serve at the pleasure of the Board, which may from time to time appoint members in substitution for members previously appointed and fill vacancies, however caused, in the Committee. The Committee may select one of its members as its Chairman and shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by a majority of the members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. 5.2 Authority. Subject to the terms of the Plan, the Committee shall have discretionary authority to: (a) determine the individuals to whom Options are granted, the type and amounts of Options to be granted and the time of all such grants; (b) determine the terms, conditions and provisions of, and restrictions relating to, each Option granted; (c) interpret and construe the Plan and all Agreements; (d) prescribe, amend and rescind rules and regulations relating to the Plan; (e) determine the content and form of all Agreements; (f) determine all questions relating to Options under the Plan; (g) maintain accounts, records and ledgers relating to Options; (h) maintain records concerning its decisions and proceedings; (i) employ agents, attorneys, accountants or other persons for such purposes as the Committee considers necessary or desirable; (j) take, at any time, any action permitted by Section 9.6 irrespective of whether any Change of Control has occurred or is imminent; and (k) do and perform all acts which it may deem necessary or appropriate for the administration of the Plan and carry out the purposes of the Plan. 5.3 Delegation. Except as required by Rule 16b-3 with respect to grants of Options to individuals who are subject to Section 16 of the Exchange Act or as otherwise required for compliance with Rule 16b-3 or other applicable law, the Committee may delegate all or any part of its authority under the Plan to any Employee, Employees or committee. 5.4 Adjudication of Claims. The Committee shall have discretionary authority to make all determinations as to the right to benefits under the Plan. In the event that a Participant believes he has not received the benefits to which he is entitled under the Plan, a claim shall be made in writing to the Committee. The claim shall be reviewed by the Committee. If the claim is approved or denied, in full or in part, the Committee shall provide a written notice of approval or denial within 90 days with, in the case of a denial, the specific reasons for the denial and specific reference to the provisions of the Plan and/or Agreement upon which the denial is based. A claim shall be deemed denied if the Committee does not take any action within the aforesaid 90 day period. If a claim is denied or deemed denied and a review is desired, the Participant shall notify the Committee in writing within 60 days of the receipt of notice of denial or the date on which the claim is deemed to be denied, as the case may be. In requesting a review, the Participant may review the Plan or any document relating to it and submit any written issues and comments he may deem appropriate. The Committee shall then review the claim and provide a written decision within 60 days. This decision, if adverse to the Participant, shall state the specific reasons for the decision and shall include reference to specific provisions of the Plan and/or Agreement on which the decision is based. The Committee's decision on review shall be final. ARTICLE VI OPTIONS 6.1 Types of Options. The Committee shall have authority to grant both ISOs and NQSOs under the Plan. 6.2 Grant of ISOs and Option Price. Each ISO must be granted to an Employee and granted within ten years from the date of adoption of the Plan by the Board. The purchase price for Shares under any ISO shall be no less than the Fair Market Value of the Shares at the time the Option is granted. 6.3 Other ISO Terms. In addition to the requirements of Section 6.2: (a) Each ISO, by its terms,. cannot be exercisable after the expiration of 10 years from the date such the ISO is granted; (b) Each ISO, by its terms, cannot be transferable by the optionee otherwise than by will or the laws of descent and distribution, and must be excisable, during his lifetime, only by him; and (c) The optionee, at the time the ISO is granted, cannot own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or its Affiliates unless, at the time the Option is granted, the purchase price is at least 110 percent of the Fair Market Value of the Shares subject to the Option and such Option, by its terms, is not exercisable after the expiration of five years from the date such Option is granted. 6.4 $100,000 Per Year Limitation for ISOs. To the extent that the aggregate Fair Market Value of Shares with respect to which ISOs (determined without regard to this Section 6.4) are exercisable for the first time by any individual during any calendar year (under all plans of the Company and its Affiliates) exceeds $100,000, such Options shall be treated as options which are not ISOs. The foregoing sentence shall be applied by taking Options into account in the order in which they were granted, and the Fair Market Value of any Shares shall be determined as of the time the Option with respect to such Shares is granted. 6.5 NQSOs. The terms of each NQSO shall provide that such Option will not be treated as an ISO. The purchase price for Shares under any NQSO shall be no less than the Fair Market Value of the Shares at the time the Option is granted. 6.6 Determination by Committee. Except as otherwise provided in Section 6.2 through Section 6.5, the terms of all Options shall be determined by the Committee. ARTICLE VII AGREEMENTS AND CERTAIN OPTIONS 7.1 Grant Evidenced by Agreement. The grant of any Option under the Plan shall be evidenced by an Agreement which shall describe the specific Option granted and the terms and conditions of the Option. The granting of any Option shall be subject to, and conditioned upon, the recipient's execution of any Agreement required by the Committee. Except as otherwise provided in an Agreement, all capitalized terms used in the Agreement shall have the same meaning as in the Plan. The Agreement shall be subject to all of the terms of the Plan. 7.2 Provisions of Agreement. Each Agreement shall contain such provisions that the Committee shall determine to be necessary, desirable and appropriate for the Option granted which may include, but need not be limited to, the following with respect to any Option: description of the type of Option; the Option's duration; its transferability; its exercise price, the exercise period and the person or persons who may exercise the Option; the effect upon such Option of the Participant's death or termination of employment; the Option's conditions; when, if, and how any Option may be forfeited, converted into another Option, modified, exchanged for another Option, or replaced; and the restrictions on any Shares purchased under the Option. ARTICLE VIII PAYMENT, DIVIDENDS, AND WITHHOLDING 8.1 Payment. Upon the exercise of an Option, the amount due the Company shall be paid: (a) in cash; (b) by the tender to the Company of Shares owned by the optionee and registered in his name having a Fair Market Value equal to the amount due to the Company; (c) in cash, but by means of a so-called "cashless exercise" of an Option; and/or (e) by any combination of the payment methods specified in (a), (b) and (c) above. Notwithstanding the foregoing, any method of payment other than (a) may be used only with the consent of the Committee or if and to the extent so provided in an Agreement. The proceeds of the sale of Common Stock purchased pursuant to an Option shall be added to the general funds of the Company or to the Shares held in treasury, as the case may be, and used for the corporate purposes of the Company as the Board shall determine. 8.2 Dividend Equivalents. Grants of Options may include dividend equivalent payments or dividend credit rights. 8.3 Withholding. Unless otherwise provided in an Agreement, the Company shall, at the time any Option is exercised, withhold from the Shares issuable upon the exercise of an Option, any amount necessary to satisfy federal, state and local income and/or other tax withholding requirements with respect to the exercise of such Option. ARTICLE IX AMENDMENT, TERMINATION AND CHANGE OF CONTROL 9.1 Amendment. The Board shall have the sole right and power to amend the Plan at any time and from time to time, provided, however, that the Board may not amend the Plan without approval of the shareholders of the Company: (a) in a manner which would cause Options which are intended to qualify as ISOs to fail to qualify; (b) in a manner which would cause grants under the Plan to fail to meet the requirements of Rule 16b-3; or (c) in a manner which would violate applicable law. 9.2 Term. The Plan shall commence as of the Effective Date and, subject to the terms of the Plan, including those requiring approval by the shareholders of the Company and those limiting the period over which ISOs may be granted, shall continue in full force and effect until terminated. 9.3 Termination. The Plan may be terminated at any time by the Board. 9.4 Effect of Amendment or Termination. Subject to the provisions of Section 9.5, the amendment or termination of the Plan shall not adversely affect a Participant's right to any Option granted prior to such amendment or termination. 9.5 Committee's Right. Any Option granted may be converted, modified, forfeited or canceled, in whole or in part, by the Committee if and to the extent permitted in the Plan or applicable Agreement or with the consent of the Participant to whom such Option was granted. 9.6 Change of Control. In order to maintain a Participant's rights in the event of a Change in Control, the Committee, in its sole discretion, may, in any Agreement evidencing an Option, or at any time prior to, or simultaneously with or after a Change in Control, provide such protection as it may deem necessary. Without, in any way, limiting the generality of the foregoing sentence or requiring any specific protection, the Committee may: (a) provide for the acceleration of any time periods relating to the exercise of such Option so that such Option may be exercised in full on or before a date fixed by the Committee; (b) provide for the purchase of such Option, upon the Participant's request, for an amount of cash equal to the amount which could have been attained upon the exercise of such Option had such Option been currently exercisable; (c) make such adjustment to the Option then outstanding as the Committee deems appropriate to reflect such transaction or change; and/or (d) cause the Options then outstanding to be assumed, or new Options substituted therefor, by the surviving corporation in such change. ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Headings and Captions. The headings and captions to the several Articles and Sections contained in the Plan are included only for convenience and shall not be construed as a part of the Plan or in any respect affect or modify its provisions. 10.2 Number and Gender. The masculine and neuter, wherever used in the Plan, shall refer to either the masculine, neuter or feminine; and, unless the context otherwise requires, the singular shall include the plural and the plural the singular. 10.3 Governing Law. This Plan shall be construed and administered in accordance with the laws of the State of Virginia. 10.4 Purchase for Investment. The Committee may require each person purchasing Shares pursuant to an Option to represent to and agree with the Company in writing that such person is acquiring the Shares for investment and without a view to distribution or resale. The certificates for such Shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for Shares delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under all applicable laws, rules and regulations, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate references to such restrictions. 10.5 No Employment Contract. The adoption of the Plan shall not confer upon any Employee any right to continued employment nor shall it interfere in any way with the right of the Employer to terminate the employment of any of its Employees at any time. 10.6 No Effect on Other Benefits. The grant of Options under the Plan shall have no effect on any benefits to which a Participant may be entitled from the Employer, under another plan or otherwise, or preclude a Participant from receiving any such benefits. 10.7 Section 162(m) Fail-Safe Provision. If Code Section 162(m) is applicable to the Company and to a Participant, ISOs and NQSOs are intended to meet the requirements of "other performance-based compensation" under Code Section 162(m)(4)(C), so that any remuneration resulting from the grant or exercise of any such Option will not be considered "applicable employee remuneration" within the meaning of Code Section 162(m)(4). If and to the extent any provision of the Plan or action by the Board, Committee, or the Committee's designee is contrary to such intention, it shall be deemed null and void. QUESTECH, INC. STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS 1. Purpose. The purpose of the QuesTech, Inc. Stock Option Plan for Non-Employee Directors ("Plan") is to increase the proprietary interest of Non-Employee Directors in QuesTech, Inc. ("Corporation") by granting them non-qualified options ("Options") to purchase shares ("Shares") of common stock, $0.05 per share par value, of the Corporation ("Common Stock") that will promote long-term shareholder value through ownership of Common Stock. 2. Administration. The Plan shall be administered by the Board of Directors. Grants of Options under the Plan shall be automatic as provided in Section 5 and, upon the approval of the Board of Directors with an interested director recusing himself or herself, in the discretion of the Board of Directors as provided in Section 6. The Board shall have full authority to interpret the plan, to promulgate such rules and regulations with respect to the Plan as it deems desirable and to make all other determinations necessary or appropriate for the administration of the Plan, and such determinations shall be final and binding upon all persons having an interest in the Plan. 3. Participation. Each member of the Board of Directors of the Corporation who is not an employee of the Corporation or any of its subsidiaries at the date of each grant ("Non-Employee Director") shall be eligible to participate in the Plan. 4. Available Shares. The number of Shares available for grants under the Plan shall not exceed 50,000 shares, subject to adjustment as provided in Section 11. Any Shares issued pursuant to Options ("Optioned Shares") may consist, in whole or in part, of authorized and unissued Shares or Shares in the Corporation's treasury. All Options granted under the Plan shall be non-qualified options not entitled to special tax treatment under Section 422 of the Internal Revenue Code of 1986, as amended. 5. Formula Awards under the Plan. (a) Grant of Formula Award Options. Each individual who becomes a Non-Employee Director (but excluding any Non-Employee Director re-elected), shall, on the first anniversary of the first trading day coinciding with or immediately following election to the Board, automatically be granted an Option for 5,000 shares all of which shall vest at the rate of 20 percent per year each year following the date of grant. Each Non-Employee Director upon re-election shall, on the first trading day coinciding with or immediately following such reelection, automatically be granted an Option to acquire 5,000 shares, 20 percent of which vests each year following the date of grant and the balance one year after the date of grant. The written agreement evidencing each Option shall be dated as of the applicable date of grant. Each Non-Employee Director accepting an Option shall execute and return a copy of the agreement to the Corporation. (b) Option Exercise Price. The exercise price per Share ("Option Price") of the formula award Option described above in Section 5(a) shall be 100% of the Fair Market Value of a Share on the business day immediately preceding the date of grant. "Fair Market Value" as of any date shall be the last reported sale price, regular way, of the Shares on any day or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case on the principal national securities exchange on which the Shares are listed or, if the Shares are not listed on a national securities exchange and are listed on the Nasdaq Stock Market, the sale price determined in the same fashion or, if the Shares are not so listed on any of the foregoing, the average of the bid and asked prices on such day as furnished by dealers in the Shares in the over-the-counter market. All calculations of the current market price shall be made to the nearest cent. (c) Term of Option. Each formula award Option shall expire ten (10) years from the date of grant. (d) Exercise of Option. Each Option granted under Section 5(a) to (i) a newly elected Non-Employee Director shall be exercisable six months from its date of grant and (ii) a re-elected Non-Employee Director shall be exercisable as provided in Section 5(a) above. 6. Other Grants. The Board may make such other, discretionary Option grants to Non-Employee Directors as it may determine, so long as such Options are evidenced by a written agreement setting forth the terms and conditions of such Option, which shall in all events be consistent with the terms of this Plan. 7. Manner of Exercise. An exercisable Option, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary of the Corporation at his or her office of all of the following: (a) Notice in writing signed by the Optionee or other person then entitled to exercise an Option or portion thereof, stating that the Option or portion is exercised, such notice complying with all applicable rules established by the Board; (b) Such representations and documents as the Board, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Federal Securities Act of 1933, as amended ("Federal Securities Act"), and any other Federal or state securities laws or regulations. The Board may, in its absolute discretion, also take whatever action it deems appropriate to effect such compliance, including without limitation, placing legends on share certificates and issuing stop-transfer orders to transfer agents and registrars; and (c) Full cash payment of the Option Price for the Optioned Shares with respect to which such Option or portion is thereby exercised and which are to be delivered to him or her pursuant to such exercise. Such payment need not accompany the written notice of exercise if the Optionee, either (a) in the notice of exercise directs that the stock certificate or certificates for the Optioned Shares as to which the Option is exercised be delivered to a broker-dealer registered with the Securities and Exchange Commission that is a member of the New York Stock Exchange or any other broker-dealer acceptable to the Board, as the agent for the Optionee, which broker-dealer delivers to the Corporation its unconditional and irrevocable undertaking that, at the time such stock certificate or certificates are delivered, such broker-dealer will pay to the Corporation an amount in cash equal to such payment, plus the amount ("withholding amount") of all federal, state and/or local taxes of any kind which the Corporation is required to withhold with respect to the exercise of the Option or (b) furnish with said notice (i) Shares (endorsed in favor of the Corporation) having a Fair Market Value equal to the amount of such payment or (ii) instructions that the Corporation withhold from the Optioned Shares to be delivered a number of Optioned Shares having a fair market value equal to the Option Price, plus (in each case), the withholding amount. 8. Conditions to Issuance of Stock Certificates. The Corporation shall not be required to issue or deliver any certificate or certificates for Optioned Shares prior to fulfillment of all of the following conditions: (a) The completion of any registration or other qualification of such Shares under any Federal or state law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Corporation shall, in its absolute discretion, deem necessary or advisable; (b) The obtaining of any approval or other clearance from any state or federal governmental agency which the Corporation shall, in its absolute discretion, determine to be necessary or advisable; (c) The provision for any income tax withholding which the Corporation shall, in its absolute discretion, determine to be necessary or advisable; and (d) The lapse of such reasonable period of time following the exercise of the Option as the Corporation may determine, in its absolute discretion, from time to time to be necessary or advisable for reasons of administrative convenience. 9. Rights as Stockholders. An Optionee shall not be, nor have any of the rights of, a stockholder of the Corporation in respect to any shares of Common Stock which may be purchased upon the exercise of any option or portion thereof unless and until certificates representing such shares have been issued by the Corporation. 10. Non-transferability. An Option shall be non-assignable and non-transferable by a Non-Employee Director other than by will or the laws of descent and distribution. A Non-Employee Director shall forfeit any Option assigned or transferred, voluntarily or involuntarily, other than as permitted under this Section. An Option may be exercised during the Non-Employee Director's lifetime only by such person or his or her guardian or legal representative. 11. Adjustments. In the event of a stock dividend or stock split, or combination or other reduction in the number of issued Shares, a merger, consolidation, reorganization, recapitalization, sale or exchange of substantially all assets or dissolution of the Corporation, then appropriate adjustments shall be made in the shares and number of Shares subject to and authorized by this Plan and the Option prices specified, in order to prevent dilution or enlargement of the rights of the Non-Employee Directors under the Plan. 12. Amendment of the Plan. The Board of Directors may suspend or terminate the Plan or any portion thereof at any time, and the Board of Directors may amend the Plan from time to time as may be deemed to be in the best interests of the Corporation; provided, however, that no such amendment, alteration or discontinuation shall be made (a) that would impair the rights of a Non-Employee Director with respect to Options theretofore awarded, without such person's consent, or (b) without the approval of the stockholders if such approval is necessary to comply with any legal, tax or regulatory requirement, including any approval requirement which is a prerequisite for exemptive relief from Section 16(b) of the Securities Exchange Act of 1934, as amended. 13. Miscellaneous Provisions. Neither the Plan nor any action taken hereunder shall be construed as giving any Non-Employee Director any right to be nominated for re-election to the Board. 14. Effective Date and Duration of Plan. The Plan shall be effective as of November 1, 1996 and shall expire ten years from the effective date hereof unless earlier terminated by the Board. EX-11 4 QuesTech, Inc. and Subsidiaries Exhibit 11 - Statement Re: Computation of Per-Share Earnings Year Ended December 31 1996 1995 1994 Net Income $ 818,300 $ 520,100 $ 317,800 Primary Earnings: Shares Weighted average number of common shares outstanding .... 1,572,381 1,556,508 1,568,000 Common stock equivalents ....... 122,124 135,459 50,386 SECT shares, weighted .......... <176,131> <207,287> <221,792> Weighted average number of common shares outstanding as adjusted .................. 1,518,374 1,484,680 1,396,594 Primary earnings per common share: $ 0.54 $ 0.35 $ 0.23
Fully Diluted Earnings: Shares Weighted average number of common shares outstanding .... 1,572,381 1,556,508 1,568,000 Common stock equivalents ....... 128,507 190,987 64,694 SECT shares .................... <176,131> <207,287> <221,792> Weighted average number of common shares outstanding as adjusted .................. 1,524,757 1,540,208 1,410,902 Fully diluted earnings per common share: $ 0.54 $ 0.34 $ 0.23
-----END PRIVACY-ENHANCED MESSAGE-----