<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 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
incorporation or organization) Identification No.)
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(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.05 per share)
---------------------------------------
(Title of class)
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 (Section 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. [ X ]
Aggregate market value of Common Stock held by non-affiliates of the
registrant at February 13, 1998 -- approximately $6 million.
Number of shares of Common Stock outstanding on February 13, 1998 --
1,618,557 shares.
1
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DOCUMENTS INCORPORATED BY REFERENCE
Documents of Registrant Form 10-K Reference Locations
- ----------------------------------- -----------------------------
Portions of the Registrant's 1997
Consolidated Financial Statements
and Notes thereto Part I, II and IV
Portions of Registrant's 1998
Proxy Statement Part III
2
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PART I
Item 1. BUSINESS
Introduction
QuesTech, Inc. (the Company), provides a broad spectrum of scientific,
engineering, research, management and support services, primarily for defense
and national security applications and, to a lesser extent, for general
industrial and commercial applications. The Company's systems engineering
and related services include signal and information processing and analysis,
program management and logistics services, electronic and information warfare
design and analysis, and related information technology, computer software,
and systems integration and industrial analysis. A major portion of the
Company's 1997 revenue was derived from competitively awarded contracts with
U. S. Government clients, primarily agencies of the Department of Defense and
the national security community.
The Company was incorporated as Quest Research Corporation under the
laws of the Commonwealth of Virginia on December 31, 1968. Its name was
changed to QuesTech, Inc. on August 26, 1981. Since its inception, the
Company has provided its customers with leading edge systems and services
designed for highly specialized applications. The Company believes that the
application-specific knowledge it has developed, together with its recognized
name in the industries it serves, represent significant assets of the Company
in a highly competitive environment.
Industry Segments
The Company currently operates in two industry segments: government
contracting and commercial. The government contracting segment consists of
furnishing scientific, engineering, research, management and support services
primarily to defense and intelligence agencies of the United States
Government. The commercial segment consists of furnishing such services to
non-governmental entities and the design, manufacture and sale of plastic
containers. The revenue, operating profit (or loss) and assets employed in
support of each segment are set forth in Note J of the attached Notes to the
Company's Consolidated Financial Statements for the year ending December 31,
1997; which Note J is hereby incorporated herein by reference.
Description of the Business
The Company conducts its operations through four principal operating
units, each of which possesses a distinct set of skills and is focused on a
specific customer base, as follows: QuesTech Research Division ("QTRD") and
QuesTech Service Company ("QTSC"), both of which are engaged primarily in the
government contracting segment of the business, and QT Information Sciences
Corportion ("QTISC") and QuesTech Packaging, Inc. ("QTPI"), both of which are
engaged primarily in the commercial segment.
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QuesTech Research Division
QTRD performs engineering services beginning with concept formulation
and system design and continuing through engineering, technical and program
management. In addition, QTRD acts as a research and development resource
for its customers which consist primarily of agencies of the Department of
Defense ("DOD") and the national security community. Occasionally QTRD
provides similar engineering services to commercial customers as a
subcontractor to its sister company, QTISC. QTRD's activities include:
- - Signal and Information Processing and Analysis: QTRD provides services
and designs systems for the extraction, processing and analysis of
meaningful intelligence information from electromagnetic signals
(generally through computer collection, transformation, manipulation,
decoding and interpretation of signals).
- - Intelligence and Electronic Warfare: Through analysis, modeling and
simulation, rapid prototyping and customer support, broad technical
expertise in signals analysis, data fusion, automatic target
recognition, RF collection, lasers, infrared, radar and visible sensors,
QTRD supports customer needs in the areas of intelligence and electronic
warfare and sensor systems. Extensive systems integration experience
results in timely transition of advanced technology to demonstrable and
fielded equipment.
- - Software Engineering: QTRD participates in the design and implementation
of defense and national security related software packages for use in a
wide variety of computers and special purpose military processors;
including development of special applications packages and real-time
operational software and designing, validating and verifying complete
turn-key systems.
- - Modeling and Simulation: QTRD develops software, using digital, analog
and hybrid designs, to simulate a broad range of military problems;
including design of war games ranging from detailed simulation of
missile seekers to full battlefield campaign models.
- - Command, Control and Communications: QTRD provides a wide array of
services with respect to the design and evaluation of special purpose
commmunications and related systems; including design and evaluation of
low vulnerability and low probability of intercept systems, interface
analysis, test methodologies development, evaluation of the performance
of countermeasures and counter-countermeasures, communication system
vulnerability and spread spectrum analysis and simulation of the
performance of complex interconnected communications systems.
- - Management and Logistics: QTRD assists the Army, Navy and Air Force in
managing weapons systems acquisition programs by preparing
documentation, providing data management and configuration control,
analyzing costs and developing technical evaluation criteria.
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- - Information Assurance: QTRD develops, integrates and demonstrates
systems and capabilities that deny, disrupt and exploit modern command,
control and information systems. In addition, QTRD applies its
expertise to assess the vulnerability of these systems and to develop
techniques and tools that provide protection from threat attacks.
QTRD's business is primarily derived from competitively awarded contracts
with agencies of the United States Government. QTRD may receive work under
such contracts either as prime contractor (directly from a U.S. Government
agency) or a subcontractor (indirectly under a subcontract or purchase order
from a company that is a prime contractor to a U.S. Government agency). Such
contracts and subcontracts/purchase orders may be cost reimbursable, time and
materials or fixed price. Most of QTRD's contracts and subcontracts/purchase
orders are usually cost reimbursable or time and materials, which means,
among other things, that the Company's costs will be reimbursed as incurred;
subject to incurred cost audits in which the Government may from time to time
disallow certain claimed costs. These contracts and subcontracts/purchase
orders are also generally subject to termination at the convenience of the
Government. If so terminated, 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 upon the Company would
depend upon the particular contract and the nature of the termination.
QuesTech Service Company
QTSC provides a variety of field engineering and technical services,
including electronic equipment and system installation, testing and
maintenance (including command and control center electronic maintenance),
computer software maintenance, test range support services (including test
monitoring and operations and maintenance), and program support services,
such as system analysis, integrated logistics support, equipment procurement,
failure analysis, maintenance provisioning, field inspections and training.
Its personnel may be deployed as required to customer facilities throughout
the world. Its customers consist primarily of the same agencies of the
Department of Defense ("DOD") and the national security community as QTRD and
its business is likewise derived primarily from the same type of
competitively awarded contracts as are described under the QTRD description
of business.
QuesTech Packaging, Inc.
QTPI is a Virginia corporation which was incorporated on January 17,
1996 for the purpose of commercializing the patented scrapless, melt-phase
thermoforming technology developed by its predecessor, QuesTech Ventures,
Inc., which was dissolved in 1996. QTPI designs and manufactures plastic
containers utilizing its patented process and custom-designed manufacturing
equipment. Prospective customers for QTPI products include virtually all
high volume users of plastic containers, such as sellers of food, drink,
medicines, etc.
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Virtually every product that QTPI sells is designed to meet the specific
requirements of a particular customer. For this reason, there is a
substantial lead time between the initial expression of interest by a
potential customer and the sale of commercial quantities of a product.
Before commercial quantities of a container can be produced, QTPI will
perform some or all of the following tasks: design the container, select an
appropriate material, produce one or more test batches, perform extensive
testing and undertake one or more production runs.
QT Information Sciences Corporation
QTISC was incorporated on November 20, 1996 as a wholly owned subsidiary
of QuesTech for the purpose of bringing QuesTech's extensive corporate
knowledge and experience in Information Security to the commercial community.
Drawing on lessons learned by QuesTech in over 30 years of related work for
the Department of Defense and other Federal customers, QTISC developed a line
of products and services uniquely attuned to the Information Security needs
of corporations throughout the world. QTISC is able to design secure network
architectures, conduct vulnerability analyses employing network penetration
tools used by hackers and others interested in unauthorized entry into a
system, help companies prepare sound security procedures and practices, and
conduct a wide variety of professional training courses and seminars. As
authorized by the National Computer Security Association (NCSA), QTISC also
conducts Web Site Certifications.
Industrial and commercial operators of large and/or mission critical
information systems (such as utilities, banks, etc.) are targeted customers.
QTISC plans to offer its services on the basis of usual and customary
commercial terms, which will be negotiated with customers on a case-by-case
basis.
Intellectual Property
The Company applies for patent, copyright and trademark (service mark)
protection when it believes that the expense of doing so is justified. The
Company currently has seven U.S. patents, with three U.S. applications
pending, and approximately 40 foreign patents, with two foreign applications
pending. The Company attempts to protect its intellectual property by legal
action where it feels such action is warranted. The Company also relies on a
combination of trade secret and other intellectual property law,
nondisclosure agreements and other protective measures to establish and
protect its proprietary rights in its intellectual property. However, there
can be no assurance such efforts will be successful, or that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets.
Although the Company may occasionally obtain rights to the intellectual
property of others under license, the Company is not a licensee of any
intellectual property material to the conduct of its
6
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business. In addition, the Company occasionally grants to others rights
under certain of its intellectual property when deemed to be in the best
interests of the Company.
Customers
Products and services offered by the Company are sold primarily to
defense and intelligence agencies of the United States Government and to a
lesser extent to users of plastic packaging for general consumer purposes.
In 1997, approximately 43% of the Company's revenue was derived from the TEFS
(Technical Engineering Fabrication Support) contract with the U.S. Department
of the Army. It is expected that approximately the same percentage of the
Company's revenue for 1998 will be derived from this contract.
Backlog
Set forth in the table below is the Company's funded and unfunded
backlog as of December 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
Funded Backlog Unfunded Backlog
December 31, December 31,
----------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
$ 29,728,800 $ 38,608,600 $335,643,200 $367,148,200
</TABLE>
"Backlog" is the aggregate contract revenues remaining to be earned
under written contracts as of the stated date. "Funded backlog" is that
portion which is covered by funding appropriations to and allotments by the
procuring agencies. "Unfunded backlog" is that portion of backlog equal to
the backlog less the funded backlog. Although there can be no assurance that
unfunded backlog will become funded backlog, historically a majority of the
Company's unfunded backlog has eventually been converted into funded backlog.
Competition
The markets for the Company's products and services are highly
competitive. In the government contracting segment, the Company's
competitors include large diversified firms having greater financial
resources and larger technical staffs as well as smaller firms which are
highly qualified in certain specialized areas and which may be able to offer
lower prices and/or which may receive beneficial treatment under various
government programs for small and disadvantaged businesses. In addition, the
Government's in-house resources, as well as federally sponsored,
not-for-profit research centers frequently compete with the Company. As the
Government has reduced its defense spending and simultaneously tended to
bundle information technology procurements into larger contracts, competition
for the resulting smaller number of larger contracts has intensified despite
effects of increasing propensity of the government to buy services via
indefinite delivery/indefinite quantity
7
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(IDIQ) contract awarded simultaneously to many firms who must then compete
for tasks.
In the information technology portion of the commercial business
segment, the Company's competitors include many of the same large and small
firms with which it competes in the government contracting segment. In the
plastic container portion of the commercial business segment, the Company's
competitors include numerous large and small firms that produce plastic
containers utilizing different manufacturing processes and/or different types
of plastics, as well as producers of metal and paper containers.
In both segments the Company believes that its products and services
compete favorably with those of its competitors. To remain competitive over
the long term, the Company must continue to position itself to respond
rapidly to changes in packaging and information technology, as well as
changes in Government procurement practices and, among other factors,
successfully retain qualified technical personnel.
Personnel
The Company and its subsidiaries, as of December 31, 1997, had
approximately 636 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.
Foreign and Domestic Operations, Export Sales
During the years December 31, 1997, 1996 and 1995, the Company has
conducted all of its operations in the United States and has not had any
material export sales.
Item 2. PROPERTIES
The Company maintains [23] offices throughout the United States, the
locations of which are based principally on customer requirements, the
principal ones being described below:
<TABLE>
<CAPTION>
Approximate
Location Principal Use Square Footage
-------- ------------- --------------
<S> <C> <C>
Falls Church, Virginia Administrative 26,000
Annapolis, Maryland Administrative 3,000
San Diego, California Engineering 11,000
Manassas, Virginia Engineering 25,000
Wall, New Jersey Engineering 5,200
8
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Fair Lakes Engineering 8,500
Dayton Engineering 6,400
Ballston Engineering 5,200
</TABLE>
The Company leases all of its facilities for terms of seven (7) years or
less. Management believes that these facilities are adequate to serve the
Company's needs in the foreseeable future.
Item 3. LEGAL PROCEEDINGS
The Company, including its subsidiaries, are not subject to any material
pending legal proceedings, and none of the assets of the Company or its
subsidiaries are subject to any such proceedings, other than routine
litigation, if any, incidental to the business and against which the Company
is either adequately insured, or which is not material.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, no matters were submitted to a vote
of security holders.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on NASDAQ. Set forth below are the
high and low selling prices1 for the Company's common stock for each full
quarter of 1997 and 1996, during which such common stock has been publicly
traded as reported by NASDAQ.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
1st fiscal quarter - 1997 7.50 5.38
2nd fiscal quarter - 1997 8.38 6.25
3rd fiscal quarter - 1997 8.50 6.50
4th fiscal quarter - 1997 8.13 6.50
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
</TABLE>
As of December 31, 1997 there were 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.
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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.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations Statements Data:
(In thousands, except
earnings/loss per share):
Revenues .................... $78,476 $72,370 $57,951 $54,696 $52,649
Income from operations before
other income[expense] and
income taxes .............. 1,770 1,583 2,028 1,877 1,431
Charges arising from settle-
ments of litigation ....... -- -- 722 843 1,754
Interest expense ............ 720 578 396 386 307
Earnings[loss] before income
taxes ..................... 1,050 1,005 910 648 [630]
Income taxes ................ 405 186 390 328 345
Net earnings[loss] .......... 646 818 520 318 [286]
Earnings[loss] per common
share and common equivalent
share:
Basic EPS ................... $ .45 $ .59 $ .39 $ .24 $ [.18]
Diluted EPS ................. $ .42 $ .54 $ .34 $ .23 $ [.18]
Weighted average number of
shares outstanding:
Basic .................... 1,439 1,395 1,349 1,346 1,567
Diluted .................. 1,522 1,518 1,540 1,411 1,567
</TABLE>
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<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total Assets ................ $23,969 $20,618 $16,424 $15,759 $17,610
Long-term obligations ....... 1,528 1,722 156 213 274
Indebtedness to related
parties ................... 1,543 1,417 1,322 1,189 1,281
Accrued postretirement
benefit cost .............. 1,577 1,267 1,161 977 1,091
Other long-term obligations . 894 1,011 1,137 831 884
Stockholders' equity ........ $ 6,704 $ 6,032 $ 5,048 $ 4,653 $ 4,335
</TABLE>
Quarterly Results of Operations (Unaudited)
(In thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Net Sales:
1997 ...................... $19,813 $19,354 $19,819 $19,490
1996 ...................... 14,507 19,834 20,378 17,651
Gross Profit:
1997 ...................... 350 453 403 564
1996 ...................... 305 431 335 512
Income Taxes (Benefit):(a)
1997 ...................... 89 125 88 103
1996 ...................... 87 132 90 [123]
Net Income:
1997 ...................... 122 170 119 235
1996 ...................... 111 168 114 425
Basic Earnings
Per Common Share:(b)
1997 ...................... .08 .12 .08 .16
1996 ...................... .08 .12 .08 .30
Diluted Earnings
Per Common Share:(c)
1997 ...................... .08 .11 .08 .15
1996 ...................... .07 .11 .08 .29
</TABLE>
(a) The income tax benefit for the three months ended December 31, 1996
included a benefit of $130,600 for certain one-time adjustments
related to depreciation.
(b),(c) Earnings per share (basic and diluted) are calculated based on the
requirements of SFAS 128, which replaced primary EPS with basic
EPS. Diluted EPS is computed similarly to fully diluted EPS
pursuant to Opinion 15. In complying with the requirements of SFAS
128, the Company has restated previously reported quarterly data.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: 1997 Compared With 1996
REVENUES
For 1997, the Company's consolidated revenues were $78.5 million, up 8%
over the prior fiscal year. Most of the revenue growth was provided by the
government contracts segment as a result of new contract awards and existing
contracts which received additional funding. The Company's ability to
achieve higher direct labor utilization and increased direct labor staffing
were additional drivers of revenue growth in 1997.
Government Contracts Segment
For 1997, the Company's revenues grew by $6 million compared to 1996, of
which $4 million is attributable to the QTSC unit of the government contract
segment. QTSC's revenues have increased over the last three years due to new
contract awards. Its recent awards include contracts requiring core
competencies in video graphics production and technical and engineering
acquisition support.
The QTRD unit of the government contract's segment continues to account
for the most significant portion of the Company's revenues. QTRD's revenue
growth for 1997 increased by 2% over 1996 and was due primarily to increased
direct labor. Recently, QTRD was unsuccessful in a bid to retain a major
contract which accounted for 8% of the 1997 revenues. This has contributed
to a reduction in the Company's backlog as of the end of 1997, when compared
to the end of 1996.
Commercial Segment
For 1997, commercial segment sales consisted primarily of sales by QTPI,
including reimbursable costs arising under a contract with the U.S. Army
Soldier Systems Command and reimbursable pre-production costs under a new
production contract with a Fortune 100 Company. Full-scale production under
the latter contract will not commence until March, 1998. Sales of $677,100
during 1996 were in fulfillment of an initial supply contract which has since
ended.
QTISC, which was formed in late 1996, reported 1997 sales which were not
material to the operations.
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OPERATING EXPENSES
Operating expenses for 1997 were $76.7 million, or 97.7% of revenues,
compared to $70.8 million, or 97.8% of revenues for 1996. Of these amounts,
salaries, wages and employee benefits accounted for 54% of revenues for 1997,
compared to 49% for 1996. Labor cost increases resulted from increased
direct labor requirements in connection with the Company's various task order
contracts. Other operating expenses declined to 45% of revenues for 1997,
compared to 50% for 1996. The decline for 1997 when compared to 1996 was due
primarily to reduced pass-through costs under government contracts, a
reduction in QTPI's cost of operations and a reduction in certain reserves.
INCOME FROM OPERATIONS
Income from operations for 1997 was $1.8 million compared to $1.6
million for 1996, and remained at approximately 2% of revenues in each year.
For 1997, growth in income from operations was offset by certain nonrecurring
costs which impacted operating margins. These costs included those
associated with:
- - the base closing of Vint Hill Farms Station (Virginia) and subsequent
relocation of contract efforts to Fort Monmouth, New Jersey. Related
costs included: employment guarantees for employees in transition,
relocation of key employees, and recruitment of replacement employees;
- - increased bid, proposal, and business development activities;
- - recruiting technical and administrative staff during tight labor market
conditions;
- - expansion of office facilities in the Northern Virginia area and Wall,
New Jersey to accommodate increased employee staffing and to ensure
close proximity to customers.
- - depreciation of newly acquired personal computers, servers, and project
accounting software and other capitalized costs to support the Company's
information systems and wide area network.
INTEREST EXPENSE
Interest expense for 1997 was $719,800, up 25% from 1996, due to
increased line of credit borrowings to fund working capital requirements and
from interest charges associated with the capital lease on manufacturing
equipment. The capital lease was consummated in late 1996 and therefore did
not impact interest in either 1996 or 1995.
INCOME TAXES
During each of the last three years, state income tax, net of the
federal income tax benefit, diminished in significance as a component of the
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effective income tax rate. During 1996, the Company benefited from a tax
loss associated with an investment in a foreign subsidiary and changes in
depreciation methods. See Note E of the financial statements.
NET EARNINGS AND EARNINGS PER SHARE
The Company's 1997 basic earnings per share were $.45 ($.42, diluted) on
net earnings of $645,900 compared to $.59 ($.54, diluted) on 1996 net
earnings of $818,300. The earnings per share calculation in 1996 and 1995
have been restated, based on the provisions of a newly issued accounting
standard, SFAS 128, "Earnings per Share." See Note A14 of the Financial
Statements.
FINANCIAL CONDITION
During 1997, cash used by operations was $851,400, with a significant
portion of this amount used primarily to finance the growth in receivables.
The accounts receivable balance increased by $3.4 million during 1997, as a
result of delays in contract funding and overall increases in revenues.
During 1996, the increase in receivables amounted to less than half of the
1997 increase, thereby contributing to cash flows of $955,300 provided by
operations.
The Company used $1.5 million for investing activities, consisting
primarily of capital expenditures for the purchase of personal computers,
servers, and software applications to enhance the Company's wide area
network, information and accounting systems. Management expects to complete
its internal system development efforts by mid-1998. In addition, the hiring
of new employees and the expansion of office facilities necessitated the
purchase of additional personal computers, office equipment and furniture.
During 1996, the Company's capital expenditures of $3.8 million were used
primarily for enhancement of the production facility of QTPI in Newport News,
Virginia. No significant capital projects are planned in 1998.
The Company relied principally on its line of credit facility to finance
its operations and capital expenditures. Cash flows provided by financing
activities were in excess of $2.0 million during 1997 and 1996 and consisted
primarily of increased borrowings under the line of credit facility and
proceeds from a capital lease, respectively. Management recently
renegotiated its credit agreement to allow it to have the option to borrow at
the prime rate or LIBO based (London Interbank Offered) rate, thereby
potentially reducing interest costs. Additionally, management is exploring
debt and equity financing options to support QTPI's investment and working
capital requirements.
Management believes that its line of credit facility will be sufficient
during 1998 to fund expected capital expenditures, working capital needs, and
other cash requirements.
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FORWARD-LOOKING STATEMENTS
Management's discussion and analysis of the results of operations and
financial conditions and other sections of this Form 10-K may contain
forward-looking statements on the Company's outlook for the future. Such
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Certain factors could cause actual
results to differ materially from the statements. These factors include the
Company's ability to attract and retain key personnel, particularly those
involved in technical efforts; interest rate levels; changes in technology;
the potential impact of industry consolidation; and the Company's ability to
successfully exploit its commercial packaging technology.
Year 2000 Issue
Management has undertaken an investigation of whether the Company will
be adversely impacted by the issue of whether its systems are Year 2000
compliant. Based on this review, management has determined that a material
adverse impact on the Company's financial statements is unlikely.
Outlook
Over the last few years, the federal government has moved from specific
contracts to very general IDIQ (indefinite delivery/indefinite quantity)
contracts. These contracts provide the winning bidder the right to market its
products and services rather than a commitment from the purchasing agency to
buy through the contract. This has made buying services and products easier
for the federal government, but it has contributed to additional competitive
pressures already heightened due to appropriation cutbacks. As a result,
pressures on near-term profits in the industry have increased as companies
build sales and marketing infrastructures to capture business.
Several segments within the industry, such as the area of application
programming and information technology (IT), will provide growth
opportunities for contractors. In addition to the expanding demand for IT
services by the federal government, commercial demand for IT services is
dramatically increasing. The increased demand is characterized by the need
for government and the commercial sectors to focus on the Year 2000 date
problem. Profit margins tend to be stable-to-higher in the area of
information technology due to strong demand and scarce resources.
Management believes the Company is well poised to meet the challenges
presented by the changing market, as many of its products and services are
related to information technology.
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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.
17
<PAGE>
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 42.9%
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, basic and diluted earnings per share were $.59 and $.54 on
earnings of $818,300; these amounts reflected a 51% and 59% increase over per
share earnings of $.38 and $.34 (basic and diluted restated) during 1995.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company together with the
report thereon of Grant Thornton LLP, dated February 6, 1998, and all Notes
to such Consolidated Financial Statements are hereby incorporated herein by
reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting
and financial disclosure required to be reported herein.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information set forth under the caption "Election of Directors" on pages
2 and 3 of the definitive 1998 Proxy Statement of the Registrant to be
furnished to shareholders in connection with its Annual Meeting to be held on
May 15, 1998 (the "1998 Proxy Statement) with respect to the name of each
nominee or director, his age, his positions and offices with the Registrant,
his business experience, his directorships in other public companies, his
service on the Registrant's Board of Directors and certain of his family
relationships and information set forth under the caption "Stock Ownership of
the Company's Directors, Nominees and Executive Officers" on pages 13 and 14
of the 1998 Proxy Statement with respect to Section 16 matters is hereby
incorporated herein by reference.
18
<PAGE>
Officers of the Registrant are elected annually by the Board of
Directors at the meeting of the directors immediately following the annual
meeting of shareholders. There are no arrangements or understandings between
any officer and any other person pursuant to which the officer was selected.
Information with respect to Executive Officers of the Registrant is set forth
below:
Vincent L. Salvatori, age 65, has served as Chief Executive Officer of
the Company since October, 1988. He has been a director of the Company since
January 1968.
Gerald F. Mayefskie, age 57, has served as President of the Company
since 1991. He has been a director of the Company since May, 1990.
William M. Fairl, age 49, has served as Senior Vice President of the
Company since May, 1996. From January, 1995 to May, 1996 he served as Vice
President-Group Manager of the Company and from December, 1988 to January,
1995 he served as Senior Computer Scientist with the Company.
Joseph P. O'Connell, Jr., age 53, has served as Vice President and Chief
Financial Officer of the Company since March, 1989.
Joe W. Rigby, age 57, has served as Senior Vice President of the Company
since August, 1996. For more than 30 years prior to August, 1996 he served
in progressively more responsible positions in the United States Army,
retiring in 1996 with the rank of Major General.
Michael P. Rivera, age 51, has served as Vice President, General Counsel
and Secretary of the Company since September, 1997. From December, 1988
until July, 1997, he served as Vice President, General Counsel and Secretary
to Union Switch & Signal, Inc.
Michael Stankosky, age 54, has served as Senior Vice President of the
Company since April, 1997. From April, 1992 to April, 1997 he served as Vice
President, U.S. and International Business Development, of Science
Applications International Corporation.
Douglas Wood, age 53, has served as Senior Vice President of the Company
since August, 1997. From January, 1992 to August, 1997 he served as
Director, United States Army, CECOM, Intelligence and Electronic Warfare
Directorate.
Item 11. EXECUTIVE COMPENSATION
Information with respect to remuneration of executive officers and
directors, and certain other matters set forth in the 1998 Proxy Statement
(i) under the caption "Compensation of Officers and Directors" on pages 7, 8,
and 9 thereof and (ii) under the caption "Compensation Committee Interlocks
and Insider Participation" on page 10 thereof is, to the extent
19
<PAGE>
such information is required by Item 402 of Regulation S-K, hereby
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of (i) persons who
beneficially own 5% or more of the outstanding shares of the Registrant's
common stock, (ii) directors, nominees and named executive officers
individually and (iii) directors, nominees and executive officers as a group
set forth in the 1998 Proxy Statement under the caption "Stock Ownership of
Certain Beneficial Owners and Management" on pages 13 and 14 thereof is, to
the extent such information is required by Item 403 of Regulation S-K, hereby
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to relationships and related transactions
between the Registrant and any director, nominee for director, executive
officer, security holder owning 5% or more of the Registrant's voting
securities, any member of the immediate family of any of the above or certain
persons to whom such persons are related, as set forth in the 1998 Proxy
Statement under the caption "Compensation Committee Interlocks and Insider
Participation" on page 10 thereof is, to the extent such information is
required by Item 404 of Regulation S-K, hereby incorporated herein by
reference.
20
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
a. The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Page In
Consolidated Page
Financial In This
Statements* Report
------------ -------
<S> <C> <C>
(1) Consolidated Financial Statements as of
December 31, 1997:
Report of Independent Accountants 3 --
Consolidated Balance Sheet at December 31,
1997 and 1996 4,5 --
Consolidated Statement of Earnings for
the Years Ended December 31, 1997,
1996 and 1995 6 --
Consolidated Statement of Cash Flows for
the Years Ended December 31, 1997,
1996 and 1995 9,10 --
Notes to Consolidated Financial State-
ments -- December 31, 1997, 1996 and
1995 11-42 --
*Incorporated by reference from the
indicated pages of the 1997 Consoli-
dated Financial Statements
(2) Financial Statement Schedules:
II. Valuation and Qualifying Accounts 44 --
All other schedules are omitted because
they are not applicable or the required
information is shown in the financial
statements or notes thereto.
b. No reports on Form 8-K have been filed
during the last quarter of 1997. --
c. The exhibits filed as part of this report
and exhibits incorporated herein by refer-
ence to other documents are listed in the
Index to Exhibits to this Annual Report on
Form 10-K. --
21
<PAGE>
d. The financial statement schedules required
to be filed as part of this report are
listed under a.(2) above. --
</TABLE>
With the exception of the information herein expressly incorporated by
reference, the 1998 Proxy Statement is not deemed filed as part of this
Report on Form 10-K.
22
<PAGE>
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: March 6, 1998 By: /s/ Vincent L. Salvatori
------------- ------------------------
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
/s/ Vincent L. Salvatori CEO and Chairman of March 6, 1998
________________________ the Board (Principal _____________________
Vincent L. Salvatori Executive Officer)
/s/ Gerald F. Mayefskie President, March 6, 1998
________________________ Chief Operating Officer _____________________
Gerald F. Mayefskie and Director
/s/ Joseph P. O'Connell, Jr. Chief Financial Officer March 6, 1998
________________________ (Principal Financial and _____________________
Joseph P. O'Connell, Jr. Accounting Officer)
/s/ Vincent M. Russo March 6, 1998
________________________ Director _____________________
Vincent M. Russo
/s/ Edward Broenniman March 6, 1998
________________________ Director _____________________
Edward Broenniman
23
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description page numbers
- ----------- ----------- -------------
<S> <C> <C>
3 Restated Articles of Incorporation *
and Bylaws of the Registrant,
incorporated by reference to Exhibit 3
of the Registrant's Registration
No. 2-88617
10.1 Officer and Managers Discretionary *
Bonus Plan, as amended and restated,
incorporated by reference to Exhibit
10(d) of Registrant's Annual Report
on Form 10-K for the period ended
December 31, 1987
10.2 QuesTech Variable Deferral Plan *
incorporated by reference to Exhibit
10(k) of Registrant's Annual Report
on Form 10-K for the period ended
December 31, 1987
10.3 Limited Partnership Agreement with *
respect to the Kitty Hawk Office
Center incorporated by reference
to Exhibit 10(v) of Registrant's
Annual Report on Form 10-K for the
period ended December 31, 1989
10.5 Amended QuesTech, Inc. Officers and *
Managers Deferred Compensation Plan
incorporated by reference to Exhibit
10(t) of Registrant's Annual Report
on Form 10-K for the period ended
December 31, 1992
10.6 Lease dated November 24, 1993 between *
Louis Esposito and the Registrant
incorporated by reference to Exhibit
10(x) of Registrant's Annual Report
on Form 10-K for the period ended
December 31, 1993
10.7 QuesTech, Inc. Stock Employee Compen- *
sation Trust incorporated by reference
to Exhibit 10(y) of Registrant's
Annual Report on Form 10-K for the
period ended December 31, 1993
24
<PAGE>
(a) Amended and Restated Stock *
Employee Compensation Trust
incorporated by reference to
Exhibit 10(q) of Registrant's
Annual Report on Form 10-K for
the period ended December 31, 1995
10.8 1994 Incentive Stock Option Plan *
incorporated by reference to
Exhibit 10(aa) of Registrant's
Annual Report on Form 10-K for the
period ended December 31, 1994
(a) Amendment to 1994 Incentive Stock *
Option Plan dated November 15,
1995 incorporated by reference to
Exhibit 10(p) of Registrant's
Annual Report on Form 10-K for
the period ended December 31, 1995
10.9 Lease dated March 14, 1995 between John *
Hancock Mutual Life Insurance Company
and the Registrant incorporated by
reference to Exhibit 10(cc) of Regis-
trant's Annual Report on the Form 10-K
for the period ended December 31, 1994
10.10 Amended and Restated Loan and Security *
Agreement between Signet Bank and the
Registrant, dated June 3, 1996 incorp-
orated by reference to Exhibit 10(r) of
Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1996
(a) Amendment No. 1, dated May 31, 1997 *
1997, to the Amended and Restated
Loan and Security Agreement between
between Signet Bank and Registrant,
incorporated by reference to
Exhibit 10(t) of Registrant's
Quarterly Report on Form 10-Q for
the period ended June 30, 1997
(b) Amendment No. 2, dated December 23, 28-51
1997, to the Amended and Restated
Loan and Security Agreement between
Signet Bank and Registrant
25
<PAGE>
10.11 Equipment Lease between General *
Electric Capital Corporation and
Registrant, dated October 24, 1996
incorporated by reference to Exhibit
10(x) of Registrant's Quarterly Report
on Form 10-Q for the period ended
September 30, 1996
10.12 1996 Incentive Stock Option Plan dated *
May 24, 1996, incorporated by reference
to Exhibit 10(a)(i) of Registrant's
Annual Report on Form 10-K for the
ended December 31, 1996
(a) Amendment No. 1, dated March 15, 52
1997, to 1996 Incentive Stock
Option Plan
10.13 Stock Option Plan for Non-employee *
Directors, dated November 1, 1996,
incorporated by reference to Exhibit
10(a)(ii) of Registrant's Annual
Report on Form 10-K for the period
ended December 31, 1996
10.14 Sixth Amended Employment Agreement 53-81
between Vincent L. Salvatori and
Registrant, dated November 24, 1997
10.15 Third Amended Employment Agreement 82-87
between Gerald F. Mayefskie and
Registrant, dated November 17, 1997
10.16 First Amendment to Deed of Lease 88-106
between John Hancock Mutual Life
Insurance Company and the Registrant,
dated December 31, 1997
11 Statement Re: Computation of per share 38**
earnings incorporated by reference to
Note I to Registrant's Consolidated
Financial Statements for the year
ended December 31, 1997
21 Subsidiaries of the Registrant 107
27 Financial Data Schedule 108
</TABLE>
* Previously filed; incorporated herein by reference.
** Page in Consolidated Financial Statements for the
year ended December 31, 1997.
26
<PAGE>
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 1998 Annual
Stockholders' Meeting.
27
<PAGE>
10.10b
AMENDMENT NO. 2 TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 2 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(this "Amendment"), dated as of the 23 day of December, 1997, is made by and
among QUESTECH, INC., a Virginia corporation ("QuesTech"), QUESTECH SERVICE
COMPANY, a Virginia corporation formerly known as Engineering Resources, Inc.
("QTSC"), QUESTECH PACKAGING, INC., a Virginia corporation ("QTPI"; QuesTech,
QTSC and QTPI are referred to individually as a "Borrower" and collectively as
the "Borrowers"), and FIRST UNION NATIONAL BANK, a National banking association,
successor by merger to Signet Bank, a Virginia banking corporation (the
"Lender").
RECITALS
A. The Lender and the Borrowers entered into an Amended and Restated Loan
and Security Agreement dated as of June 3, 1996 (as amended through the date
hereof, the "Agreement") pursuant to which the Lender has agreed to extend
credit to the Borrowers, and the Borrowers have agreed to obtain credit from the
Lender, on the terms and conditions set forth in such Agreement.
B. The Borrowers have requested that the Lender make certain modifications
to the Agreement, including, offering a LIBOR pricing option, providing an
additional term loan facility, and permitting a higher advance rate with respect
to certain commercial receivables included in the borrowing base, and the Lender
has consented to such request subject to the execution of this Amendment and the
satisfaction of the conditions specified herein.
C. The Borrowers and the Lender now desire to execute this Amendment to set
forth their agreements with respect to the modifications to the Agreement.
Accordingly, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Lender and the Borrowers agree
as follows:
SECTION 1. Definitions. Capitalized terms used in this Amendment and not
defined herein are defined in the Agreement.
SECTION 2. Amendments to Agreement. The Agreement is hereby amended as follows:
2.1 Amendments to Section 1. Section 1 of the Agreement is amended as
follows:
2.1(a) Borrowing Base. The definition of the term Borrowing Base is
replaced in its entirety with the following definition:
"Borrowing Base" means, at the time in question, the sum of (a) 85% of
Eligible Billed Government Receivables, (b) 80% of Eligible Billed Commercial
Receivables, and (c) 85% of Eligible Billed Special Commercial Receivables, all
as depicted in the Borrowing Base Certificate the Lender has most recently
received pursuant to Section 2.1(e) or Section 5.8(g) provided, however, that
<PAGE>
(i) the Borrowing Base shall be reduced by the Letter of Credit Exposure on the
date the Borrowing Base is being calculated, (ii) at all times the Borrowing
Base shall remain subject to verification by the Lender, and (iii) in no event
shall the Borrowing-Base attributable to the Accounts Receivable described in
clause (b) of this definition of "Borrowing Base" exceed One Million and no/100
Dollars ($1,000,000.00).
2.1(b) Commitment Fee. The definition of the term Commitment Fee is
restated in its entirety as follows:
"Commitment Fee" means the quarterly fee to be paid by the Borrowers to
the Lender pursuant to Section 2.5 hereof in consideration of the commitment by
the Lender to make Revolving Loans hereunder. The Commitment Fee due for each
calendar quarter (or portion thereof) shall equal the product of the Commitment
Fee Rate in effect for such quarter (or portion thereof) multiplied by the
difference between $6,000,000.00 and the sum of the average daily principal
balance of the Revolving Loans during such quarter (or applicable portion
thereof) plus the average daily face amount of all Letters of Credit outstanding
during such quarter (or applicable portion thereof).
2.1(c) Default Rate. The definition of the term Default Rate is
restated in its entirety as follows:
"Default Rate" means, with respect to a Term Loan, a rate of interest equal
to 3% above the interest rate otherwise applicable to such Term Loan and, in all
other cases, a rate of interest equal to 3% above the interest rate otherwise
applicable to Revolving Loans.
2.1(d) Eligible Bill Commercial Receivable. The definition of the term
Eligible Billed Commercial Receivable is replace in its entirety with the
following definition:
"Eligible Billed Commercial Receivable" means any Eligible Billed
Receivable which does not arise out of a prime contract between a Borrower and
the Government and does not qualify as an Eligible Billed Special Commercial
Receivable; provided that, for so long as (i) more than 50% of the Eligible
Receivables due from any Commercial Customer or group of Commercial
Customers which are Affiliates of each other remains unpaid for more than 90
days following the date of initial invoice to such Commercial Customer(s) for
such Eligible Receivables or (ii) any Commercial Customer or an Affiliate of a
Commercial Customer is obligated to the Borrower pursuant to a promissory note
or other agreement entered into by such Commercial Customer or Affiliate in lieu
of payment of an Account Receivable, then no Accounts Receivable of
2
<PAGE>
such Commercial Customer(s) may be included as Eligible Billed Commercial
Receivables.
2.1(e) Eligible Billed-Special Commercial Receivable. The following
definition of the term Eligible Billed Special Commercial Receivable is inserted
in the proper alphabetical location in Section 1:
"Eligible Billed Special Commercial Receivable" means any Eligible Billed
Receivable due from a Special Commercial Customer which does not arise out of a
prime contract between a Borrower and the Government and does not qualify as an
Eligible Billed Commercial Receivable; provided that, for so long as (i) more
than 50% of the Eligible Receivables due from any individual Commercial Customer
or group of Commercial Customers which are Affiliates of each other remains
unpaid for more than 90 days following the date of initial invoice to such
Commercial Customer(s) for such Eligible Receivables or (ii) any Commercial
Customer or an Affiliate of a Commercial Customer is obligated to a Borrower
pursuant to a promissory note or other agreement entered into by such Commercial
Customer or Affiliate in lieu of payment of an Account Receivable, then no
Accounts Receivable of such Commercial Customer(s) may be included as Eligible
Billed Special Commercial Receivables.
2.1(f) Extended Maturity Date. The following definition of the term
Extended Maturity Date is inserted in the proper alphabetical location in
Section 1:
"Extended Maturity Date" shall mean with respect to each Term Loan the
numerically corresponding day of the forty-eighth (48th) calendar month
following the date when such Term Loan is made. For example, if a Term Loan is
funded on December 1, 1997, its Extended Maturity Date would be December 1,
2001.
2.1(g) Interest Determination Date. The following definition of the
term "Interest Determination Date" is inserted in the proper alphabetical
location in Section 1:
"Interest Determination Date" means the first Business Day of each calendar
month.
2.1(h) Letter of Credit Exposure. The following definition of the
term Letter of Credit Exposure is inserted in the proper alphabetical location
in Section 1:
"Letter of Credit Exposure" means, at any given date, the available face
amount of outstanding Letters of Credit on such date plus the aggregate amount
of drafts drawn under or purporting to be drawn under Letters of Credit that
have been paid by the Lender and for which the Lender has not been reimbursed as
of such date.
3
<PAGE>
2.1(i) LIBO-Based Rate. The following definition of the term
"LIBO-Based Rate" is inserted in the proper alphabetical location in Section 1:
"LIBO-Based Rate" means the rate per annum determined by the Lender to
be equal to the sum of (a) the then applicable LIBO Rate plus (b) 2.70%.
2.1(j) LIBO Rate. The following definition of the term LIBO Rate is
inserted in the proper alphabetical location in Section 1:
"LIBO Rate" means that rate per annum determined by the Lender on each
Interest Determination Date to be equal to the London Interbank Offered Rate as
published on such Interest Determination Date by Bloomberg or Dow
Jones-Telerate, as BBA LIBOR on page 3750 (or by Reuters Monitor Money Rates
Services (LIBO page), if Bloomberg or Dow Jones-Telerate is not available), or
such other page as may replace that page on that service for the purpose of
displaying rates or prices comparable to that rate (rounded upwards, if
necessary, to the next higher 1/100%) representing the offered rate for deposits
in United States Dollars for one (1) month periods that will be in effect on
such Interest Determination Date (and if such rates are quoted based on the
amount of the deposit, in an amount equal to the Principal Amount on such
Interest Determination Date); provided, however, that such London Interbank
Offered Rate shall be determined by the Lender in its sole discretion and the
resulting LIBO Rate shall include any adjustment deemed necessary by the Lender,
in its sole discretion, to reflect the cost of the Lender's reserve requirements
as they exist from time to time. If more than one such rate appears on such
page or its replacement, the Lender will use the arithmetic mean of such rates
to determine the LIBO Rate. The LIBO Rate is not necessarily the lowest or most
favorable rate of interest charged by the Lender on extensions of credit to
debtors.
2.1(k) Loan Documents. The definition of the term Loan Documents is
restated in its entirety as follows:
"Loan Documents" means this Agreement, the Notes, and any other document
now or hereafter executed or delivered in connection with the Obligations in
evidence thereof or as security therefor, including, without limitation, any
guaranty, life insurance assignment, pledge agreement security agreement, deed
of trust, mortgage, promissory note or subordination agreement.
2.1(l) Maturity Date. The following definition of the term Maturity
Date is inserted in the proper alphabetical location in Section 1:
"Maturity Date" shall mean with respect to each Term Loan the numerically
corresponding day of the twelfth (12th) calendar month following the date when
4
<PAGE>
such Term Loan is made. For example, if a Term Loan is funded on December 1,
1997, its Maturity Date would be December 1, 1998.
2.1(m) Maximum Amount. The definition of the term Maximum Amount is
restated in its entirety as follows:
"Maximum Amount" means, at any time, the lesser of (a) the difference
between $6,000,000-00 and the Letter of Credit Exposure at such time or (b) the
then applicable Borrowing Base.
2.1(n) Note. The definition of the term Note is restated in its
entirety as follows:
"Note" means either the Revolving Note or a Term Note, depending upon the
context in which the term is used, and "Notes" means one or more of the
Revolving Note and the Term Notes.
2.1(o) Obligations. The definition of the term Obligations is
restated in its entirety as follows:
"Obligations" means the Loans, the Notes, all indebtedness and obligations
of a Borrower under this Agreement and the other Loan Documents, as well as all
other obligations and indebtedness of a Borrower to the Lender, now existing or
hereafter arising, of every kind and description, whether or not evidenced by
notes or other instruments, and whether such obligations are direct or indirect,
fixed or contingent, liquidated or unliquidated, including, without limitation,
any overdrafts in any deposit account maintained by a Borrower with the Lender
and all obligations of a Borrower with respect to letters of credit issued by
the Lender for the account of such Borrower.
2.1(p) Pre-Closing Settlement Package. The following definition of the
term Pre-Closing Settlement Package is inserted in the proper alphabetical
location in Section 1:
"Pre-Closing Settlement Package" means the following documents with respect
to each Qualifying Single Family Dwelling Unit for which QuesTech is requesting
that the Lender advance a Term Loan:
(i) a copy of the Term Note that will evidence such Term Loan,
appropriately completed;
(ii) a copy of the Deed of Trust that will secure such Tenn Note,
appropriately completed;
5
<PAGE>
(iii) an original commitment for a policy of owner's title insurance
insuring QuesTech, its successors and/or assigns in a form acceptable to the
Lender, including such endorsements and affirmative coverages as the Lender
shall require and subject to only such exceptions to coverage as the Lender
shall approve;
(iv) an original binder for the hazard insurance policy and, if
required by law, flood insurance policy, with extended coverage of the hazard
insurance policy, covering the Qualifying Single Family Dwelling Unit;
(v) an original appraisal of the Qualifying Single Family
Dwelling Unit addressed to the Lender and otherwise acceptable to the Lender;
(vi) a copy of the HUD-1 Settlement Statement prepared in connection
with the closing of the corresponding Term Loan;
(vii) a copy of the proposed Deed conveying the Qualifying Single
Family Dwelling Unit to QuesTech; and
(viii) such other documents and information as the Lender may
reasonably request to verify that the conditions to the Lender's obligations to
make the corresponding Term Loan have been satisfied.
2.1(q) Qualifying Single Family Dwelling Unit. The following
definition of Qualifying Single Family Dwelling Unit is inserted in the proper
alphabetical location in Section 1:
"Qualifying Single Family Dwelling Unit" means a single family dwelling
unit which: (i) is owned by an employee of a Borrower who is being transferred
from his or her current place of employment with the Borrower to another
facility of the Borrower and (ii) satisfies the underwriting requirements of the
Lender as suitable collateral for a Term Loan.
2.1(r) Rate Request. The following definition of the term Rate
Request is inserted in the proper alphabetical location in Section 1:
"Rate Request" means QuesTech's telephonic notice given on behalf of the
Borrowers (to be confirmed promptly in writing) of the Borrowers' intention to
have all of the Principal Amount bear interest at the LIBO-Based Rate.
6
<PAGE>
2.1(s) Revolving Facility. The definition of the term Revolving
Facility is inserted in the proper alphabetical location on Section 1:
"Revolving Facility" means the line of credit established by the Lender for
the benefit of the Borrowers in an amount not to exceed the Maximum Amount to be
used by the Borrowers only for the purposes specified in Section 2.1(d).
2.1(t) Revolving Loans. The following definition of the term
Revolving Loans is inserted in the proper alphabetical location in Section 1:
"Revolving Loans" means loans made by the Lender to the Borrower under the
Revolving Facility.
2.1(u) Revolving Note. The following definition of the term Revolving
Note is inserted in the proper alphabetical location in Section 1:
"Revolving Note" means the promissory note in form and substance acceptable
to the Lender in the original principal amount of $6,000,000.00 (as it may be
amended, modified supplemented or replaced from time to time) evidencing the
obligation of the Borrower to pay the principal amount of the Revolving Loans
together with interest on the Revolving Loans.
2.1(v) Settlement Package. The following definition of the term
Settlement Package is inserted in the proper alphabetical location in Section 1:
"Settlement Package" means the following documents with respect to each
Term Loan and the Qualifying Single Family Dwelling Unit securing such Term
Loan:
(i) the executed original Term Note that evidences such Term Loan,
appropriately completed;
(ii) the executed, original Deed of Trust that secures such Term
Note, appropriately completed;
(iii) the original hazard insurance policy and, if required by law,
flood insurance policy, with extended coverage of the hazard insurance policy,
covering the Qualifying Single Family Dwelling Unit issued in exact conformance
with the binder for such policy included in the Pre-Settlement Closing Package
for such Term Loan;
(iv) the executed, original HUD-1 Settlement Statement prepared in
connection with the closing of such Term Loan, in exact conformance to the copy
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of such HUD-1 Settlement Statement included in the Pre-Closing Settlement
Package for such Term Loan, or containing only such modifications as the Lender
shall have previously approved;
(v) an original policy of owner's title insurance insuring QuesTech,
its successors and/or assigns in exact conformance to the commitment for such
policy included in the Pre-Closing Settlement Package for such Term Loan, or
containing only such modifications as the Lender shall have previously approved;
(vi) the original, recorded Deed conveying the Qualifying Single
Family Dwelling Unit to QuesTech, which Deed shall be in exact conformance to
the copy of such Deed included in the Pre-Closing Settlement Package for such
Term Loan, or shall contain only such modifications as the Lender shall have
previously approved; and
(vii) such other documents and information as the Lender may
reasonably request to verify that the conditions to the Lender's obligations to
make the such Term Loan have been satisfied.
2.1(w) Special Commercial Customer. The following definition of the
term Special Commercial Customer is inserted in the proper alphabetical location
in Section 1:
"Special Commercial Customer" means any Person obligated on an Account
Receivable which the Lender, in its sole discretion, has approved as a Special
Commercial Customer, such approval to be evidenced by the inclusion of such
Person's name on the Schedule of Special Commercial Customers attached hereto.
The status of Special Commercial Customer may be reviewed by the Lender at any
time and any Person may be removed as a Special Commercial Customer by the
Lender, in its sole discretion, upon notice to the Borrowers of the Lender's
decision to remove such Person. Upon the Lender's issuance of such a notice no
new Accounts Receivable due from such Person may be included in the Borrowing
Base and all existing Accounts Receivable of such Person included in the
Borrowing Base as of the date of such notice shall no longer be permitted to be
included in the Borrowing Base on the thirty-first (31st) day following the date
of such notice.
2.1(x) Term Facility. The following definition of the term Term
Facility is inserted in the proper alphabetical location in Section 1:
"Term Facility" means the line of credit in the maximum amount of
$750,000.00 established by the Lender for the benefit of QuesTech on the terms
set forth in Section 2.2 hereof to be used by QuesTech only for the purposes
specified in Section 2.2 (b) hereof.
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2.1(y) Term Loan. The following definition of the term Term Loan is
inserted in the proper alphabetical location in Section 1:
"Term Loan" means each Loan made by the Lender to QuesTech under the Term
Facility.
2.1(z) Term Note. The following definition of the term Term Note is
inserted in the proper alphabetical location in Section 1:
"Term Note" means each promissory note in form and substance acceptable to
the Lender (as it may be amended, modified supplemented or replaced from time to
time) evidencing the obligation of QuesTech to pay the principal amount of a
Term Loan together with interest on such Term Loan.
2.2 Amendments to Section 2. Section 2 is restated in its entirety as
follows:
SECTION 2. Loans.
2.1. Revolving Facility Amount and Borrowing Procedure.
(a) Subject to the terms and conditions of this Agreement, the Lender agrees
to make Revolving Loans to the Borrowers (through the Agent) from time to time
until the Termination Date unless, after giving effect to any such Revolving
Loan (i) the Principal Amount would exceed the Maximum Amount, (ii) a Borrower
then has, or as a result of such Revolving Loan would have, an obligation to
prepay any Loan, or (iii) a Borrower then has, or as a result of such Revolving
Loan would have, an obligation to provide additional collateral to the Lender
pursuant to Section 2.1(c) hereof; provided, however that for the purposes of
all such calculations, Revolving Loans to be repaid by Revolving Loans to be
advanced on such date shall be excluded from the Principal Amount. Subject to
the foregoing limitations, the Borrowers (acting through the Agent) may borrow,
repay without penalty and re-borrow hereunder from the date hereof until the
Termination Date. The obligation of the Borrowers to repay the Revolving Loans,
together with interest thereon, shall be evidenced by the Revolving Note. The
unpaid principal balance of the Revolving Note shall be payable on the
Termination Date, subject to acceleration, termination or prepayment under the
terms of this Agreement.
(b) Subject to the terms and conditions of this Agreement, the Application
applicable thereto and the other Loan Documents, the Lender agrees to issue
Letters of Credit under the Revolving Facility for the benefit of QuesTech in an
aggregate amount not to exceed $500,000.00 unless after giving effect to the
issuance of any such Letter of Credit (i) the Principal Amount would exceed the
Maximum Amount, (ii) a Borrower then has, or as a result of such Letter of
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Credit would have, an obligation to prepay any Loan, or (iii) a Borrower then
has, or as a result of such Letter of Credit would have, an obligation to
provide additional collateral to the Lender pursuant to Section 2.1(c) hereof,
provided, however that, for the purposes of all such calculations, Letters of
Credit to be replaced with Letters of Credit to be issued on such date shall be
excluded. The expiration date of each Letter of Credit must be acceptable to
the Lender, in its sole and absolute discretion, but in no event shall be later
than the Termination Date.
(c) If the Principal Amount exceeds the Maximum Amount, the Borrowers shall
immediately prepay the Revolving Loans to the extent necessary to reduce such
excess. If after such prepayment the Letter of Credit Exposure exceeds the sum
of (a) 85% of Eligible Billed Government Receivables, (b) 80% of Eligible Billed
Commercial Receivables, and (c) 85% of Eligible Billed Special Commercial
Receivables, all as depicted in the Borrowing Base Certificate the Lender has
most recently received pursuant to Section 2.1(e) or Section 5.8(g), the
Borrowers shall immediately deliver to the Lender such additional collateral as
the Lender shall deem necessary to adequately secure the Borrowers' obligations
with respect to such Letter of Credit Exposure.
(d) The proceeds of the Revolving Loans shall be used for business or
commercial purposes, including supporting the issuance by the Lender of Letters
of Credit at the request of QuesTech, and for no other purpose.
(e) Only the Agent may request Revolving Loans. Any request for a Revolving
Loan must be received by the Lender not later than 1:00 p.m. (Washington, D.C.
time) on the date on which the Revolving Loan is to be made. Each request must
specify the amount of the Revolving Loan and, at the option of the Lender, shall
be accompanied by a current Borrowing Base Certificate, which may be transmitted
by telecopy to the Lender at (703) 506-9553, or such other number as the Lender
may designate in written notice to the Agent. If a Borrowing Base Certificate
is transmitted by telecopy, the Agent shall maintain the original of such
Borrowing Base Certificate as a permanent record for so long as any of the
Obligations remain outstanding and shall allow the Lender to inspect such
Borrowing Base Certificate and shall provide copies of such original to the
Lender upon its request therefor. The proceeds of the Revolving Loans will be
credited to the Operating Account. Revolving Loans may be requested by those
individuals designated by the Agent from time to time in written instruments
delivered to the Lender; provided, however, that the Borrowers shall remain
liable with respect to any Revolving Loan disbursed by the Lender in good faith
hereunder, even if such a Revolving Loan is requested by an individual who has
not been so designated. The Borrowers agree to confirm in writing from time to
time, when and as requested by the Lender, the purpose for which the proceeds of
each Revolving Loan were used.
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(f) Any request for a Letter of Credit to be issued must be made by delivery
to the Lender, not later than five (5) Business Days prior to the date of
issuance of such requested Letter of Credit, of a properly completed and
executed Application. The fee for each Letter of Credit shall be an amount
equal to an opening fee of $500.00 plus a non-refundable commission of 2% per
annum of the undrawn portion of the Letter of Credit, payable in advance upon
issuance and thereafter on each anniversary of the date of issuance of such
Letter of Credit. The Lender is authorized to advance on behalf of QuesTech as
a Revolving Loan all sums required to be paid by QuesTech to the Lender in
respect of any such Letter of Credit pursuant to the terms of the Application
(including the fee set forth above), provided that the Lender may, but shall not
be obligated to make such Revolving Loans if, after the disbursement thereof,
(i) the Principal Amount would exceed the Maximum Amount, (ii) a Borrower then
has, or as a result of such Revolving Loan would have, an obligation to prepay
any Loan, or (iii) a Borrower then has, or as a result of such Revolving Loan
would have, an obligation to provide additional collateral to the Lender
pursuant to Section 2.1(c) hereof; provided, however that, for the purposes of
all such calculations, Revolving Loans to be repaid by Revolving Loans to be
advanced on such date shall be excluded from the Principal Amount. The
provisions of the Application are deemed incorporated in this Agreement by this
reference and shall be binding upon the Lender and Borrowers as if fully set
forth herein. If a conflict exists between the terms of the Application and any
other Loan Document, the terms of the Application shall control with respect to
any Letter of Credit issued pursuant to such Application but not as to other
matters governed by this Agreement or such Loan Document.
2.2 Term Loan Amount and procedure.
(a) Subject to the terms and conditions of this Agreement, the Lender agrees
to make Term Loans to QuesTech in the aggregate principal amount of up to
$750,000.00 until March 31, 1998. The amount of each Term Loan shall be limited
to the "cash due from borrower" as depicted on line 303 of the HUD-I Settlement
Statement prepared and executed by QuesTech and the seller in connection with
each acquisition of a Qualifying Single Family Dwelling Unit by QuesTech, which
HUD-1 Settlement Statement is to be delivered to the Lender pursuant to Section
3.13 hereof. The obligation of QuesTech to repay each Term Loan plus interest
accrued thereon shall be evidenced by a Term Note. The entire principal amount
of each Term Loan shall be due on the first to occur of (i) the sale of the
Qualifying Single Family Dwelling Unit securing such Term Loan and (ii) the
Maturity Date or, if applicable, the Extended Maturity Date of such Term Loan.
If a Qualifying Single Family Dwelling Unit has not been sold by QuesTech on or
prior to the Maturity Date of the Term Loan secured by such Qualifying Single
Family Dwelling Unit and there is then no Default or Event of Default, QuesTech
may, by written notice received by the Lender three (3) Business Days in advance
of the Maturity Date, elect to extend the maturity
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date of such Term Loan to the Extended Maturity Date. As a condition to such
election, QuesTech must make a principal curtailment in the amount of 10% of the
principal balance of such Term Loan on the Maturity Date. Thereafter on each
Interest Payment Date, QuesTech shall make equal monthly payments of principal,
each in the amount of 1/360th of the principal balance of the Term Loan on the
Maturity Date (prior to the required 10% curtailment), and the entire unpaid
principal balance of such Term Loan shall be due in fall, is not sooner repaid,
on the Extended Maturity Date. The obligation of the Lender to make Term Loans
is not a revolving obligation and amounts borrowed under this Section 2.2 and
repaid may not be reborrowed.
(b) The proceeds of each Term Loan shall be used by QuesTech to acquire the
Qualifying Single Family Dwelling Unit which will secure such Term Loan, and for
no other purpose.
(c) Any request for a Term Loan must be received by the Lender not later than
1:00 p.m. (Washington, D.C. time) at least two (2) Business days prior to the
date on which the Term Loan is to be made. Each request must specify the amount
of the Term Loan and be accompanied by the documents required under Section 7.3
hereof The proceeds of the Term Loans will be credited to a deposit account
maintained with the Lender by QuesTech. Term Loans may be requested by those
individuals designated by QuesTech from time to time in written instruments
delivered to the Lender; provided, however, that the Borrowers shall remain
liable with respect to any Term Loan disbursed by the Lender in good faith
hereunder to QuesTech, even such Term Loan is requested by an individual who has
not been so designated. The Borrowers agrees to confirm in writing from time to
time, when and as requested by the Lender, the purpose for which the proceeds of
each Term Loan were used.
(d) QuesTech may prepay a Term Loan in whole or in part at any time without
premium or penalty. Any such prepayment shall be applied against the scheduled
principal payments in the inverse order of maturity and shall not otherwise
postpone or change the amount of any subsequent installment.
2.3. Interest.
(a) General Provisions.
(i) Revolving Loans. Except as otherwise provided in this Section
2.3, the Principal Amount shall bear interest for each day such Principal
Amount is outstanding until it becomes due a rate of interest determined as
set forth in this Section 2.3(a)(i). QuesTech, on behalf of the Borrowers,
shall have the option, subject to the terms and conditions hereinafter set
forth, of paying interest on the Principal Amount at the Prime Rate or the
LIBO-Based Rate, and,
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following receipt of QuesTech's verbal request therefor, the Lender will provide
the current LIBO Rate. If the Borrowers desire the application of the
LIBO-Based Rate, they shall submit a Rate Request to the Lender, which Rate
Request, if accepted by Lender, shall be effective on the next succeeding
Interest Determination Date and shall be irrevocable until the Interest
Determination Date following the Interest Determination Date when such Rate
Request becomes effective; provided, however, that in no event shall the Lender
be required to honor a Rate Request that is received later than 1:00 p.m.
(Washington, D.C. time) two (2) Business Days prior to the Interest
Determination Date when the Borrowers' desire the LIBO-Based Rate to take
effect. If the Principal Amount is then bearing interest at the LIBO-Based Rate
and QuesTech fails to submit an effective Rate Request, the Principal Amount
shall thereafter bear interest at the Prime Rate. For any period when QuesTech
has failed to designate an interest rate applicable to the Principal Amount, the
Prime Rate shall be the applicable interest rate. Payments of interest on each
Revolving Loan shall be made on each Interest Payment Date beginning on the
Interest Payment Date next succeeding the date of disbursement of such Revolving
Loan. At the option of the Lender, the Revolving Loans shall bear interest at
the Default Rate, payable on demand, during any period of Default hereunder.
Failure to exercise this option to assess a Default Rate of interest shall not
constitute a waiver of such right in the event of any subsequent Default or at a
later date during the same Default. The rate of interest with respect to any
portion of the Principal Amount attributable to Revolving Loans which, under the
terms hereof, is bearing interest at the Prime Rate shall change as and when the
Prime Rate changes.
(ii) Term Loans. The principal balance of each Term Loan shall bear
interest at the Prime Rate plus 0.50% from the date such Term Loan is advanced
until it becomes due. Payments of interest on each Term Loan shall be made on
each Interest Payment Date beginning on the Interest Payment Date next
succeeding the date of disbursement of such Term Loan. At the option of the
Lender, the Term Loans shall bear interest at the Default Rate, payable on
demand, during any period of Default hereunder. Failure to exercise this option
to assess a Default Rate of interest shall not constitute a waiver of such right
in the event of any subsequent Default or at a later date during the same
Default. The rate of interest with respect to Term Loans shall change as and
when the Prime Rate changes.
(b) Inability to Determine Rate. In the event that the Lender shall have
determined (which determination shall be conclusive and binding upon the
Borrowers) that by reason of circumstances affecting the interbank Eurodollar
market adequate and reasonable means do not exist for ascertaining the LIBO
Rate, the Lender shall forthwith give notice (which may be telephonic and
promptly confirmed in writing or by facsimile transmission) of such
determination to the Borrowers. If such notice is given, any portion of the
Principal Amount bearing interest at the LIBO-Based Rate shall immediately
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begin bearing interest at the Prime Rate. Until such notice has been withdrawn
by the Lender, the Principal Amount shall continue to bear interest at the Prime
Rate.
(c) Illegality, Impracticality. Notwithstanding any other provisions
herein, if any law, regulation, treaty or directive or any change therein or in
the interpretation or application thereof (whether having the force of law or
not) shall or may in the opinion of the Lender make it unlawful or impractical
for the Lender to make or maintain Loans bearing interest at the LIBO-Based
Rate: (1) the commitment of the Lender hereunder to make Revolving Loans bearing
interest at the LIBO-Based Rate shall forthwith be suspended and (2) the
outstanding Revolving Loans bearing interest at the LIBO-Based Rate, if any,
shall be converted automatically to Revolving Loans bearing interest at the
Prime Rate.
2.4. Administrative Fee. The obligation of the Borrowers to pay the
Administrative Fee shall commence on the date hereof and shall continue until
the Obligations have been fully and completely paid and discharged. Commencing
on the Interest Payment Date following the date hereof and continuing on each
subsequent Interest Payment Date until the Obligations have been fully and
completely paid and discharged, the Borrowers shall pay the Administrative Fee
due for the month (or partial month) ending on such Interest Payment Date. Any
accrued and unpaid portion of this fee shall be paid on the Termination Date
and, if applicable, on the Maturity Date or Extended Maturity Date of the last
outstanding Term Loan.
2.5 Commitment Fee.
(a) The obligation of the Borrowers to pay the Commitment Fee shall commence
on the date hereof and shall continue until the Lender's obligation to make
Revolving Loans has terminated and all Revolving Loans and all other Obligations
related thereto have been fully and completely paid and discharged. Commencing
on June 30, 1996 and continuing on the last day of each subsequent calendar
quarter thereafter (i.e. March 31, June 30, September 30 and December 31) until
the Lender's obligation to make Revolving Loans has terminated and all Revolving
Loans and all other Obligations related thereto have been fully and completely
paid and discharged, the Borrowers shall pay the Commitment Fee due for the
quarter (or portion thereof) then ending. Any accrued and unpaid portion of
this fee shall be paid on the Termination Date.
(b) The Borrowers shall pay a commitment fee in consideration of the Lender's
agreement to provide the Term Facility. This commitment fee will be due on
December 31, 1997 and March 31, 1998. The payment due on December 31, 1997 will
be the product of 3/8th% multiplied by the difference between $750,000.00 and
the original principal balance of all Term Loans that have been funded as
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of December 1, 1997. The payment due on March 31, 1998 will be the product of
3/8th% multiplied by the difference between $750,000.00 and the original
principal balance of all Term Loans that have been funded as of March 31, 1998.
2.6. Payments and Computations. All payments hereunder (including any
payment or prepayment of principal, interest, fees and other charges) or with
respect to the Notes or the Loans shall be made in lawful money of the United
States of America, in immediately available funds without set-off, deduction or
counterclaim of any kind, to the Lender at its office at North Tower, 3rd Floor,
7799 Leesburg Pike, Falls Church, Virginia 22043, or at such other place as the
Lender may in writing designate, and shall be applied, at the option of the
Lender, first to accrued Obligations other than principal and interest, next to
accrued interest and then to principal. If any payment of principal, interest
or fees is not due on a Business Day, then the due date will be extended to the
next succeeding full Business Day and interest and fees will be payable with
respect to the extension. If any payment of principal, interest or fees is not
made within seven days of its due date, the Borrowers agree to pay to the Lender
a late charge equal to 5% of the amount of the payment. Except as otherwise
specifically provided, interest and fees shall be computed on the basis of a
year of 360 days and actual days elapsed. The Lender may, but shall not be
obligated to, debit the amount of any payment due under this Agreement to any
deposit account or loan account of a Borrower maintained with the Lender.
2.7. Termination of Revolving Facility by Borrowers. The Borrowers may
terminate the Revolving Facility provided for in this Agreement and discontinue
borrowing thereunder by giving not less than 30 Business Days' prior written
notice of such termination to the Lender. The termination of the Revolving
Facility shall not affect the rights of the Lender with respect to any
Obligations arising prior or subsequent to such termination and the provisions
of this Agreement shall remain in full force and effect until the Obligations
have been fully and completely paid and discharged. Once the Obligations have
been fully and completely paid and discharged and all obligations of the Lender
to make Loans or issue Letters of Credit has terminated, the Lender will release
its Liens in the Collateral.
2.8. Extensions of Termination Date, Maturity Date and Extended Maturity Date.
The Lender may from time to time, in its sole discretion, extend the Termination
Date, any Maturity Date, and any Extended Maturity Date by giving written notice
of such extension to the Borrowers. During any such periods of extension, the
remaining terms and conditions of this Agreement shall remain in full force and
effect.
2.9 Appointment of QuesTech as Agent. The Borrowers hereby appoint QuesTech to
act as Agent as herein specified for the Borrowers hereunder, including,
specifically to request and receive all Loans. Each of the Borrowers hereby
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authorizes the Agent to take such action on its behalf under the provisions of
the Loan Documents and any other instruments and agreements referred to herein,
and to exercise such powers and to perform such duties hereunder, as are
specifically delegated to or required of the Agent by the terms hereof, together
with such powers as are reasonably incidental thereto. QuesTech agrees to act
as the Agent on behalf of the Borrowers to the extent provided in the Loan
Documents.
2.3 Amendments to Section 3. The following is inserted as a new Section 3.11:
3.11 Qualifying Single Family Dwelling Units.
(a) With respect to each Qualifying Single Family Dwelling Unit to be
acquired by QuesTech with the proceeds of a Term Loan, QuesTech shall (i)
provide the Lender with a copy of the Pre-Closing Settlement Package prior to
the funding of the corresponding Term Loan, (ii) execute and deliver to the
Lender a purchase money deed of trust in the form provided by the Lender
granting to the Lender a first priority lien and security interest on such
Qualifying Single Family Dwelling Unit as additional collateral for the
Obligations provide the Lender with a lien and security interest in by, (iii)
execute and deliver to the Lender a Term Note and such other documents as the
Lender may reasonably request to evidence or secure such Term Loan, each in a
form acceptable to the Lender, (iv) provide the Lender with such other
information and assistance as the Lender shall reasonable request to ensure that
the Lender has a valid, perfected first priority purchase money lien on such
Qualifying Single Family Dwelling Unit, and (v) deliver to the Lender within two
(2) days following the funding of the corresponding Term Loan the original
Settlement Package; provided, however, that if the Deed to be included in such
Settlement Package has not yet been returned by the recording office, it shall
be delivered within two (2) days following the date it is so returned and
provided, further, that if the original hazard and, if applicable, flood
insurance policies have not been delivered by the insurance company issuing such
policies, they shall be delivered within two (2) days following the date they
are so issued.
(b) Until a Default occurs, the Lender agrees to refrain from
recording any such deed of trust, but once a Default occurs (in addition to any
other remedies the Lender may then have), the Lender may record all such deeds
of trust then in the possession of the Lender or thereafter delivered to the
Lender. QuesTech shall reimburse the Lender on demand for all costs incurred by
the Lender in recording such deeds of trust and obtaining lender's title
insurance policies for the benefit of the Lender insuring the lien of such deeds
of trust. All such amounts shall bear interest at the Default Rate from the
date advanced by the Lender until repaid by the Borrowers, and the Borrowers
authorize the Lender to advance on behalf of QuesTech as a Revolving Loan all
sums required to be paid by QuesTech to the Lender in respect of any
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such deed of trust or title policy, provided that the Lender shall have no
obligation to advance such a Revolving Loan.
2.4 Amendments to Section 7.
2.4(a) Amendments to Section 7.2. Section 7.2 is restated in its entirety
as follows:
7.2. Conditions Precedent to Subsequent Disbursements of Revolving
Loans and Issuances of Letters of Credit. The disbursement of subsequent
Revolving Loans and the issuance subsequent of Letters of Credit shall be
subject to the following conditions precedent:
(a) No Default or Event of Default shall have occurred and be
continuing.
(b) No material adverse change shall have occurred in the financial
or business condition of a Borrower.
(c) All representations and warranties contained herein shall be
true and correct at the date of such disbursement or issuance.
(d) No change shall have occurred in any law or regulations
thereunder or interpretations thereof which in the opinion of counsel for the
Lender would make it illegal for the Lender to make Loans or issue Letters of
Credit hereunder.
(e) If required by the Lender, the Borrowers shall have delivered
to the Lender a current Borrowing Base Certificate, a listing and aging of
Accounts Receivable, a listing of accounts payable of each Borrower, a report
setting forth the status of all contracts, all of which shall be of a current
date, shall be appropriately completed and duly executed by the chief financial
officer of each Borrower, the Treasurer of each Borrower or such other financial
officer of each Borrower as is acceptable to the Lender and generally shall be
in form and substance satisfactory to the Lender.
(f) If previously waived by the Lender as a condition to Closing,
financing statements and/or termination statements shall have been filed in each
location where the Lender deems such filing necessary to perfect its security
interest in the Collateral or terminate a previously perfected security interest
in the Collateral.
(g) The Lender shall have received such landlord and mortgagee
waivers as it shall request from any landlord or mortgagee which, in the
reasonable judgment of the Lender, has an interest in any of the Collateral,
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and all landlord and mortgagee waivers previously provided to the Lender by any
landlord or mortgagee which, in the reasonable judgment of the Lender, has an
interest in any of the Collateral shall remain in effect.
(h) The Borrower shall have executed all other agreements,
instruments and documents and shall have performed all acts which the Lender may
require with respect to Accounts Receivable owing by the Government to ensure
compliance with the Assignment of Claims Act of 1940, as amended, and all
applicable regulations issued pursuant thereto.
(i) With respect to the issuance of a Letter of Credit, the
Lender shall have received an Application for such Letter of Credit.
2.4(b) Section 7.3. The following is inserted as a new Section 7.3:
7.2. Conditions Precedent to Disbursement Term Loans. In addition
to any applicable conditions set forth in Section 7.1 and Section 7.2 hereof,
the disbursement of each Term Loan shall be subject to the following additional
conditions precedent:
(a) The Lender shall have received from QuesTech the Pre-Closing
Settlement Package for such Term Loan required to be delivered pursuant to
Section 3.13.
(b) The Lender shall have received a borrowing request, in form and
substance satisfactory to the Lender, from QuesTech specifying the amount of the
Tenn Loan requested and the date on which such Term Loan is requested to be made
(which date shall not be sooner than the second Business Day after the date the
borrowing request is received by the Lender).
(c) The Lender shall have received closing instructions satisfactory
to the Lender executed by the attorney or settlement agency handling QuesTech's
acquisition of the Qualifying Single Family Dwelling Unit that will secure such
Term Loan, and the Lender shall be satisfied that such attorney or settlement
agency has complied with such instructions.
(d) QuesTech shall have provided the Lender with such information
and assistance as shall be necessary or appropriate for the Lender to determine
that the conditions precedent to the finding of such Term Loan have been
satisfied.
(e) The Lender shall have received all information, including
Settlement Packages, then due in respect of prior Term Loans, if any.
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2.5 Amendments to Section 8. Section 8.1(a) is restated in its entirety as
follows:
(a) The failure of a Borrower to pay any Obligation to the Lender
including, without limitation, the principal of or interest on the Notes or any
of the, Loans, when the same shall become due and payable, whether at maturity,
as a result of the Lender's demand for payment or otherwise, and such failure
shall continue for a period of ten (10) days after the date when the Lender's
notice of such failure (which notice may be a computer generated late payment
notice) is deemed effective pursuant to Section 9.3) hereof, or
2.6 Amendments to Section 9.
2.6(a) Sections 9.9(b)-(d). Sections 9.9(b)-(d) are restated in their
entirety as follows:
(b) At any time and from time to time, the Lender may grant to one or
more Banks participating interests in the Lender's commitment to make Loans
hereunder or in any or all of the Loans or the Notes. In the event of any such
grant by the Lender of a participating interest to a Bank, whether or not upon
notice to the Borrowers, the Lender shall remain responsible for the performance
of its obligations hereunder, and the Lender shall continue to deal solely and
directly with the Borrowers in connection with the Lender's rights and
obligations under this Agreement. Any agreement pursuant to which the Lender
may grant such a participation interest shall provide that the Lender shall
retain the sole right and responsibility to enforce the obligations of the
Borrowers hereunder including, without limitation, the right to approve any
amendment, modification or waiver of any provision of this Agreement; provided
that such participation agreement may provide that the Lender will not agree to
any modification, amendment or waiver of this Agreement which would have the
effect increasing or decreasing the Maximum Amount, extending the Termination
Date, a Maturity Date or an Extended Maturity Date, subjecting the Lender to any
additional obligation, reducing the principal of or rate of interest on any
Loan, or postponing the date fixed for any payment of principal of or interest
on any Loan or fees hereunder or under the Notes without the consent of such
Bank. An assignment or other transfer which is not permitted by subsection (c)
or (d) below shall be given effect for purposes of this Agreement only to the
extent of a participating interest grant in accordance with this subsection (b).
(c) At any time, the Lender may assign to one or more Banks all, or a
proportionate part of all, of the Lender's rights and obligations under this
Agreement and the Notes, and such Bank shall assume such rights and obligations,
pursuant to an instrument executed by such Bank and the Lender, with (and
subject to) the consent of the Borrowers; provided that if such Bank is an
affiliate of the Lender, the Borrowers' consent shall not be required.
19
<PAGE>
Upon execution and delivery of such an instrument and payment by such Bank to
the Lender of an amount equal to the purchase price agreed between the Lender
and such Bank, such Bank shall become a party to this Agreement and shall have
all the rights and obligations of the Lender to the extent of such Bank's
commitment to make Loans as set forth in such Bank's instrument of assumption,
and the Lender shall be released from obligations hereunder to a corresponding
extent, and no further consent or action by any party shall be required. Upon
the consummation of any assignment pursuant to this subsection (c), the Lender
and the Borrower shall make appropriate arrangements so that, if required, new
Notes are issued to the Bank. If the Bank is not incorporated under the laws of
the United States of America or a state thereof, it shall, prior to the first
date on which interest or fees are payable hereunder for its account deliver to
the Borrowers certification as to exemption from deduction or withholding of any
United States federal income taxes.
(d) The Lender may at any time assign all or any portion of its
rights under this Agreement and the Notes to a Federal Reserve Bank. No such
assignment shall release the Lender from its obligations hereunder.
2.6(b) Section 9-16. Section 9.16 is restated in its entirety as follows:
9.16. Indemnification. At all times prior to and after the consummation of
the transactions contemplated by this Agreement, the Borrowers will indemnify
and hold each Indemnitee harmless from and against all losses, damages, claims,
fines, costs and expenses (including, without limitation, reasonable attorneys'
fees, costs and expenses) incurred by any such Indemnitee, whether direct or
indirect, as a result of or arising from or relating to any Proceedings by any
Person, whether threatened or initiated, asserting a claim for any legal or
equitable remedy against any Indemnitee arising from or in connection with this
Agreement, the Notes or any of the other Loan Documents, and any of the
transactions contemplated herein or therein, except to the extent such losses,
damages, claims, fines, costs or expenses are due to the willful misconduct or
gross negligence of the Lender; provided that in connection with such
indemnification obligations, the Borrowers shall not be liable for any
settlement effected by any Indemnitee without the Borrowers' prior consent
(which the Borrowers shall not unreasonably withhold, delay or condition) and
the Borrowers shall have the right to participate at their sole cost and expense
in the defense of any proceeding for which such indemnification may be sought.
In the event of any Proceeding, the Lender shall promptly and as soon as is
practicable notify the Borrowers of the existence of such Proceeding, provided
that the Lender's failure to do so shall not preclude any Indemnitee from
seeking indemnification hereunder. At the request of the Lender, the Borrowers
will indemnify any Person to whom the Lender transfers or sells all or any
portion of its interest in the Loans or participations therein on the terms set
forth above. The
20
<PAGE>
obligations of the Borrowers under this Section 9.16 shall survive the
termination of this Agreement and payment of the Obligations.
2.7 Schedule of Special Commercial Customers. The Schedule of Special
Commercial Customers attached to this Amendment is hereby attached to and
incorporated in the Agreement.
SECTION 3. Representations and Warranties of the Borrowers. Each Borrower,
jointly and severally, represents and warrants to the Lender that:
(a) Each Borrower has the power and authority to enter into and to
perform this Amendment, to execute and deliver all documents relating to this
Amendment, and to incur the obligations provided for in this Amendment, all of
which have been duly authorized and approved in accordance with each Borrower's
corporate documents;
(b) This Amendment, together with all documents executed pursuant
hereto, shall constitute when executed the valid and legally binding obligations
of the Borrowers in accordance with their respective terms;
(c) Except with respect to events or circumstances occurring
subsequent to the date thereof and known to the Lender, all representations and
warranties made in the Agreement are true and correct as of the date hereof,
with the same force and effect as if all representations and warranties were
fully set forth herein;
(d) Each Borrower's obligations under the Loan Documents remain
valid and enforceable obligations, and the execution and delivery of this
Amendment and the other documents executed in connection herewith shall not be
construed as a novation of the Agreement or any of the other Loan Documents; and
(e) As of the date hereof, no Borrower has any offsets or defenses
against the payment of any of the Obligations.
SECTION 4. Waiver of Claims. As a specific inducement to the Lender
without which the Borrowers acknowledge the Lender would not enter into this
Amendment and the' other documents executed in connection herewith, each
Borrower hereby waives any and all claims that it may have against the Lender,
as of the date hereof, arising out of or relating to the Agreement or any other
Loan Document whether sounding in contract, tort or any other basis.
SECTION 5. Conditions of Effectiveness. This Amendment shall become
effective when, and only when, the Borrowers have executed and completed this
Amendment and a Revolving Note in form and substance acceptable to the Lender,
have delivered such original, executed documents to the Lender, and have
reimbursed the Lender for the Lender's costs and expenses incurred in connection
with this Amendment.
21
<PAGE>
SECTION 6. Miscellaneous.
6.1 Reference To Agreement and Note. Upon the effectiveness of
this Amendment, each reference in the Agreement to "this Agreement" and each
reference in the other Loan Documents to the Agreement, shall mean and be a
reference to the Agreement as amended hereby [and each reference in the
Agreement and the other Loan Documents to the "Note" shall mean and be a
reference to the applicable Note executed by the Borrowers and delivered to the
Lender pursuant to Section 5 hereof.
6.2 Effect on Loan Documents, Loans, and Accrued and Unpaid
Interest, Fees and Other Charges. Except as specifically amended above, the
Agreement and all other Loan Documents shall remain in full force and effect and
are hereby ratified and confirmed. Without limiting the generality of the
foregoing, all Collateral given to secure the Obligations of the Borrowers under
the Agreement and the other Loan Documents prior to the date hereof does and
shall continue to secure all Obligations of the Borrowers under the Agreement,
as amended hereby and the other Loan Documents, and, except as provided in the
Agreement and the other Loan Documents, no such Collateral shall be released
until all conditions to such release as contained in the Loan Documents are
satisfied. On the effective date of this Amendment, all Loans outstanding under
the Agreement shall become Revolving Loans. Any interest, fees and other
charges due under the Agreement which have accrued and remain unpaid as of the
effective date of this Amendment shall be paid on the next succeeding date that
any such charge which has accrued on or after the effective date of this
Amendment is due under the Agreement, as amended hereby, unless any such charge
is discontinued by this Amendment, in which event the Borrowers shall pay the
accrued and unpaid portion thereof upon execution of this Amendment.
6.3 No Waiver. The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy of the
Lender under any of the Loan Documents, nor constitute a waiver of any provision
of any of the Loan Documents.
6.4 Costs, Expenses and Taxes. The Borrowers, jointly and
severally, agree to pay on demand all costs and expenses of the Lender in
connection with the preparation, reproduction, execution and delivery of this
Amendment and the other instruments and documents to be delivered hereunder,
including the reasonable fees and out-of-pocket expenses of counsel for the
Lender with respect thereto.
6.5 Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia, without
giving effect to conflict of law provisions.
22
<PAGE>
IN WITNESS WHEREOF, the Borrowers and the Lender have caused this Amendment
to be signed by their duly authorized representatives under seal all as of the
day and year first above written.
QUESTECH, INC. a Virginia corporation
ATTEST: By: Vincent L. Salvatori
----------------------------------
Vincent L. Salvatori, Chairman
M. P. Rivera
- -------------------------
(Asst.) Secretary
[corporate seal)
QUESTECH SERVICE COMPANY, a Virginia
corporation
ATTEST: By: Vincent L. Salvatori
----------------------------------
Vincent L. Salvatori, Chairman
M. P. Rivera
- --------------------------
(Asst.) Secretary
[corporate seal]
QUESTECH PACKAGING, INC., a Virginia
corporation
ATTEST: By: Vincent L. Salvatori
----------------------------------
Vincent L. Salvatori, Chairman
M. P. Rivera
- --------------------------
(Asst.) Secretary
[corporate seal]
FIRST UNION NATIONAL BANK, a
National banking association, successor
by merger to Signet Bank, a Virginia
banking corporation
By: Loriana Cipolletti
----------------------------------
Loriana Cipolletti, Vice President
23
<PAGE>
SCHEDULE OF SPECIAL COMMERCIAL CUSTOMERS
Computer Sciences Corporation
Systems Engineering Division
Hughes Naval and Maritime Systems Co.
Hughes Information Systems Company
Hughes Information Technology Systems
Lockheed Martin Vought Systems
Lockheed Martin Missiles & Space
Raytheon E-Systems,
Richardson Operations
<PAGE>
10.12a
AMENDMENT NO. 1
to
QUESTECH, INC.
1996 STOCK OPTION PLAN
WHEREAS, as originally adopted, the QuesTech, Inc. 1996 Stock Option Plan
(the "Plan") provides that the number of shares of Common Stock which may be
issued in connection with options granted under the Plan shall not exceed
200,000 plus such
increases as may from time to time be authorized and adopted in accordance with
the terms of the Plan;
WHEREAS, it has been determined that the number of shares of Common Stock
available under the Plan as originally adopted is inadequate for the purposes
for which the Plan was adopted.
NOW THEREFORE, the Plan is hereby amended, as follows:
1. The number of shares set forth in Section 3.1 of Article III of the Plan is
hereby changed from 200,000 to 268,132.
2. All other terms and conditions of the Plan shall be unchanged and shall
remain in full force and effect.
3. This amendment shall take effect upon approval by the Company's Board of
Directors and Shareholders.
Dated: March 15, 1997
52
<PAGE>
10.14
SIXTH AMENDED EMPLOYMENT AGREEMENT
THIS SIXTH AMENDED EMPLOYMENT AGREEMENT made this 24th day of November,
1997, by and between QUESTECH, Inc., a Virginia corporation (hereinafter
referred to as the "Company"), and Vincent L. Salvatori (hereinafter referred
to as the "Employee").
W I T N E S S E T H:
WHEREAS, the Company and the Employee entered into an Employment
Agreement on the 20th day of December 1979, as amended on December 16, 1983,
December 23, 1986, June 13, 1991, December 23, 1991 and November 15, 1995
(collectively the "Agreement");
WHEREAS, the Company and the Employee have determined that further
amendments to the Agreement are now required;
WHEREAS, the current Amendments to the Agreement were approved by the
Board of Directors of the Company on November 17, 1997;
WHEREAS, the Company and the Employee are desirous of setting forth in
writing the Agreement as amended.
NOW, THEREFORE, for and in consideration of the sum of Ten dollars
($10.00), paid by Employee to the Corporation and other valuable
consideration, receipt of which is
<PAGE>
hereby acknowledged and the convenants, conditions and promises herein
contained, it is hereby agreed as follows:
1. Employment. By Resolution duly adopted by its Board of Directors
(hereinafter referred to as ("the Board"), a copy of the Board's
resolution attached hereto as Exhibit A, the Vice Chairman of the
Board or the President and Chief operating Officer, was authorized to
enter into this amended Agreement by executing this Agreement.
Accordingly, the Company hereby agrees to employ the Employee and the
Employee hereby accepts said employment upon the terms and conditions
hereinafter set forth.
2. Positions and Titles. During the period of the Employee's full-time
employment by the Company, as hereinafter defined in this Agreement,
the Employee shall have the titles and hold the offices of Chairman of
the Board and Chief Executive Officer, and shall have the usual
authority associated with said positions as more fully described in
the By-laws of the Company in effect as of the date of this Agreement,
In addition, the Company and the Employee further agree as follows:
2
<PAGE>
(a) The Employee may hold other offices and have other titles from
time to time as determined by the Board, but shall have no less
authority, positions and titles granted the Employee by the
Company pursuant to this paragraph.
(b) If the Employee elects part-time employment in accordance with
this Agreement, during the period of the Employeets part-time
employment by the Company, as hereinafter defined in this
Agreement:
(i) The Employee acknowledges the Board's right to request that
the Employee resign from the position of Chief Executive Officer;
and
(ii) The Employee shall continue to have the title of Chairman
of the Board and shall have the usual authority associated with
that position and perform such other duties as may be mutually
agreed upon from time to time between the Employee and the
Company.
(c) The Employee's Agreement to resign the office of Chief Executive
Officer upon his being employed by the Company having located a
3
<PAGE>
satisfactory replacement or the position of Chief Executive
Officer, and absent same, the Employee shall retain the office
and title until such replacement is located by the Company, but
in no event longer than nine (9) months from the date the
Employee elects part-time employment.
3. Term. The term of this Agreement shall be for a period of three (3)
years from the date of this Agreement. This Agreement, so long as it
governs Employee's full-time employment by the Company, shall be
renewed annually by appropriate resolutions duly adopted by the Board
for successive three (3) year periods. The Employee agrees to remain
in the employ of the Company, whether it be on a full-time or
part-time basis, as more fully defined in this Agreement, during the
period of time of this Agreement unless terminated or canceled
pursuant to paragraph 15 or 18 herein. The period of time of this
Agreement shall be the sum of the period of full-time employment
hereunder and of part-time employment unless there is an event of (i)
termination pursuant to paragraph 15 herein, (ii) cancellation
4
<PAGE>
pursuant to paragraph 18 hereof, or (iii) death of the Employee, and
shall be referred to as "the effectiveness of this Agreement". The
annual renewal of this Agreement by the Board shall be governed by the
following:
(a) The subject of the annual renewal of this Agreement by the Board
shall be an Agenda item for the Board at its regularly scheduled
quarterly meeting immediately preceding or following the
anniversary date of this Agreement, whichever may be closer to
the anniversary date.
(b) The annual renewal of this Agreement shall be by the majority
vote of the members of the Board, excluding the Employee's vote.
4. Full-Time Employment Status. During the period of the Employee's
full-time employment by the Company, the Employee shall devote such of
his business hours to the affairs of the Company as may be necessary
in order to perform his duties and responsibilities.
5. Part-Time Employment Status. During the effectiveness of this
Agreement, and upon the Employee having completed at least twelve (12)
5
<PAGE>
years of service for the Company and being at least fifty-two (52)
years of age, the Employee shall have the right to elect part-time
employment status and to be so employed by the Company for a period of
up to ten (10) years. Such right shall also be granted the Employee
in the event this Agreement and/or extension thereof are not renewed
at any time. Part-time employment, for purposes of this Agreement,
shall be defined as the Employee devoting, at his option, a minimum of
thirty-three percent (33%) and a maximum of fifty percent (50%) of his
business hours to the affairs of the Company based on two thousand and
eighty (2,080) hours annually. The employee's right to part-time
employment status and to be so employed by the Company shall be
governed by the following:
(a) The Employee shall provide the Company at least ninety (90) days
written notice of the intention to convert his employment status from
full-time to part-time. The notice may be Provided by the Employee at
any time after he has met the conditions precedent to part-time
employment or at least ninety (90) days prior to the date the Employee
fulfills the
6
<PAGE>
latest condition precedent to part-time employment status.
(b) The time at which such election is to be effective may be
shortened or waived in its entirety or extended up to an
additional six (6) months after the ninety (90) day period by a
vote of two-thirds (2/3) of the Board, excluding the Employee's
vote.
6. Compensation. The Company shall pay to the Employee as compensation
for his services hereunder the amount set forth in this paragraph,
subject to the further provisions of this paragraph:
(a) During Full-Time Employment. During the period of the Employee's
full-time employment by the Company, he shall be paid a salary
for the office of Chief Executive Officer in the sum of at least
One Hundred Forty-five Thousand Dollars ($145,000.00), to be
reviewed and increased at least annually by appropriate action of
the Board, in such a manner as to insure that the compensation
rate is commensurate with the industry scale for similar
positions. In addition to the
7
<PAGE>
salary to be paid the Employee, the Company by appropriate action
of the Board may provide the Employee bonus payments based on the
performance of the Employee and the financial condition of the
Company and such other benefits consistent with the Employee's
position. In addition, the Employee shall be entitled to receive
an annual fee as Chairman of the Board of not less than $40,000
as well as a fee as a director of the Company of not less than
$20,000.
In the event the Employee is not an officer or director of the
Company, he shall no longer be paid fees as Chairman or as a
director, but his base salary for all purposes in the Agreement
shall be no less than $205,000 or his total compensation,
including such fees, immediately prior to this time he no longer
is an officer and/or director of the Company, if higher.
(b) During Part-Time Employment. During the period of the Employee's
part-time employment by the Company, the Employee's salary shall
be governed by the parameters of hours set
8
<PAGE>
forth in paragraph 5 of this Agreement. The compensation shall
be further premised on the actual hours worked as stated on the
Employee's time card and submitted to the President of the
Company for his counter-signature. Said part-time compensation
shall be determined as follows:
(i) If the Employee is age fifty-five (55) or older at the time
of his conversion to part-time employment, he shall receive
compensation based on his hourly rate of pay which shall equal
the annual rate of compensation (including the fees referred to
above) received by the Employee at the date of Employee's
conversion to part-time employment, divided by two-thousand and
eighty (2,080) without further deduction.
(ii) If the Employee is between the ages of fifty-two (52) and
fifty-five (55) (but has not reached his fifty-fifth (55th)
birthday) at the time of his conversion to part-time employment,
he shall receive compensation based on his hourly rate of pay as
first determined in subparagraph (i)
9
<PAGE>
above (hereinafter referred to as the "Normal Hourly Rate") and
then adjusted downward as follows:
(aa) The normal hourly rate shall be reduced by
fifteen percent (15%) if the Employeers conversion to
part-time employment occurs at the age of fifty-two (52) but
before his fifty-third (53rd) birthday.
(bb) The normal hourly rate shall be reduced by ten
percent (10%) if Employee's conversion to part-time
employment occurs at the age of fifty-three (53) but before
the fifty-fourth(54th) birthday.
(cc) The normal hourly rate shall be reduced by five
percent (5%) if Employee's conversion to part-time
employment occur at the age of fifty-four (54) but before
his fifty-fifth (55th) birthday.
(iii) The Employee's hourly rate as determined by paragraph
6(b)(i) and (ii) shall be increased on each anniversary date
10
<PAGE>
of this agreement by the increase in the Consumer Price Index of
the prior twelve-month period.
(iv) The Employee shall receive such other compensation and
benefits which are granted pursuant to subparagraph (a) of this
paragraph or associated with other positions he holds in the
Company.
7. Vacation and Sick Leave. The Employee shall be entitled to vacations
and sick leave as set forth in the Company's Handbook for Employees in
effect as of the date of this Agreement, with such improvements and
additional benefits as may be incorporated therein from time to time.
Vacation time may be accrued on a pro-rata basis for part-time work
equal to one-third (1/3) to one-half (1/2) of the normal full-time
accrual, depending on the extent of part-time employment status.
S. Expenses. The Company agrees to reimburse the Employee in full for all
reasonable expenses incurred by the Employee in the pursuit of the
Company's business, whether the Employee is employed on a full-time or
part-time basis. The Employee shall submit to the President of the
11
<PAGE>
Company for his counter-signature appropriate expense reports and
vouchers in support of-the expenses incurred on behalf of the Company.
9. Insurance (Hospital, Medical, Dental and Vision). The Company
acknowledges that the Employee and his dependents, including his
current spouse (as of the date of this Agreement or any amendment
thereto), have been and are currently participants in the Company's
medical plan and that in addition the Company has maintained and
currently maintains dental and vision insurance policies for the
Employee, his current spouse, and his dependents.
With regard to such plans and insurance, the Company agrees with the
Employee as follows:
(a) To the extent possible under the terms of the plan, and if
necessary, through other insurance, the Company shall continue to
maintain the plan and shall be responsible for the respective
premium payments throughout the effectiveness of this Agreement,
(b) Or, if the Company shall not continue its plan, it shall purchase
insurance comparable thereto, to reimburse the Employee for all
12
<PAGE>
hospital, medical, dental and vision expenses not otherwise
covered.
(c) In the event the Employee has been employed by the Company for at
least twelve (12) years and terminates this Agreement pursuant to
paragraph 15(a), or this Agreement has not been terminated but
the term hereof has expired, the employee, his current spouse as
of the date of this Agreement or any amendment thereto, and to
the extent allowed by the plans and insurance, their dependents,
shall be provided life-time coverage identical with the coverage
set forth in subparagraphs (a) and (b). Such reimbursement of
the Employee shall be determined after deductions for Medicare,
Medicare supplements, and any other health insurance benefit
payments.
10. Insurance (Life). The Company shall continue to maintain permanent
life insurance (Policy #lA2248622-0 or its substitute) on the Employee
in the face amount of not less than $300,000 and agrees to pay full
premiums due on said policies during the effectiveness of this
Agreement. The
13
<PAGE>
Employee shall have the sole right to designate the beneficiaries
under such policies of insurance. The Company agrees that it shall:
(a) Pay all premiums on such policies and otherwise maintain them in
full force and effect.
(b) Not borrow on the policies or otherwise encumber them.
(c) Make no attempt or request on the Employee to change the names of
any beneficiaries or the method of the payment of the proceeds to
them.
(d) Regularly exhibit to the Employee, if requested, receipts for
premium payments as well as to furnish the Employee with proof
that the policies are in full force and effect with the
appropriate beneficiary designations.
11. Insurances.
(a) Executive Benefit Plan. The Company and Employee acknowledge
that they have entered into an Agreement setting forth an
Executive Benefit Plan dated March 9, 1984, as amended ("the
Executive Benefit Plan"). In
14
<PAGE>
connection therewith, the parties agree that this Agreement shall
not in any manner modify, alter or change the terms and
conditions of the Executive Benefit Plan.
It is further agreed that:
(i) The Employee's benefits shall not be reduced on account
of paragraph seven (7) of the Executive Benefit Plan.
(ii) All other provisions of the Executive Benefit Plan as
amended, shall remain in full force and effect.
(iii) The Employee shall be provided an annual report on the
status of the Executive Benefit Plan and his account
therein.
(iv) The Company will fully fund the financing of the
Executive Benefit Plan by January 30, 1990, and
transfer ownership of such funding vehicles to a trust
to be established by mutual consent between the Company
and the Employee.
15
<PAGE>
(b) Group Term. The Employee shall have the right to continue to
receive the group term benefit for the $100,000 group life
insurance and continue to purchase the optional $100,000
additional policy, currently costing $12.00 per pay period during
the effectiveness of this Agreement.
12. QuesTech Officers and Managers Deferred Compensation Trust (DEF COM
I). The Company agrees that the Employee shall have the right to
participate in DEFCOM I during the period he is receiving any payments
under this Agreement, and thereafter the Company agrees to allow the
Employee to make annual contributions of the eligible amounts which
can be contributed by the Founders until age 65. The Company further
agrees that the Employee shall receive from DEF COMI upon retirement
at least the highest annual payment per year of any other participant
in the Plan. The Company agrees that the Employee may continue to
serve as a Trustee of the DEF COM I Compensation Trust. The Employee
shall be provided all reports and documents available to any other
trustee or person.
16
<PAGE>
13. QuesTech Variable Deferral Plan ("the Deferral Plan"). The Company
agrees that the Employee shall continue to have the right to
participate in the Deferral Plan until the age of 65. The Company
further agrees that the Employee may continue to serve as a trustee of
the Deferral Plan Trust. The Company further agrees that:
(a) The Employee shall participate at the level chosen by him until
age 65.
(b) At termination of the Plan the Employee shall participate in any
surplus distribution in accordance with his pro-rata share of the
total pool amount.
(c) The Employee shall be provided all reports and documents
available to any other trustee.
14. Disability. The Company acknowledges that it currently maintains
disability insurance policies to compensate the Employee in the event
of his disability. Notwithstanding any obligations on the Company to
maintain disability insurance policies or the availability of same to
the Company, the Company and Employee agrees as follows:
17
<PAGE>
(a) In the event of the Employee's disability, the Employee shall be
entitled to the compensation specified in this Agreement, less
any payments made under the Company's disability insurance
policies, for the remainder of the Employeers employment term, be
it full-time or part-time, and for so long as the Employee
remains under the disability.
(b) "Disability" as used in this paragraph shall be defined by the
definition set forth in the then existing disability insurance
policies of the Company.
(c) In the event the Company does not have in full force and effect
any disability insurance policies at the time of the Employee's
disability, "disability" shall be defined as sickness, physical
or mental, or other incapacity, or other reason causing the
Employee to be unable to reasonably perform his services with
respect to the company's business as those performed immediately
prior to such disability.
18
<PAGE>
15. Termination. This Agreement may be terminated by the Company and the
Employee pursuant to the following:
(a) Employee's Voluntary Termination. The Employee may voluntarily
terminate this Agreement by providing the Company one hundred
twenty (120) days written notice if such termination is requested
during the Employee's full-time employment and sixty (60) days
written notice if during part-time employment. Any compensation
to be paid to the Employee by the Company resulting from
termination shall be governed by paragraph 16 of this Agreement.
(b) Involuntary Termination. The Company shall have the right to
involuntarily terminate the Employee with or without cause at any
time. If such termination is without cause, the Company shall
pay to the Employee the compensation as set forth in paragraph
16(b) herein. In the event the Employee is terminated by the
Company for cause, he shall be entitled to no further
compensation under this Agreement as of the effective date of
19
<PAGE>
the termination. For purposes of this Agreement, "cause" shall
be defined as any action taken by the Employee or any action
which the Employee fails to take which is determined by a court
of competent jurisdiction to be criminal, fraudulent or to
involve gross negligence on the part of the Employee, other than
an act or failure to act which the Employee in good faith
believed was for the benefit of the Company. The Company agrees
to provide the Employee at least sixty (60) days written notice
of termination pursuant to this subparagraph.
16. Payment on Termination.
(a) Voluntary Termination. In the event the Employee voluntarily
terminates this Agreement pursuant to paragraph (15)(a) hereof or
exercises his right to elect part-time employment status pursuant
to paragraph 5 hereof during the period of his full-time
employment, he shall be paid the maximum total compensation he
would receive under this Agreement for a period of five (5) years
from the effective date of termination or
20
<PAGE>
change of employment status, unless upon the Employee's request,
a waiver of the non-compete provision set forth in paragraph 17
is approved by a vote of two-thirds (2/3) of the Board excluding
the Employee. Any payments required to be made to the Employee
due to voluntary termination shall be payable to the Employee, or
upon his death, to his spouse or to his estate, at the Employee's
sole option.
(b) Involuntary Termination. In the event the Employee is
involuntarily terminated without cause by the Company, pursuant
to paragraph 15 (b), he shall receive his full maximum total
compensation pursuant to this Agreement, including part-time
employment, for a period of five (5) years from the effective
date of termination. Any payments required to be made to the
Employee due to involuntary termination shall be payable to the
Employee, or upon his death, to his spouse or to his estate, at
the Employee's sole option.
21
<PAGE>
(c) In the event that the Company is taken over by a hostile board or
the Employee is involuntarily terminated without cause by the
Company, the Company shall post a letter of credit or a note
subordinated only to the prime lender, in the amount of the total
compensation to be paid the Employee under paragraphs 10,11,12
and 16(b), such note or letter of credit to be reduced dollar for
dollar as compensation is paid out to the Employee under
paragraph 16(b), or as premiums are paid to insurers on his
behalf. In the event this paragraph is invoked, and the Employee
receives a subordinated note, sales of assets by the Company
greater than One-Hundred Thousand ($100,000) dollars will require
the approval of the Employee. A hostile board is one, which
involuntarily removes the employee from his position as Chairman
of the Board, and/or CEO or which changes the duties of either
position without the concurrence of the Employee.
17. Covenant Against Competition. The Employee acknowledges that he has
been involved in the
22
<PAGE>
operation of the Company and its subsidiaries and has familiarity
with.the operation of the business of the Company and its
subsidiaries. The Employee further acknowledges that the Company and
its subsidiaries do business throughout the United States. The
Employee agrees that during the effectiveness of this Agreement and
for a period of three (3) years from the effective date of the
Employee's voluntary or involuntary termination of employment, he will
not acquire interest in, other than an interest in a publicly traded
corporation which is insufficient to influence such corporation's
business or work, or perform any services for any person, firm,
company, corporation, or other entity anywhere in the United States,
which has been, is, or is then potentially a competitor the Company or
its subsidiaries, or which is engaged primarily in activities similar
to the type of business conducted by the Company or its subsidiaries
at the time of termination, unless the Board approves same by
two-thirds (2/3) vote excluding the vote of the Employee.
23
<PAGE>
18. Death of Employee. In the event of the Employee's death during the
effectiveness of this Agreement, this Agreement shall stand terminated
as of the date of death, except as to the following:
(a) All compensation then being paid to the Employee by the Company
as of the date of death shall continue to be paid to the
Employee's surviving spouse or if not survived by his spouse,
then his dependents, for a period of five (5) years after the
date of death. In the event the Employee is not survived by his
spouse or leaves no dependents, no compensation shall be payable
by the Company after the date of death.
(b) The provisions of paragraph 9(c) shall survive the termination of
this Agreement and shall bind the Company as to their
requirements.
(c) The Company shall cooperate and take all necessary steps to
effectuate the payment of the insurance proceeds established in
paragraph 10 of this Agreement.
24
<PAGE>
(d) All accrued and unpaid benefits under this Agreement, whatsoever
in nature, shall be payable to the Employee's estate.
19. Assignment of Agreement. In the event that the Company is merged,
reorganized, sold or otherwise comes under new ownership or control,
if allowable under the law, all provisions of this Agreement shall
bind the Company's successor in interest. The Company's successor in
interest shall be required to retain the employee in the same capacity
as employed by the Company.
20. Amendments. This Agreement cannot be changed or terminated orally
and no waiver of compliance with any provision or condition hereof
shall be effective unless evidenced by an instrument in writing duly
executed by the parties hereto sought to be charged by such waiver.
21. Writing. This Agreement sets forth the entire understanding of the
parties with respect to the employment of the Employee by the Company
and supersedes any and all prior agreements, arrangements and
understandings relating to the subject matter hereof. This-Agreement
shall be binding upon and inure to the benefit of the
25
<PAGE>
parties and their respective successors and assigns.
22. Waiver. The waiver by the Company or the Employee of any breach of any
provision of this Agreement shall not be construed as a waiver of any
subsequent breach of this Agreement.
23. General Provisions.
(a) Should the parties disagree as to the meaning of the provisions
of this Agreement, they shall attempt to negotiate a settlement
of their differences. If, however, the negotiations are
unsuccessful, either party may seek aid of a court competent
jurisdiction in the Commonwealth of Virginia, to either settle
disputes arising as to the meaning or intent of this Agreement or
to declare the parties' rights or to enforce this Agreement. In
that event, the court shall deny attorney's fees and costs to the
party not substantially prevailing and award the same to the
party who substantially prevails.
(b) In the event that any term, provision, or paragraph of this
Agreement is declared
26
<PAGE>
illegal, void or unenforceable, the same shall not affect or
impair the other terms, provisions, or paragraphs of this
Agreement. Convenants contained in this Agreement shall be
independent. The doctrine of severability shall be applied. The
parties do not intend by this statement to imply the illegality,
voidness or unenforceability of any of the terms, provisions or
paragraphs of this Agreement.
24. Captions. The captions for each paragraph are not part of this
Agreement, but are for identification purposes only.
25. Governing Law. This Agreement is made under and shall be construed
pursuant to the laws of the Commonwealth of Virginia.
26. Notices. Any notice, writing, report or other document required or
permitted hereunder shall be in writing and shall be given by pre-paid
registered or certified mail, return receipt requested, addressed as
follows:
27
<PAGE>
27.
IF TO THE COMPANY:
QuesTech, Inc.
7600W Leesburg Pike
Falls Church, VA 22043
Attention: President and Chief Operating Officer
COPY TO:
Michael Rivera, Esq.
Vice President and General Counsel
7600-W Leesburg Pike
Falls Church, VA 22043
IF TO THE EMPLOYEE:
Vincent L. Salvatori
2652 Green Briar Lane
Annapolis, MD 21401
The date of any such notice and of service thereof
shall be deemed to be the date of dispatch. Either party
may change his address or purpose of notice by giving in
accordance with the provisions of this paragraph.
28
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto
set their hands the date and year first above written.
THE COMPANY:
Witnessed by: QUESTECH, INC.
M. P. Rivera By: Gerald F. Mayefskie
- --------------------- ------------------------------
GERALD F. MAYEFSKIE
President and Chief Operating
Officer
THE EMPLOYEE:
Witnessed by: VINCENT L. SALVATORI
M. P. Rivera Vincent L. Salvatori
- --------------------- ------------------------------
29
<PAGE>
10.15
THIRD AMENDED EMPLOYMENT AGREEMENT
THIS THIRD AMENDED EMPLOYMENT AGREEMENT made this 17th day of November,
1997 by and between QUESTECH, INC., a Virginia corporation (hereinafter referred
to as "the Company"), and GERALD F. MAYEFSKIE (hereinafter referred to as "the
Employee").
WITNESSETH:
WHEREAS, the Company and the Employee entered into an Employment on the
23rd day of December, 1991 ("the Agreement") and thereafter certain amendments
thereto;
WHEREAS, the Company and the Employee have determined that further
amendments to the Agreement are now necessary;
WHEREAS, the amendments to the Agreement set forth herein were approved by
the Board of Directors of the Company on November 17, 1997; and
WHEREAS, the Company and the Employee are desirous of setting forth in
writing the Agreement as amended.
NOW, THEREFORE, for and in consideration of the sum of Ten dollars
(S10.00), paid by Employee to the Corporation and other valuable consideration,
receipt of which is hereby acknowledged, and the covenants, conditions, and
promises herein contained, it is hereby agreed as follows:
1. Employment. The Corporation, by resolution duly adopted by its Board of
Directors (hereinafter referred to as "the Board"), a copy of which resolution
is attached hereto as Exhibit A, hereby authorizes the Company to enter into
this amended Agreement by the Chairman of the Board and the Chief Executive
Officer, executing this Agreement and the Employee hereby accepts said
employment upon the terms and conditions hereinafter set forth.
2. Positions and Titles. During the period of the Employee's full-time
employment by the Company, as hereinafter defined in this Agreement, the
Employee shall have the titles and hold the offices of President and Chief
Operating Officer, and shall have the usual authority associated with said
positions and offices as more fully described in the By-Laws of the Company in
effect as of the date of this Agreement.
3. Term. The term of this Agreement shall be for a period of two (2) years
from the date of this Agreement to its second anniversary date. This Agreement
and the term of the Employee's full-time employment by the Company, shall be
renewed annually by appropriate resolution duly adopted by the Board for
successive two (2)-year periods. The Employee agrees to remain in the employ of
the Company, as fully defined in this Agreement, during the period of time of
this Agreement unless terminated or canceled pursuant to paragraphs 11 or 14
herein. The annual renewal of this Agreement by the Board shall be governed by
the following:
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<PAGE>
(a) The subject of the annual renewal of this Agreement by the Board
shall be an agenda item for the Board at its regularly-scheduled quarterly
meeting immediately preceding or following the annual anniversary date of this
Agreement, whichever may be closer to the anniversary date.
(b) The annual renewal of this Agreement shall be by the majority
vote of the members of the Board, excluding the Employee's vote.
4. Emplovee Status. During the period of the Employee's full-time
employment by the Company, the Employee shall devote such of his business hours
to the affairs of the Company as may be necessary in order to perform his duties
and responsibilities.
5. Compensation. During the period of the Employee's full-time employment
by the Company, the Company shall pay to the Employee as compensation for his
services hereunder a salary for the office of President and Chief Operating
Officer in the sum of at least One Hundred Thirty-Five Thousand Dollars
($135,000.00), to be reviewed and increased at least annually by appropriate
action of the Board, in such a manner as to insure that the compensation rate is
commensurate with the industry scale for similar positions. In addition to the
salary to be paid the Employee, the Company by appropriate action of the Board
may provide the Employee bonus payments based on the performance of the Employee
and the financial condition of the Company and such other benefits as are
consistent with the Employee's position. In addition, the Employee shall
receive as a fee as a director of the Company not less than $20,000.
6. Vacation and Sick Leave. The Employee shall be entitled to vacations
and sick leave as set forth in the Company's Handbook for Employees in effect as
of the date of this Agreement, with such improvements and additional benefits as
may be incorporated therein from time to time.
7. Expenses. The Company agrees to reimburse the Employee in full for all
reasonable expenses incurred by the Employee in the pursuit of the Company's
business. The Employee shall submit to the Chief Executive Officer of the
Company for his approval appropriate expense reports and vouchers in support of
the expenses incurred on behalf of the Company.
8. Insurance(Hospital, Medical, Dental, and Vision). The Company
acknowledges that the Employee, his current spouse (as of the date of this
Agreement or any amendment thereto) and his dependents currently are
participants in the Company's medical plan and that in addition the Company
currently maintains dental and vision insurance policies for the Employee, his
spouse, and his dependents. With regard to such plans and insurance, the
Company agrees with the Employee as follows:
(a) To the extent possible under the terms of the plan, and if
necessary, through other insurance, the Company shall continue to maintain the
plan and shall be responsible for the respective premium payments throughout the
effectiveness of this Agreement.
(b) The Company shall continue its plan, or purchase insurance
comparable thereto, to reimburse the Employee for all hospital, medical, dental,
and vision expenses not otherwise covered.
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<PAGE>
(c) In the event that the Employee has been employed by the Company
for at least twelve (12) years and terminates this Agreement pursuant to
paragraph 14(a), or this Agreement has not been terminated but the term hereof
has expired, the Employee, his current spouse (as of the date of this Agreement
or any amendment thereto), and to the extent allowed by spouse the plan and
insurance, their dependents, shall be provided life-time coverage identical to
the coverage set forth in this paragraph. Such reimbursement of the Employee
shall be determined after deductions for Medicare, Medicare supplements, and any
other health insurance benefit payments.
9. Insurance (Life). The Company shall continue to maintain permanent life
insurance on the Employee in the face amount of $300,000 and agrees to pay full
premiums due on said policies during the effectiveness of this Agreement. The
Employee shall have the sole right to designate the beneficiaries under such
policies of insurance. The Company agrees that it shall:
(a) Pay all premiums on such policies and otherwise maintain them in
full force and effect.
(b) Not borrow on the policies or otherwise encumber them.
(c) Make no attempt or request of the Employee to change the names of
any beneficiaries or the method of the payment of the proceeds to them.
(d) Regularly exhibit to the Employee, if requested, receipts for
premium payments as well as to furnish to the Employee proof that the policies
are in full force and effect with the appropriate beneficiary designations.
10. OuesTech Officers and Managers Deferred Compensation Trust (DEF COM
1). The Company agrees that the Employee shall have the right to participate in
DEF COM I during the period in which he is receiving payments under this
Agreement, and thereafter the Company agrees to allow the Employee to make
annual contributions of the eligible amounts that can be contributed by the
Founders until age 65. The Company further agrees that the Employee shall
receive from DEF COM I upon retirement an amount equal to the highest added
retirement benefit at QuesTech, excluding the present Chairman and Chief
Executive Officer.
11. Termination. This Agreement may be terminated by the Company and the
Employee pursuant to the following:
(a) Employee's Voluntary Termination. The Employee may voluntarily
terminate this Agreement by providing the Company one hundred twenty (120) days'
written notice if such termination is requested during the Employee's full-time
employment. Any compensation to be paid to the Employee by the Company
resulting from termination shall be governed by paragraph 12(a) of this
Agreement.
(b) Involuntary Termination. The Company shall have the right to
involuntarily terminate the Employee with or without cause at any time. If such
termination is without cause, the Company shall pay to the Employee the
compensation governed by paragraph 12(b) herein. In the event the Employee is
terminated by the Company for cause, he shall be entitled to no further
compensation under this Agreement as of the effective date of the termination.
For purposes of this Agreement, "cause" shall be defined as any action taken by
the Employee or any
84
<PAGE>
action that the Employee fails to take that is determined by a court of
competent jurisdiction to be criminal, fraudulent, or to involve gross
negligence on the part of the Employee, other than an act or failure toact that
the Employee in good faith believed was for the benefit of the Company. The
Company agrees to provide the Employee at least sixty (60) days' written notice
of termination pursuant to this subparagraph.
12. Payment on Termination.
(a) Voluntary Termination. In the event that the Employee voluntarily
terminates this Agreement pursuant to paragraph 11(a) during the period of his
full-time employment, he shall be paid the maximum total compensation that he
would receive under this Agreement for a period of two (2) years from the
effective date of termination, unless upon the Employee's request, a waiver of
the non-compete provision set forth in paragraph 13 is approved by a vote of
two-thirds (2/3) of the Board excluding the Employee. Any payments required to
be made to the Employee due to voluntary termination shall be payable to the
Employee, or upon his death, to his spouse or to his estate, at the Employee's
sole option.
(b) Involuntary Termination. In the event that the Employee is
involuntarily terminated without cause by the Company, pursuant to paragraph
11(b), he shall receive his maximum total compensation pursuant to this
Agreement for a period of two (2) years from the effective date of termination.
Any payments required to be made to the Employee due to involuntary termination
shall be payable to the Employee, or upon his death, to his spouse or to his
estate, at the Employee's sole option.
13. Covenant Against Competition. The Employee acknowledges that he has
been involved in the operation of the Company and its subsidiaries and has
familiarity with the operation of the business of the Company and its
subsidiaries. The Employee further acknowledges that the Company and its
subsidiaries do business throughout the United States. The Employee agrees that
for a period of two (2) years from the effective date of the Employee's
voluntary termination of employment, he will not acquire interest in, other than
an interest in a publicly-traded corporation that is insufficient to influence
such corporation's business or work, or perform any services for any person,
firm, company, corporation, or other entity anywhere in the United States, which
has been, is, or is then potentially a competitor of the Company or its
subsidiaries, or which is engaged primarily in activities similar to the type of
business conducted by the Company or its subsidiaries at the time of
termination, unless the Board approves same by two-thirds (2/3) vote excluding
the vote of the Employee.
14. Death of Employee. In the event of the Employee's death during the
effectiveness of this Agreement, this Agreement shall stand terminated as of the
date of death, except as to the following:
(a) All compensation then being paid to the Employee by the Company
as of the date of death shall continue to be paid to the Employee's surviving
spouse if not survived by his spouse, then his dependents, for a period of five
(5) years after the date of death. In the event that the Employee is not
survived by his spouse or leaves no dependents, no compensation shall be payable
by the Company after the date of death.
85
<PAGE>
(b) The provisions of paragraph 9(c) shall survive the termination of
this Agreement and shall bind the Company as to their requirements.
(c) The Company shall cooperate and take all necessary steps to
effectuate the payment of the insurance proceeds established in paragraph IO of
this Agreement.
(d) All accrued and unpaid benefits under this Agreement, whatsoever
in nature, shall be payable to the Employee's estate.
15. Assignment of Agreement. In the event that the Company is merged,
reorganized, sold or otherwise comes under new ownership or control, if
allowable under the law, all provisions of this Agreement shall bind the
Company's successor in interest. The Company's successor in interest shall be
required to retain the Employee in the same capacity as employed by the Company.
16. Amendments. This Agreement cannot be changed or terminated orally and
no waiver of compliance with any provision or condition hereof shall be
effective unless evidenced by an instrument in writing duly executed by the
parties hereto sought to be charged by such waiver.
17. Writing. This Agreement sets forth the entire understanding of the
parties with respect to the employment of the Employee by the Company and
supersedes any and all prior agreements, arrangements and understandings
relating to the subject matter hereof. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns.
18. Waiver. The waiver by the Company or the Employee of any breach of any
provision of this Agreement shall not operate to be construed as a waiver of any
subsequent breach of this Agreement.
19. General Provisions.
(a) This Agreement, the relationship between the parties thereunder
and the settlement of any disputes as referred to below shall in all respects be
governed by the laws of the Commonwealth of Virginia.
(b) Any dispute that may arise either in contract or at law out of or
in connection with the Agreement shall be finally and exclusively settled by
arbitration by three arbitrators, in Virginia, in accordance with the Rules of
the American Arbitration Association. Each party selects one AAA arbitrator and
the two selected arbitrators shall select a third. The parties agree that the
decision of the arbitrator(s) shall be final and binding and that any right of
appeal with respect to any question of law arising in the course of the
arbitration or out of the award shall be excluded.
(c) Should the parties disagree as to the meaning of the provisions
of this Agreement, they shall attempt to negotiate a settlement of their
differences. If, however, the negotiations are unsuccessful, either party may
seek arbitration, in Virginia, by the AAA as defined above, to either settle
disputes arising as to the meaning of the Agreement or to declare the party's
rights or to enforce the Agreement.
20. Captions. The captions for each paragraph are not part of this
86
<PAGE>
Agreement, but are for identification purposes only.
21. Governing Law. This Agreement is made under and shall be construed
pursuant to the laws of the Commonwealth of Virginia.
22. Notices. Any notice, writing, report or other document required or
permitted hereunder shall be in writing and shall be given by pre-paid
registered or certified mail, return receipt requested, addressed as follows:
IF TO THE COMPANY:
QuesTech, Inc.
7600-W Leesburg Pike
Falls Church, VA 22043
Attention: Chairman and Chief Executive Officer
COPY TO:
Vice President and General Counsel
QuesTech, Inc.
7600-W Leesburg Pike
Falls Church, VA 22043
IF TO THE EMPLOYEE:
Gerald F. Mayefskie
1302 Pleasant Meadow Road
Crofton, MD 21114
The date of any such notice and of service thereof shall be deemed to be
the date of dispatch. Either party may change his address or purpose of notice
by giving notice in accordance with the provisions of this paragraph.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the
date and year first above written.
THE COMPANY:
Witnessed by: QUESTECH, INC.
M. P. Rivera By: Vincent L. Salvatori
---------------------------
VINCENT L. SALVATORI
Chairman and Chief Executive Officer
THE EMPLOYEE:
Witnessed by:
M. P. Rivera By: Gerald F. Mayefskie
---------------------------
GERALD F. MAYEFSKIE
87
<PAGE>
FIRST AMENDMENT TO DEED OF LEASE
THIS FIRST AMENDMENT TO DEED OF LEASE (this "First Amendment") is made
effective as of the 31st of December, 1997 (the "Effective Date"), by and
between JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, a Massachusetts corporation
("Landlord") and QUESTECH, INC., a Virginia corporation ("Tenant").
WITNESSETH:
WHEREAS, pursuant to that certain Deed of lease dated March 14, 1995
(the "Original Lease"), Landlord leased to Tenant and Tenant leased from
Landlord approximately 25,939 rentable square feet of office space (the
"Premises," as more particularly described in the Original Lease) on the
first (1st) floor of the building located at 7600-West Leesburg Pike, Falls
Church, Virginia (the "Building");
WHEREAS, the Term of the Original Lease is scheduled to expire on
September 30, 1998; and
WHEREAS, Landlord and Tenant have agreed to modify the terms and extend
the Term of the Original Lease, upon the terms, conditions and provisions
hereinafter set forth.
Now, THEREFORE, in consideration of the foregoing, of the mutual covenants
and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Landlord and Tenant, intending to be legally bound, hereby covenant and agree as
follows:
1. Incorporation of Recitals. The foregoing recitals are hereby
incorporated herein and made a part hereof by this reference.
2. Definitions. Except as otherwise specified herein, all capitalized
terms in this First Amendment shall have the meanings assigned thereto in the
Original Lease. The term "Lease" as used in this First Amendment (and in the
Original Lease) shall mean the Original Lease, as amended by this First
Amendment.
3. Term.
(a) The Original Lease is hereby amended as follows:
(i) Section 1c of the Original Lease is hereby amended by
deleting therefrom the language "Lease Expiration Date:
September 30, 1998," and by inserting in lieu thereof the
following language: "Lease Expiration Date: December 31,
1997."
(ii) Section 3 of the Original Lease is hereby amended by
deleting therefrom the language "September 30, 1998," and by
inserting in lieu thereof the following language: "December
31, 1997."
(b) The Term of the Original Lease, as amended by Section 3(a),
above, is hereby extended for a period of seven (7) years (the "Extension
Term"), commencing on January 1, 1998 (the "Extension Term Commencement Date"),
and, expiring on December 31, 2004 (the "Extension Term Expiration Date"),
unless earlier terminated in accordance with the terms and conditions of Lease.
88
<PAGE>
4. Annual Base Rent. From and after the Extension Term Commencement
Date, the "Annual Base Rent" under the Lease shall be in the amounts set
forth on the following schedule:
<TABLE>
<CAPTION>
Annual Base Rent
Per Square Foot Annual Monthly
Time Period Per Annum Base Rent Base Rent
- ----------- ---------------- --------- ---------
<S> <C> <C> <C>
1/1/1998 - 12-31-1998 $24.00 $622,536.00 $51,878.00
1/1/1999 - 12/31/1999 $24.72 $641,212.08 $53,434.34
1/1/2000 - 12/31/2000 $25.46 $660,406.94 $55,033.91
1/1/2001 - 12/31/2001 $26.22 $680,120.58 $56,676.72
1/1/2002 - 12/31/2002 $27.01 $700,612.39 $58,384.37
1/1/2003 - 12/31/2003 $29.01 $752,490.39 $62,707.53
1/1/2004 - 12/31/2004 $29.88 $775,057.32 $64,588.11
</TABLE>
From and after the Extension Term Commencement Date, Section 4(b) of the
Original Lease (captioned "Annual Adjustment") shall no longer be of any force
or effect.
5. Operating Expenses. Commencing on the first anniversary of the
Extension Term Commencement Date and continuing therafter for the ramainder of
the Extension Term, Tenant shall pay to Landlord, as Additional Rent, Tenant's
Pro Rata Share of the Operating Expenses incurred during each calendar year of
the Extension Term which are in excess of the Base Amount in accordance with the
terms of Section 4c of the Original Lease, as modified by this First Amendment.
During the Extension Term: (a) the "Base Amount" shall mean the total amount of
Operating Expenses for the Buildings incurred during calendar year 1998; and (b)
Tenant's Pro Rata Share is eleven and eighty-two one-hundredths percent
(11.82%).
6. As-Is Condition. Tenant hereby accepts the Premises in their
"as-is" condition as of the Effective Date, and Landlord shall have no
obligation to make any improvements or alterations of any kind in or to the
Premises in connection with this First Amendment or the Extension Term,
except as otherwise expressly set forth on the Extension Term Work Agreement
attached hereto as Exhibit A and incorporated herein by this reference.
7. Lobby Lincense.
(a) During the Extension Term, the non-exclusive right and lincense
granted to Tenant by Landlord to use the Lobby Space pursuant to Section 2a(ii)
of the Original Lease shall remain in full force and effect, subject to the
terms and conditions of this Section 7. From and after the Extension Term
Commencement Date, Tenant shall pay to Landlord, as Additional Rent for the
Lobby License (the "Monthly Lobby Space Lincense Fee"), the amounts set forth on
the following schedule:
<TABLE>
<CAPTION>
Annual Lobby Monthly Lobby
Time Period Space License Fee Space License Fee
<S> <C> <C>
1/1/1998 - 12/31/1998 $2,400.00 $200.00
</TABLE>
89
<PAGE>
1/1/1999 - 12/31/1999 $2,472.00 $206.00
1/1/2000 - 12/31/2000 $2,546.00 $212.17
1/1/2001 - 12/31/2001 $2,662.00 $218.50
1/1/2002 - 12/31/2002 $2,701.00 $225.08
1/1/2003 - 12/31/2003 $2,901.00 $241.75
1/1/2004 - 12/31/2004 $2,988.00 $249.00
(b) Notwithstanding anything contained in this first Amendment or
the Original Lease to the contrary, either Landlord or Tenant shall have the
right to revoke or terminate, as the case may be, the Lobby License at any
time during the Extension Term upon seventy-five (75) days' prior written
notice to the other party. Upon such revocation or termination, Tenant shall
restore the Lobby Space in accordance with the terms and conditions of
Section 8 of the Original Lease. Tenant's failure to pay the Monthly Lobby
Space License Fee shall constitute a default pursuant to Section 16 of the
Original Lease.
8. Security Deposit.
a. Simultaneously with the execution of this First Amendment,
Tenant shall deposit with Landlord, as security (and not prepaid rent) for
the payment of Monthly Base Rent, Monthly Lobby Space License Fee, and for
the faithful performance by Tenant of all other covenants, conditions and
agreements of the Lease, cash in the amount of Fifty-One Thousand Eight
Hundred Seventy-Eight Dollars ($51,878.00) (the "Security Deposit"). The
Security Deposit shall earn interest at the simple rate of interest of three
percent (3%) per annum. If any sum payable by Tenant to Landlord shall be
overdue and unpaid, or if Landlord makes any Payments on behalf of Tenant, or
if Tenant fails to perform any of the Original Lease, as amended by this
First Amendment, then Landlord, at its option and without prejudice to any
other remedy which Landlord may have, may apply all or part of the Security
Deposit to compensate Landlord for the payment of Monthly Base Rent,
Additional Rent or the Monthly Lobby Space License Fee, or any loss or damage
sustained by Landlord. Tenant shall restore the Security Deposit to the
original sum deposited upon demand. Provided that Tenant shall have made all
payments and performed all covenants and agreements of the Lease, the
Security Deposit shall be repaid to Tenant within sixty (60) days after the
expiration of the Extension Term or the vacation of the Premises by Tenant,
whichever is later or as soon thereafter as possible.
b. In the event of the sale or transfer of Landlord's interest in
the Building, Landlord shall transfer the Security Deposit to the purchaser
or assignee, in which event Tenant shall look only to the new Landlord for
the return of the Security Deposit, and Landlord shall there upon be released
from all liability to Tenant for the return of the Security Deposit. Tenant
hereby agrees not to look to the mortgagee, as mortgagee, mortgagee in
possession, or successor in title to the property, for accountability for any
security deposit required by the Landlord hereunder, unless said sums have
actually been received by said mortgagee as security for the Tenant's
performance of the Lease. In the event of any permitted assignment of
Tenant's interest in the Lease, the Security Deposit may, at Landlord's sole
option, be held by Landlord as a deposit made by the assignee, and Landlord
shall have no further liability to any prior Tenant with respect to the
return of the the Security Deposit.
c. The parties acknowledge that upon the receipt by Landlord of
the cash Security Deposit to be deposited by Tenant pursuant to this Section
8,(i) the existing letter of credit held by Landlord as security under the
Original Lease shall be terminated and (ii) the parties hereto shall act
promptly and in good faith to effectuate the termination of the existing
letter of credit.
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9. Parking. As of the Extension Term Commencement Date, Section 22a of
the Original Lease is hereby amended by deleting therefrom the language
"eighteen (18) reserved parking spaces, seven (7) of which shall be located
in the parking garage adjacent to the Buildings, and eleven (11) of which
shall be located on the surface lot adjacent to the Buildings, for use by
Tenant's employees', agents and guests," and by inserting in lieu thereof the
following: "eighteen (18) reserved parking spaces designated as follows: (i)
seven (7) such spaces shall be located in the parking garage adjacent to the
Buildings (which spaces shall be Tenant's existing spaces numbered 62, and
70 through 75), and (ii) eleven (11) such spaces shall be located on the
surface lot adjacent to the Buildings (which spaces shall be Tenant's
existing eleven (11) reserved spaces as of the Effective Date), for use by
Tenant's employees, agents and guests. Notwithstanding the foregoing, in the
event Landlord elects, in its sole discretion, to undertake the development of
a third building on the land on which the Building are located, Landlord
shall have the right to temporarily relocate any or all of such reserved
spaces in Landlord's sole and absolute discretion."
10. Exterior Sign. Landlord shall, at Landlord's sole cost and expense,
remove Tenant's existing sign from the Building and install a new sign (the
dimensions, materials, color and other attributes of which shall be approved
by Landlord in its sole discretion) on the Building at the location set forth
on Exhibit B attached hereto and incorporated herein by this reference (the
"New Exterior Sign"). Tenant shall, at its sole cost and expense, maintain
the New Exterior Sign throughout the Extension Term, and remove same, at
Tenant's sole cost and expense, at the end of the Extension Term hereof,
subject to and in accordance with the terms and conditions of Section 28 of
the Original Lease. Notwithstanding the foregoing, in the event Aetna Life
and Casualty Company ("Aetna") removes its existing sign from the Building,
Tenant, upon prior written notice to Landlord, shall have the right, at its
sole expense, to relocate the New Exterior Sign to the location occupied by
the Aetna sign (the "Aetna Sign Location"). The relocation of the New
Exterior Sign by Tenant to the Aetna Sign Location shall be subject to and in
accordance with the terms and conditions of Section 28 of the Original Lease.
11. Air Quality of Premises. Tenant has determined that the quality and
quantity of air flow in the Premises is acceptable. During the Extension
Term, Landlord shall not be obligated to perform air quality testing in or to
the Premises. Tenant, on behalf of itself and its officers, directors,
employees, agents representatives, contractors, licensees and invitees,
hereby releases, relinquishes,and waives its rights to do so, and any and all
claims, suits, damages and actions in law or in equity which it had, has, or
may hereafter have against Landlord and its officers, directors,
shareholders, employees, subsidiaries, affiliates, agents, representatives,
attorneys predecessors, successors and assigns, arising out of or based upon,
or in any manner connected with the quality or quantity of air flow in the
Premises. In the event that any claim is made against Landlord during the
Extension Term by Tenant, its officers, directors, employees, agent,
representatives, contractors, licensees or invitees, arising out of or based
upon, or in any manner connected with the quantity or quality of air flow in
the Premises, Tenant shall indemnify Landlord in accordance with Section 11
of the Original Lease, unless the liability from such claims is conclusively
deemed by a court of competent jurisdiction (after exhaustion of any and all
appeal processes) to be as a direct result of an immediate and demonstrable
health problem in the Premises or as a direct result of the violation of any
health ordinances governing the Premises. The provisions of this Paragraph
11 shall survive the transactions contemplated herein or any termination of
the Lease.
12. Additional Modifications.
(a) Effective as of the Extension Term Commencement Date, Section
4c(iii) of the Original Lease is hereby amended by adding the following
language to the end thereof: "Notwithstanding the foregoing, Landlord's right
to increase Operating Expenses in the event of a "Special Tenant" shall only
be applicable if there were no Special Tenants during the Base Year."
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(b) As of the Effective Date, the Original Lease is hereby amended
by adding thereto a new Section 30. which reads as follows:
"30. ENVIRONMENTAL CONCERNS.
A. Tenant, its agents. employees, contractors or invites
shall not (i) cause or permit any Hazardous Materials
(hereinafter defined) to be brought upon, stored, used or
disposed on, in or about the Premises and/or the Building, or
(ii) knowingly permit the release, discharge, spill or
emission of any Hazardous Material in or from the Premises.
B. Tenant hereby agrees that it is and shall
be fully responsible for all costs,expenses, damages or
liabilities (including, but not limited to those incurred by
Landlord and/or its mortgagee) which may occur from the use,
storage, disposal, release, spill, discharge or emissions of
Hazardous Materials by Tenant whether or not the same may be
permitted by this Lease. Tenant shall defend, indemnify and
hold harmless Landlord, its mortgagee and its agents from and
against any claims, demands, administrative orders, judicial
orders, penalties, fines, liabilities, settlements, damages,
costs or expenses (including, without limitation, reasonable
attorney and consultant fees, court costs and litigation
expenses) of whatever kind or nature, known or unknown,
contingent or otherwise, arising out of or in any way related
to the use, storage, disposal, release, discharge, spill, or
emission of any Hazardous Material, or the violation of any
Environmental Laws, by Tenant, its agents, employees,
contractors or invites. The provisions of this Section 30
shall be in addition to any other obligations and liabilities
Tenant may have to Landlord at law or in equity and shall
survive the transactions contemplated herein or any
termination of this Lease.
C. As used in this Lease, the term 'Hazardous Materials' shall
include, without limitation:
(i) Those substances included within the definitions of
'hazardous substances,' 'hazardous materials,' 'toxic
substances,' or 'solid waste' in the Comprehensive
Environmental Response Compensation and Liability Act of 1980
(42 U.S.C. Section 9601 et seq.) ('CERCLA'), as amended by
Superfund Amendments and Reauthorization Act of 1986 ('SARA'),
the Resource Conservation and Recovery Act of 1976 ('RCRA'),
and the Hazardous Materials Transportation Act, and in the
regulations promulgated pursuant to said laws, all as amended;
(ii) Those substances listed in the United States Department
of Transportation Table (49 CFR 172.101 and amendments
thereto) or by the Environmental Protection Agency (of any
successor agency) as hazardous substances (40 CFR Part 302 and
amendments thereto); and
(iii) Any material, waste or substance which is (A)
petroleum, (B) asbestos, (C) polychlorinated biphenyl, (D)
designated as a 'hazardous substance' pursuant to Section 311
of the Clean Water Act, 33 U.S.C. Section 1251 et seq. (33
U.S.C. Section 1321) or listed pursuant to the Clean Water Act
(33 U.S.C. Section 1317); (E) flammable explosives; or (F)
radioactive materials.
D. All federal, state or local laws, statutes,
regulations, rules, ordinances, codes, standards, orders,
licences and permits of any governmental authority identified
in
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Section 30.C. above, or issued or promulgated thereunder
shall be referred to as the 'Environmental Laws.'
E. Landlord or its employees shall not (i) intentionally cause
or knowingly permit any Hazardous Materials (hereinafter
defined) to be brought upon, stored, used or dispose on, in or
about the Building, or (ii) knowingly permit the release,
discharge, spill or emission of any Hazardous Materials in the
Building. Landlord shall defend, indemnify and hold harmless
Tenant from and against any claims, demands, administrative
orders, judicial orders, penalties, fines, liabilities,
settlements, damages, costs or expenses (including without
limitation reasonable attorney's fees), arising out of the
use, storage, disposal, release, discharge, spill or emission
by Landlord of any Hazardous Material at the Building."
13. Brokers. Tenant represents and warrants to Landlord that neither it
nor its officers or agents nor anyone acting on its behalf has dealt with any
real estate brokers in connection with this First Amendment other than LPC
Commercial Services, Inc., as Landlord's agent, and The Fred Ezra Company, as
Tenant's agent (the "Brokers") to whom any commissions due shall be paid by
Landlord. Tenant agrees to indemnify and hold harmless Landlord from the
claim or claims of any broker or brokers (other than the Brokers) with whom
it is ultimately determined that Tenant has dealt in violation of the
foregoing representations and warranties.
14. Counterpart Copies. This First Amendment may be executed in two (2)
or more counterparts shall have the same force and effect as if all parties
hereto had executed a single copy of this First Amendment.
15. Miscellaneous. This First Amendment (a) shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
successors, representatives, executors, administrators, transferees and
assigns (except as expressly otherwise provided in the Lease) and (b) shall
be governed by and construed in accordance with the laws of the Commonwealth
of Virginia.
16. Ratification. Except as expressly amended by this First Amendment,
all other terms, conditions and provisions of the Lease are hereby ratified
and confirmed and shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Deed of Lease under seal as of the day and year first
hereinabove written.
LANDLORD:
ATTEST: JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
/s/ By /s/ Anne W. Comstock
- ------------------------ ----------------------------
Name: Anne W. Comstock
Title: Senior Investment Officer
John Hancock Mutual
Life Ins. Co.
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TENANT:
ATTEST: QUESTECH, INC.
/s/ By /s/ V.L. Salvatori
- ----------------------- -----------------------------
Name: V.L. Salvatori
Title: Chairman and CEO
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EXHIBIT A
EXTENSION TERM WORK AGREEMENT
This Extension Term Work Agreement (this "Work Agreement") is attached to
and made a part of that certain First Amendment to Deed of Lease (the "First
Amendment") made effective as of December 31, 1997, by and between John
Hancock Mutual Life Insurance Company, as landlord ("Landlord") and Questech,
Inc., as tenant ("Tenant") for the premises (the "Premises") described in
that certain Deed of Lease dated March 14, 1995 (the "Original Lease") in the
office building located at 7600-West Leesburg Pike, Falls Church, Virginia
(the "Building"). It is the intent of this Work Agreement that Tenant shall
be permitted freedom in the design and layout of the Premises, consistent
with applicable building codes and requirements of law, including without
limitation the Americans With Disabilities Act, and with sound architectural
and construction practice in first-class office buildings, provided that
neither the design nor the implementation of the Tenant Improvements
(hereinafter defined) shall cause any interference to the operation of the
Building's mechanical, plumbing, life safety, electrical or other systems or
to other Building operations or functions, nor shall they increase
maintenance or utility charges for operating the Building. Capitalized terms
not otherwise defined in this Work Agreement shall have the meanings set
forth in the Original Lease, as amended by the First Amendment. In the event
of any conflict between the terms hereof and the terms of the Original Lease,
as amended by the First Amendment, the terms hereof shall prevail for the
purposes of design and construction of the Tenant Improvements.
A. LEASEHOLD IMPROVEMENTS. All construction, improvements or
alterations required by Tenant in the Premises during the Extension Term
("Tenant Improvements") shall be undertaken by Tenant, at Tenant's sole cost
and expense, subject to the application of the Improvement Allowance
(hereinafter defined), in strict accordance with the terms of this Work
Agreement.
B. PLANS AND SPECIFICATIONS
1. Space Planner. Tenant may employ the services of Landlord's
space planner to prepare space plans and working drawings and specifications
for the Tenant Improvements, or Tenant may employ other professional space
planning and architectural assistance. If Tenant elects to use a design
consultant or architect other than Landlord's designated design consultants,
Tenant shall obtain Landlord's prior written approval, which approval shall
not be unreasonably withheld. (The design consultant or architect employed by
Tenant shall be referred to herein as the "Space Planner.") If Tenant elects
to use Landlord's space planner, Tenant shall devote such time in
consultation with Landlord's space planner as shall be necessary to enable
the latter to complete the Tenant's Plan (hereinafter defined) and submit
same to Landlord for its review and approval as specified below. If Tenant
elects to use its own space planning professionals, Tenant's Plan shall be
prepared in accordance with the building standard format for working drawings
and with information furnished by and coordination with Landlord's space
planner and structural, mechanical, electrical and plumbing engineers. Tenant
shall be solely responsible for all fees and costs of the Space Planner,
regardless of whether or not such Space Planner is Landlord's design
consultant, subject however to the application of the Improvement Allowance.
2. Time Schedule. Landlord and Tenant shall adhere to the
following schedule:
a. Tenant shall furnish to Landlord for Landlord's review and
approval a proposed preliminary space plan (the "Preliminary Plan") prepared
by the Space Planner showing the general layout of the Premises upon
completion of the Tenant Improvements. The Preliminary Plan shall contain the
information and otherwise comply with the requirements therefor described in
Schedule A-1 attached hereto. Landlord shall advise Tenant of Landlord's
approval or disapproval of Tenant's Preliminary Plan within ten
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Exhibit A, Page 2
(10) business days after Tenant submits the Preliminary Plan to Landlord.
Tenant shall revise the proposed Preliminary Plan to meet Landlord's
objections, if any, and resubmit the Preliminary Plan to Landlord for its
review and approval promptly after Landlord notifies Tenant of Landlord's
objections, if any. Landlord shall respond to any revised Preliminary Plan
submitted by Tenant within seven (7) business days after its submission.
b. Promptly after Landlord has approved the Preliminary Plan,
Tenant shall furnish to Landlord for its review and approval a proposed
detailed space plan for the Tenant Improvements (the "Final Space Plan")
prepared by the Space Planner, substantially in conformance with the
Preliminary Plan approved by Landlord. The Final Space Plan shall contain the
information and otherwise comply with the requirements therefor described in
Schedule A-2 attached hereto. Landlord shall advise Tenant of Landlord's
approval or disapproval of the Final Space Plan within ten (10) business days
after Tenant submits the Final Space Plan to Landlord. Tenant shall revise
the proposed Final Space Plan to meet Landlord's objections, if any, and
resubmit the Final Space Plan to Landlord for its review and approval promptly
after Landlord notifies Tenant of Landlord's objections, if any. Landlord
shall respond to any revised Final Space Plan submitted by Tenant within
seven (7) business days after its submission.
c. Promptly after Landlord approves of the Final Space Plan,
Tenant shall furnish to Landlord for its review and approval all
architectural plans, working drawings and specifications (the "Contract
Documents") for the construction of the Tenant Improvements in the Premises
in accordance with the Final Space Plan. The Contract Documents shall include
without limitation the final mechanical, electrical, plumbing, life-safety and
structural plans and specifications for the Premises and all final
architectural plans, working drawings and specifications for the Tenant
Improvements. The Contract Documents shall comply with the requirements
described in Schedule A-3 attached hereto, and they shall be sufficient in
form and substance to enable the Contractor (hereinafter defined) to obtain a
building permit for the construction of the Tenant Improvements. Landlord
shall advise Tenant of Landlord's approval or disapproval of the Contract
Documents, or any of them, within fifteen (15) business days after Tenant
submits the Contract Documents to Landlord. Tenant shall revise the Contract
Documents to meet Landlord's objections, if any, and resubmit the Contract
Documents to Landlord for its review and approval promptly after Landlord
notifies Tenant of Landlord's objections, if any. Landlord shall respond to
any revised Contract Documents submitted by Tenant within ten (10) business
days after their submission.
d. The Preliminary Plan, the Final Space Plan and the
Contract Documents are referred to collectively herein as the "Tenant's Plan."
e. The Tenant's Plan shall comply with all applicable
building codes, laws and regulations (including without limitation the
Americans with Disabilities Act), shall not interfere with or require any
changes to or modifications of the base Building's mechanical, electrical,
plumbing or other systems or to other Building operations or functions, and
shall not increase maintenance or utility charges for operating the Building
in excess of the standard requirements for normal first-class office
buildings. Landlord's approval of the Tenant's Plans shall constitute
approval of tenant's design concept only and approval of the Tenant's Plans
shall in no event be deemed to be a representation or warranty by Landlord
as to whether the Tenant's Plans comply with any and all legal requirements
applicable to the Tenant's Plans the the Tenant's Improvements. Tenant hereby
agrees to indemnify and hold Landlord and its agents, officers, directors,
and employees harmless from and against any cost, damage, claim, liability or
expense (including attorneys' fees) incurred by or claimed against Landlord
and its agents, officers, directors and employees, directly or indirectly,
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Exhibit A, Page 3
as a result of or in any way arising from the failure of the Tenant's Plans to
comply with the requirements set forth above.
3. Base Building Changes. If Tenant requests work to be done in
the Premises or for the benefit of the Premises that necessitates revisions or
changes in the design or construction of the base Building or Building
systems, any such changes shall be subject to prior written approval of
Landlord, in its sole discretion, and Tenant shall be responsible for all
costs and delays resulting from such design revisions or construction changes,
including architectural and engineering charges, and any special permits or
fees attributed thereto. Before Landlord shall order such design and/or
construction changes to be made, Tenant shall pay to Landlord the full cost of
such changes.
4. Changes. If there are any changes requested by Tenant, after
Landlord's approval of Tenant's Plan in accordance with the schedule set forth
above, each such change must be approved by Landlord and paid for by Tenant as
requested below. Tenant shall be responsible for all architectural and
engineering costs and delivery resulting from such changes.
C. COST OF TENANT IMPROVEMENTS
1. Construction Costs. All costs of design and construction of the
Tenant Improvements, including without limitation the costs of all space
planning, architectural and engineering work related thereto, all governmental
and quasi-governmental approvals and permits required therefor, the cost to
install the Tenant Improvements by the Contractor (hereinafter defined), all
other direct and indirect construction costs, including the installation costs
associated with Tenant's telephone systems and local area network, wiring
throughout the Premises, and the Construction Supervision Fee (hereinafter
defined) (collectively, "Construction Costs"), shall be paid by Tenant,
subject, however, to the application of (i) the Improvement Allowance
described in Paragraph C.2 below, not previously disbursed pursuant to this
Work Agreement (the "Available Allowance") below.
2. Improvement Allowance. Provided that Tenant has fully performed
all of its obligations under this Work Agreement and the Original Lease, as
amended by the First Amendment, Landlord agrees to provide to Tenant an
allowance (the "Improvement Allowance") in the amount of Two Hundred Seven
Thousand Five Hundred Twelve Dollars ($207,512.00) (or Eight Dollars ($8.00)
per rentable square foot of the Premises), to be applied solely to the
Construction Costs; provided, however, that Tenant shall only be permitted to
use (i) up to Twenty-Five Thousand Nine Hundred Thirty-Nine Dollars
($25,939.00) of the Improvement Allowance to defray the cost of installation
for Tenant's telephone systems and local area network wiring and (ii) up to
Seventy-Seven Thousand Eight Hundred Seventeen Dollars ($77,817.00) of the
Improvement Allowance to defray the cost of all space planning, architectural
and engineering work related to the Tenant Improvements. Landlord shall pay,
in addition to the Tenant Allowance, Two Thousand Five Hundred Ninety-Three
Dollars ($2,593.00)(or ten cents ($0.10) per rentable square foot of the
Premises) to defray the cost of all space planning, architectural and
engineering work related to the Tenant Improvements. Subject to the
provisions of Paragraph C.3, below, the Construction Costs shall be paid by
Landlord to the extent of, and shall be deducted by Landlord from, the
Available Allowance, as invoices therefor are rendered to Landlord as and when
Construction Costs are actually incurred by Tenant; provided, however, that
Landlord shall have received partial lien waivers and such other documentation
as Landlord may reasonably require from the party requesting such payment, and
Tenant shall have satisfied all of the other conditions set forth in Paragraph
C.3, below. In the event that Tenant does not expend all or any portion of the
Improvement
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Exhibit A, Page 4
Allowance for costs expressly permitted hereunder within twelve (12) months
after the Extension Term Commencement Date, the unused portion of the
Improvement Allowance shall be retained by Landlord.
3. Disbursement of Improvement Allowance. Disbursement of the
Improvement Allowance shall be subject to the following conditions:
a. Once each calendar month, Tenant shall present to Landlord
separate requests for payment for the Tenant Improvements work (the "Draw
Request") which have been completed to date; provided that (i) the final Draw
Request may be submitted immediately upon completion of the Tenant
Improvements, and (ii) the conditions set forth in Paragraph C3(c), below,
shall be satisfied. Each Draw Request shall include Tenant's certification
that the Tenant Improvements covered thereby have been satisfactorily
completed, and shall be substantiated by original invoices for such work,
along with partial lien waivers with respect thereto. At Landlord's election,
such Draw Requests shall also include a confirmation by the Construction
Supervisor (hereinafter defined) that the Tenant Improvements for which
payment is requested have been completed in conformity with the Tenant's Plan;
provided that such confirmation (1) shall not be considered an assurance by
Landlord that such Tenant Improvements are in conformance with the Tenant's
Plan or applicable code requirements; and (2) shall not preclude Landlord from
subsequently asserting that the Tenant Improvements (or any part thereof)
deviate from the Tenant's Plan or applicable code requirements. Within thirty
(30) days of Landlord's receipt of a complete and correct Draw Request,
Landlord shall make payment to the Contractor, subject as hereinafter provided.
b. All Draw Requests covering construction work shall be
accompanied by the AIA Application and Certificate for Payment (AIA Documents
G702 and G703), certified by the Space Planner, and covering only such work as
is actually installed in the Premises. All Certificates for Payment shall
include full, partial, or conditional releases of lien, as the case may be,
and other such documentation as the Landlord may reasonably request. Prior to
substantial completion of the Tenant Improvements, all Certificates for
Payment shall include retainage of not less than ten percent (10%) of the
value of the work in place, until fifty percent (50%) of the work has been
completed, whereupon, at Landlord's discretion, there shall be no further
retainage withheld; provided however that if Landlord determines that
construction problems have arisen thereafter, Landlord shall require that a
retainage of five percent (5%) of the value of the work in place be withheld
from future payments.
c. Landlord shall not disburse the final ten percent (10%) of
the Improvement Allowance until Landlord has received a final Draw Request
accompanied by final lien waivers and/or other evidence reasonably
satisfactory to Landlord that all contractors, workers, material and service
suppliers and all other persons having claims against Tenant for payment of
work done or material or services supplied in connection with the Tenant
Improvements have been paid in full, and (ii) final plans, specifications and
drawings for all work in place, including changes to or deviations from the
Tenant's Plan approved by Landlord.
d. In the event that a Default is then occurring under the
Original Lease, as amended by the First Amendment, Landlord shall have no
obligation to make any payment of the Improvement Allowance, until such time
as the Default has been cured by Tenant.
e. Landlord shall have the right, but not an obligation, to
pay any contractor, workers, material and service supplier, and all other
persons who have performed work or supplied material
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Exhibit A, Page 5
or service in connection with the Tenant Improvements if Tenant has failed to
do so, and Tenant shall pay Landlord on demand the amount Landlord has so
paid.
5. Costs Exceeding Available Allowance. All Construction Costs
in excess of the Available Allowance shall be paid by Tenant within ten (10)
business days of receipt by Tenant of invoices therefor.
D. CONSTRUCTION
1. Selection of Tenant's Contractor. Once Landlord has approved the
Tenant's Plan, Tenant shall prepare a bid package in order to obtain a fixed
price bid for the construction of the Tenant Improvements (the "Bid
Package"), which Bid Package shall be subject to Landlord's approval in its
reasonable discretion. Tenant shall submit the Bid Package to three (3) of
the following general contractors: Dietze Construction; G&F Construction; and
Chamberlain Construction Corporation (the "Approved Contractors"). Once
Tenant has received from the Approved Contractors bids for the construction
of the Tenant Improvements, Tenant shall select the contractor to undertake
the Tenant Improvements (the "Contractor") from among the Approved
Contractors.
2. Construction Supervision. All of the Tenant Improvements shall
be performed by the Contractor. Landlord shall retain the services of LPC
Commercial Services, Inc. ("Construction Supervisor") to act as Landlord's
construction supervisor in connection with the construction of the Tenant
Improvements, and Tenant shall pay the Construction Supervisor a construction
supervision fee ("Construction Supervision Fee") in the amount of Six
Thousand Two Hundred Twenty-Five Dollars ($6,225.00), to cover the costs of
coordination and supervision of the Tenant Improvements. The Construction
Supervision Fee shall be deducted by Landlord from the Improvement Allowance.
3. Construction by the Contractor. In undertaking the Tenant
improvements, Tenant and the Contractor shall comply with the following
conditions:
a. No work shall proceed without Landlord's prior written
approval (which shall not be unreasonably withheld, conditioned or delayed)
of which (i) each of Tenant's subcontractors, and (ii) compliance by Tenant
and the Contractor with the insurance requirements set forth below:
b. All work shall be performed in conformity with (i) the
final approved Tenant's Plan, (ii) all applilcable codes and regulations of
governmental authorities having jurisdiction over the Building and the
Premises, (iii) valid building permits and other authorizations from
appropriate governmental agencies, when required, which shall have been
obtained at Tenant's sole expense, and (iv) Landlord's construction policies,
rules and regulations attached hereto as Schedule A-4, as the same may be
modified by Landlord from time to time ("Construction Rules"). Any work not
acceptable to the appropriate governmental agencies or not reasonably
satisfactory to Landlord shall be promptly corrected or replaced at Tenant's
expense. Notwithstanding any failure by Landlord to object to any such work,
Landlord shall have no responsibility therefor; and
c. Before any work is commenced or the Contractor's equipment
is moved onto any part of the Building or the Land, the Contractor and all
subcontractors shall deliver to Landlord policies or certificates evidencing
the following types of insurance coverage in the following minimum amounts,
which policies shall be issued by companies approved by Landlord, shall be
maintained by Tenant and the Contractor
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Exhibit A, Page 6
at all times during the performance of the Tenant Improvements, and which
shall name Landlord, its managing agent, and any other persons having an
interest in the Building as additional insureds as their interest may appear:
(1) Worker's compensation coverage as required by law and
employers liability coverage, including without limitation bodily injury
caused by disease with a limit of $250,000.00 per employee;
(2) Commercial general liability policy to include,
without limitation, completed operations, property damage, independent
contractor's and personal injury coverage with limits in an amount of not
less than $3,000,000.00 Combined Single Limit;
(3) Automobile liability coverage, with bodily injury
limits of at least $1,000,000.00 per accident; and
(4) All insurance required pursuant to Section 12 of the
Lease.
Dependent on the scope of work to be performed at the Premises, Landlord
shall have the right to require increased limits or broader coverages as
Landlord reasonably deems appropriate.
5. Landlord Inspection. Landlord and its representatives are
authorized by Tenant to make periodic inspections of the Premises during
contruction of the Tenant Improvements, and to discuss with the Contractor,
and all subcontractors performing work in connection with the Tenant
Improvements, anything having to do with the Tenant Improvements, the
Premises, the Building and/or the base Building systems.
E. DELAY BY TENANT. No delay by Tenant in completing the Tenant
Improvements shall delay or otherwise effect (1) the Extension Term
Commencement Date; or (2) Tenant's obligation to pay Annual Base Rent on and
the Monthly Lobby Space License Fee from and after the Extension Term
Commencement Date.
F. TENANT'S AGENT. Tenant hereby designates Walter V. Edwards, III., whose
address is 7600-West Leesburg Pike, Falls Church, Virginia and whose
telephone number is (703) 760-1049, who may act as its agent for purposes of
authorizing and executing any and all documents, work orders or other
writings and changes thereto needed to effect the terms of this Work
Agreement, and any and all changes, additions or deletions to the work
contemplated herein. Tenant's Agents shall have full power and authority to
bind Tenant to all actions taken with regard to the Tenant Improvements and
Landlord shall have the right to relay on any documents executed by such
authorized party.
100
<PAGE>
Exhibit A, Page 7
LIST OF SCHEDULES
Schedule A-1 Preliminary Plan
Schedule A-2 Requirements for Final Space Plan
Schedule A-3 Requirements for Contract Documents
Schedule A-4 Construction Rules and Regulations
101
<PAGE>
SCHEDULE A-1
REQUIREMENTS FOR PRELIMINARY PLAN
Preliminary layout plans, drawings and specifications (together with related
information for structural design work) (three (3) sets), including without
limitation the following information:
a. partitions, location of doors, location of lighting fixtures
and special requirements (such as additional plumbing pipes in
the Premises);
b. locations, dimensions and structural design of all
penetrations of the floor slab requiring structural framing if
any; and
c. locations and structural design of all floor area requiring dead
load capacities in excess of 60 pounds per rentable square foot
and live load capacities excess of 15 pounds per rentable square
foot, if any.
102
<PAGE>
SCHEDULE A-2
REQUIREMENTS FOR FINAL SPACE PLAN
Floor plans, together with related information for mechanical, electrical
and plumbing design work showing partition arrangement and reflected ceiling
plans (three (3) sets), including without limitation the following
information:
a. identify the location of conference rooms and density of occupancy;
b. indicate the density of occupancy for all rooms;
c. identify the location of any food service areas or vending equipment
rooms;
d. identify areas, if any, requiring twenty-four (24) hour air
conditioning;
e. indicate those partitions that are to extend from floor to underside
of structural slab above or require special acoustical treatment;
f. identify the location of rooms for and layout of, telephone
equipment other than building core telephone closet;
g. identify the locations and types of plumbing required for toilets
(other than core facilities), sinks, drinking fountains etc.;
h. indicate light switches of offices, conference rooms and all other
rooms in the Premises;
i. indicate the layouts for specially installed equipment, including
computer and duplicating equipment, the size and capacity of
mechanical and electrical services required and head rejection of
the equipment;
j. indicate the dimensioned location of : (A) electrical receptacles
(one hundred twenty (120) volts), including receptacles for wall
clocks and telephone outlets and their respective locations (wall to
floor), (B) electrical receptacles for use in the operation of Tenant's
business equipment which requires two hundred eight (208) volts or
separate electrical circuits, (c) electronic calculating and CRT
systems, etc. and (D) special audio-visual requirements;
k. indicate proposed layout of sprinkler and other life safety and fire
protection equipment, including any special equipment (e.g. Halon) and
raised flooring;
l. indicate the swing of each door;
m. indicate a schedule for doors and frames complete with hardware if
applicable; and
n. indicate any special file systems to be installed.
103
<PAGE>
SCHEDULE A-3
REQUIREMENTS FOR CONTRACT DOCUMENTS
Final architectural detail and working drawings, finish schedules and related
plans (three (3) reproducible sets) including without limitation the
following information and/or meeting the following condition:
a. materials, colors and designs of wallcoverings; floor coverings and
window coverings and finishes;
b. paintings and decorative treatment required to complete all
construction;
c. complete, finished, detailed mechanical, electrical, plumbing and
structural plans and specifications with respect thereto for the
Initial Improvements, including but not limited to the Building's
base mechanical systems;
d. all final drawings and blueprints must be drawn to a scale of
one-eighth (1/8) inch to one (1) foot.
104
<PAGE>
SCHEDULE A-4
CONSTRUCTION RULES AND REGULATIONS
1. Contractors and construction personnel will use loading dock area for all
deliveries and will not use loading dock for vehicle parking.
2. No utilities (electricity, water, gas, plumbing) or services to the
tenants are to be cut off or interrupted without first having requested, in
writing, and secured, in writing, the permission of Landlord.
3. Contractors will remove their trash and debris daily, or as often as
necessary to maintain cleanliness in the building. Building trash containers
are not to be used for construction debris. Landlord reserves the right to
bill Tenant for any cost incurred to clean up debris left by the Contractor
or any subcontractor. Further, the building staff is instructed to hold the
driver's license of any employee of the contractor while using the freight
elevator to ensure that all debris is removed from the elevator.
4. The Contractor will supply Landlord with a copy of all permits prior to
the start of any work.
5. The Contractor will post the building permit on a wall of the
construction site while work is being performed.
6. Public area corridors and carpet are to be protected by plastic runners
or a series of walk-off mats from the elevator to the suite under
reconstruction.
7. Walk-off mats are to be provided at entrance doors. Protection of
hallway carpets, wall coverings, and elevators from damage with masonite
board, carpet, cardboard, or pads is required.
8. Landlord will be notified of all work schedules of all workmen on the job
and will be notified, in writing, of names of those who may be working in the
building after "normal" business hours.
9. Passenger elevators shall not be used for moving building materials and
shall not be used for construction personnel. The designated freight
elevator is the only elevator to be used for moving materials and
construction personnel. This elevator may be used only when it is completely
protected as determined by Landlord's building engineer.
10. Contractors will be responsible for daily removal of waste foods, milk
and soft drink containers, etc. to trash room and will not use any Building
trash receptacles but trash receptacles supplied by them.
11. No building materials are to enter the Building by way of main lobby, and
no materials are to be stored in any lobbies at any time.
12. Construction personnel are not to eat in the lobby or in front of the
Building nor are they to congregate in the lobby or in front of the Building.
There will be no smoking, eating, or open food containers in the elevators,
carpeted areas or public lobbies.
13. Landlord is to be contacted by any tenant when work is completed for
inspection. All damage to Building will be determined at that time.
105
<PAGE>
Schedule A-4, Page 2
14. All key access, fire alarm work, or interruption of security hours must
be arranged with Landlord's Building engineer.
15. There will be no radios allowed on job site. All workers are required to
wear a shirt, shoes, and full length trousers. There will be no yelling or
boisterous activities. There will be no alcohol or controlled substances
allowed or tolerated.
16. Public spaces-- corridors, elevators, bathrooms, lobby etc.-- must be
cleaned immediately after use. Construction debris or materials found in
public areas will be removed at Tenant's cost.
17. All construction materials or debris must be stored within the Premises
or in an approved lock-up.
18. All contractors hired by Tenant to undertake work in the Premises shall
be licensed and bonded in the District of Columbia. Tenant shall indemnify
Landlord, its managing agent, Mortgagee and their agents, against all
claims, damage, injury or loss (including without limitation reasonable
attorneys fees) arising out of the presence of, or work undertaken by, any
contractor, subcontractor or materialmen hired by Tenant to undertake work
and/or install equipment in the Premises, and Tenant shall require in
writing, all of its contractor(s) and sub-contractor(s) to indemnify and hold
such parties harmless from all claims, damage, injury and loss (including
without limitation reasonable attorneys fees) which may or might arise by
reason of the actions or omissions of said contracting parry, its agents or
in the performance of construction work in the Premises.
19. Tenant's contractors shall not post any signs on any part of the Building
on the Premises.
20. Tenant's contractors shall at all times ensure that work is performed so
as to avoid disruption of the business of the Building or its tenants.
21. All Tenant's materials, work, installations and decorations of any nature
brought upon or installed in the Premises shall be at Tenant's risk, and
neither Landlord nor any party acting on Landlord's behalf shall be
responsible for any damage thereto or loss or destruction thereof.
22. Tenant shall award its contracts and conduct its activities hereunder in
a manner consistent with Landlord's contractors' labor agreement affecting
the Building.
106
<PAGE>
Exhibit 13
ANNUAL REPORT ON FORM 10-K
ITEM 14 (a) (1), (2), (3), (10), (11)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1997
QuesTech, Inc.
FALLS CHURCH, VIRGINIA
<PAGE>
QuesTech, Inc. and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
December 31, 1997, 1996 and 1995
<PAGE>
C O N T E N T S
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS-- DECEMBER 31, 1997
AND 1996 4
CONSOLIDATED STATEMENTS OF EARNINGS--YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -YEARS
ENDED DECEMBER 31, 1997, 1996 AND 1995 7
CONSOLIDATED STATEMENTS OF CASH FLOWS--YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11-42
SUPPLEMENTAL INFORMATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS 44
</TABLE>
<PAGE>
[Letterhead]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders
QuesTech, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of QuesTech,
Inc. (a Virginia corporation), and Subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of QuesTech, Inc.,
and Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
We have also audited Schedule II as of December 31, 1997, and for each of
the three years in the period then ended. In our opinion, this schedule
presents fairly the information required to be set forth therein.
/s/GRANT THORNTON LLP
Vienna, Virginia
February 6, 1998
3
<PAGE>
QuesTech, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
<TABLE>
<CAPTION>
1997 1996
---------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................... $ 108,500 $ 54,300
Accounts receivable
Trade.......................................... 12,134,800 9,030,900
Income taxes and other......................... 867,200 594,500
Inventories....................................... 69,200 170,400
Prepaid expenses and other........................ 165,300 350,200
Deferred income taxes............................. 239,500 900,300
------------ -------------
Total current assets........................... 13,584,500 11,100,600
EQUIPMENT AND LEASEHOLD IMPROVEMENTS--at
cost less accumulated depreciation and
amortization....................................... 5,434,400 4,952,600
GOODWILL, less accumulated amortization of
$1,726,200 and $1,571,600, respectively............ 1,210,400 1,365,000
DEFERRED INCOME TAXES, net of valuation
allowance of $262,000.............................. 1,369,900 1,315,600
OTHER ASSETS......................................... 2,369,600 1,884,300
------------- -------------
TOTAL ASSETS......................................... $ 23,968,800 $ 20,618,100
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
QuesTech, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Line of credit..................................... $ 3,919,800 $ 1,227,400
Current maturities of long-term
obligations...................................... 511,900 374,000
Accounts payable..................................... 2,195,400 1,940,300
Accrued liabilities and deferred
credits............................................ 5,095,800 5,627,300
------------- ------------
Total current liabilities...................... 11,722,900 9,169,000
LONG-TERM OBLIGATIONS, net of current
maturities......................................... 1,527,800 1,721,800
INDEBTEDNESS TO RELATED PARTIES...................... 1,542,900 1,417,100
ACCRUED POSTRETIREMENT BENEFIT COST.................. 1,577,000 1,267,300
OTHER LONG TERM OBLIGATIONS.......................... 894,300 1,010,500
------------- ------------
Total liabilities............................ 17,264,900 14,585,700
------------- ------------
COMMITMENTS AND CONTINGENCIES........................
STOCKHOLDERS' EQUITY
Common stock-- authorized 3,000,000 shares
of $.05 par value, issued 1,657,304 and
1,649,904 shares, outstanding 1,618,557
and 1,610,857 and at December 31, 1997 and
1996, respectively................................. 82,800 82,500
Additional paid in capital.......................... 2,878,300 2,835,600
Retained earnings................................... 4,297,900 3,652,000
Less: Treasury Stock at cost....................... (210,500) (193,100)
Due from SECT....................................... (344,600) (344,600)
------------- ------------
Total stockholders' equity.................... 6,703,900 6,032,400
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $23,968,800 $20,618,100
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
QuesTech, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues.............................................. $ 78,476,100 $ 72,370,100 $ 57,951,200
Operating expenses
Salaries, wages and
employee benefits................................ 41,538,000 34,594,600 28,269,100
Other operating expenses............................ 35,167,800 36,192,700 27,653,800
------------- ------------- -------------
Total Operating Expenses.............................. 76,705,800 70,787,300 55,922,900
------------- ------------- -------------
Income from operations............................ 1,770,300 1,582,800 2,028,300
Other expense
Interest expense.................................... (719,800) (578,300) (395,800)
Charges arising from settlements
of litigation..................................... -- -- (722,100)
------------- ------------- -------------
Earnings before income taxes...................... 1,050,500 1,004,500 910,400
Provision for income taxes............................ (404,600) (186,200) (390,300)
------------- ------------- -------------
NET EARNINGS................................... $ 645,900 $ 818,300 $ 520,100
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common
shares outstanding:
Basic............................................... 1,439,193 1,395,397 1,349,331
------------- ------------- -------------
Diluted............................................. 1,521,755 1,517,521 1,540,318
------------- ------------- -------------
------------- ------------- -------------
Earnings per share:
Basic................................................... $ .45 $ .59 $ .39
------------- ------------- -------------
------------- ------------- -------------
Diluted................................................. $ .42 $ .54 $ .34
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Common Stock:
Beginning balance.................................... $ 82,500 $ 78,900 $ 78,900
Exercise of options.................................. 300 3,600 --
------------ ------------ ------------
Ending balance....................................... 82,800 82,500 78,900
------------ ------------ ------------
------------ ------------ ------------
Additional paid in capital:
Beginning balance.................................. 2,835,600 2,720,100 2,722,700
Exercise of options................................ 42,700 85,500 (2,600)
Tax benefit associated with exercise of options.... -- 30,000 --
------------ ------------ ------------
Ending balance..................................... 2,878,300 2,835,600 2,720,100
------------ ------------ ------------
------------ ------------ ------------
Retained Earnings:
Beginning balance.................................... 3,652,000 2,833,700 2,313,600
Net Earnings......................................... 645,900 818,300 520,100
------------ ------------ ------------
Ending balance....................................... 4,297,900 3,652,000 2,833,700
------------ ------------ ------------
------------ ------------ ------------
Treasury Shares:
Beginning balance.................................... (193,100) (227,300) (30,000)
Purchase of shares................................... (17,400) -- (197,300)
Exercise of options.................................. -- 34,200 --
------------ ------------ ------------
Ending balance....................................... (210,500) (193,100) (227,300)
------------ ------------ ------------
------------ ------------ ------------
Due from SECT:
Beginning balance.................................... (344,600) (357,600) (432,500)
Exercise of options.................................. -- 13,000 74,900
------------ ------------ ------------
Ending balance....................................... (344,600) (344,600) (357,600)
------------ ------------ ------------
------------ ------------ ------------
Total Stockholders' Equity............................. $ 6,703,900 $ 6,032,400 $ 5,047,800
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
7
<PAGE>
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Shares of Common stock authorized...................... 3,000,000 3,000,000 3,000,000
------------ ------------ ------------
------------ ------------ ------------
Shares of Common stock issued:
Beginning balance.................................... 1,649,904 1,578,000 1,578,000
Exercise of options.................................. 7,400 71,904 --
------------ ------------ ------------
Ending balance....................................... 1,657,304 1,649,904 1,578,000
------------ ------------ ------------
------------ ------------ ------------
Shares of Treasury stock:
Beginning balance.................................... 39,047 41,539 10,000
Acquisition (Reissue) of Treasury stock.............. (300) (2,492) 31,539
------------ ------------ ------------
Ending balance....................................... 38,747 39,047 41,539
------------ ------------ ------------
------------ ------------ ------------
Shares held by the SECT:
Beginning balance.................................... 176,131 183,392 221,792
Release of Shares.................................... -- (7,261) (38,400)
------------ ------------ ------------
Ending balance....................................... 176,131 176,131 183,392
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net earnings......................................... $ 645,900 $ 818,300 $ 520,100
Adjustments to reconcile net earnings to net cash
from operating activities:
Depreciation and Amortization........................ 1,176,900 940,900 677,300
Reserve for unrecovered contract costs and
doubtful accounts................................... -- 337,500 185,000
Increase in fund values of nonqualifying plan
assets.............................................. (244,600) (234,900) (197,200)
Changes in assets and liabilities:
Accounts receivable................................ (3,376,600) (1,267,000) 689,500
Inventories........................................ 101,200 (88,900) (81,500)
Prepaid expenses and other assets.................. (58,300) 56,000 194,500
Accounts payable and accrued expenses.............. (193,100) 464,500 (175,400)
Income taxes payable............................... -- (45,200) (74,700)
Deferred taxes payable............................. 606,500 (246,500) (195,700)
Indebtedness to related parties and other
long-term obligations............................. 181,000 114,300 559,100
Accrued postretirement benefits...................... 309,700 106,300 184,200
------------ ------------ ------------
Net cash (used in) provided by operating
activities...................................... (851,400) 955,300 2,285,200
------------ ------------ ------------
</TABLE>
9
<PAGE>
QuesTech, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from investing activities:
Capital expenditures................................. $(1,501,600) $(3,815,500) $(2,019,900)
------------ ------------ ------------
Net cash used in investing activities............ (1,501,600) (3,815,500) (2,019,900)
Cash flows from financing activities:
Borrowings on line of credit......................... 2,692,400 833,300 139,900
Cash proceeds from exercise of stock options......... 25,600 166,300 51,700
Proceeds from lease financing........................ -- 2,041,900 --
Repayment of long-term debt.......................... (194,000) (131,800) (51,100)
Repayment of indebtedness to related parties......... (600) (58,600) (242,300)
Repayment of other long-term debt.................... (116,200) (114,900) (70,400)
Purchase of Treasury Stock........................... -- -- (176,700)
------------ ------------ ------------
Net cash provided by (used in) financing
activities........................................ 2,407,200 2,736,200 (348,900)
------------ ------------ ------------
Net increase (decrease) in cash........................ 54,200 (124,000) (83,600)
Cash, beginning of period.............................. 54,300 178,300 261,900
------------ ------------ ------------
Cash, end of period.................................... $ 108,500 $ 54,300 $ 178,300
------------ ------------ ------------
------------ ------------ ------------
Cash payments for:
Interest............................................. $ 540,600 $ 355,900 $ 147,300
Income taxes......................................... $ 250,300 $ 916,400 $ 671,200
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES
1. Nature of Operations.
The company performs a broad range of high technology services for industry
and agencies of the United States Department of Defense ("DOD") and the
national security community. These services are provided through two business
units, revenues from government contracts account for 99% of the Company's
revenues. A third subsidiary, Questech Packaging, Inc. ("QTPI") is in the
business of manufacturing plastic containers.
2. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany transactions have
been eliminated in consolidation.
4. Income Recognition
The Company provides services, primarily for the United States Government,
under three types of contracts: cost-reimbursement, fixed price and
time-and-materials. Substantially all of the Company's revenue is derived
from these contracts. Approximately 40% of the Company's consolidated
revenues during each of the last three years was generated by a major
contract with the Department of the Army. Income is recognized for
cost-reimbursement and fixed-price type contracts using the
percentage-of-completion method based on costs incurred; for
time-and-materials contracts, income is based on contractually defined
billing rates applied to services performed and materials delivered.
Anticipated losses on contracts are recognized as soon as they become known.
11
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
Certain of the Company's contracts include provisions permitting the
government to withhold a defined amount or percentage of a contract price
until certain conditions have been satisfactorily met. These conditions
primarily relate to uncompleted indirect cost rate negotiations and
substantial completion of contract performance. The inclusion of these
amounts in income is consistent with the revenue recognition policy stated
above. The inclusion of the retainages and costs subject to audit in income
is consistent with common industry practice.
A portion of the Company's revenues related to performance on certain
cost-reimbursement type contracts is subject to audit by the United States
Defense Contract Audit Agency (DCAA). Such contract audits have been
completed through December 31, 1995 for QTRD and December 31, 1991 for QTSC.
DCAA audits of contract costs for the government contract segment of QTSC for
fiscal years 1992 through 1995 are expected to be completed during 1998.
Contract revenue has been recorded in amounts that are expected to be
realized upon final settlement.
5. Operating Expenses
Operating expenses presented in the accompanying statements of operations
reflect the allocation of overhead and general and administrative expenses.
6. Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months
or less to be cash equivalents.
7. Inventories
Inventories consist principally of raw materials and certain finished goods
and are stated at the lower of cost or market. Cost is determined principally
under the average cost method.
12
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
8. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
o Cash and cash equivalents, accounts receivable, accounts payable, line of
credit, and other accrued liabilities--The carrying amounts approximate
fair value because of the short maturity of these instruments. The
Company's receivables arise primarily in connection with its performance on
government contracts and therefore have negligible credit risk.
o Cash Values of Insurance Policies--The fair value is based on the cash
values accumulated in these policies, net of borrowings. Surrender charges
are not reflected in the fair value amount unless cash withdrawals or loans
are made against these policies.
o Letter of credit--The fair value is based on the estimated cost to
terminate or otherwise settle these obligations with the counter-parties.
Following is a summary of the estimated fair value at December 31, 1997, of
the Company's financial instruments other than those on which the carrying
amount approximates fair value.
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Cash values of Insurance policies $ 1,697,800 $ 1,697,800
Letter of credit -- $ 250,000
</TABLE>
The letter of credit, which was outstanding at December 31, 1997 was released
on February 5, 1998.
13
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
9. Property, Plant and Equipment and Related Depreciation
Property, plant and equipment are recorded at cost. Cost includes
expenditures for major improvements and replacements and the net amount of
interest cost associated with significant capital additions. Construction in
progress costs and specialized manufacturing equipment in service are stated
at the lower of cost or fair value, based on expected future cash flows from
the capital investment. During 1997 and 1996, interest cost associated with
construction in progress was expensed due to immaterial amounts. The cost of
properties held under capital leases is equal to the lower of the net present
value of the minimum lease payments or the fair value of the leased property
at the inception of the lease.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives
(generally five to ten years), using both the straight-line and
declining-balance methods. Amortization of computer software developed for
internal use is over five years, based on a double-declining balance method.
Leasehold improvements are amortized over the lives of the respective leases
or the service lives of the improvements, whichever is the shorter period.
Amortization of capitalized leased assets is included with depreciation
expense.
In accordance with SFAS 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of," long-lived assets and
certain intangibles, including goodwill, are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying amount
may not be recoverable. The Company has determined that no impairment loss
need be recognized for applicable assets of continuing operations.
10. Goodwill
The excess of the acquisition costs over the fair value of the net assets of
the businesses acquired is being amortized on a straight-line basis over
periods ranging from 19 to 20 years.
14
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
The Company regularly performs a reassessment of the continuing value of the
acquired goodwill associated with the acquisitions. To the extent that the
future cash flows based on the contracts' expected operating profits will
exceed the carrying cost of the asset, an impairment loss is not recognized.
Contract termination or non-renewal of the contract are events or changes in
circumstances that indicate that the carrying amount of the goodwill asset
may not be recoverable, thereby requiring the recognition of an impairment
loss at that time.
11. Accounting for Postretirement Benefits
The Company applies the provisions of SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and has elected to recognize
the transition obligation on a delayed recognition basis. The transition
obligation represents the unfunded portion of the accrued postretirement
benefit obligation (the "APBO") as of the transition date less any accrued
postretirement benefit cost. The accrued postretirement benefit cost as of
the balance sheet date reflects the net periodic cost attributed to the
current year, net of benefit payments, plus the accrued amount as of the
beginning of the year. The cost measurement principles and required
disclosures of SFAS 106 are applied separately to each identifiable
postretirement benefit plan. The accrued postretirement benefit cost
obligation is reported as an aggregate amount in the financial statements.
12. Accounting for Post-Employment Benefits
The Company periodically re-evaluates its projected obligations under
post-employment agreements when the subject officers receive compensation
increases during their years of active employment. The projected cost of
additional compensation payable during the post-employment years is
discounted at present value and charged to operations. Periodic increases in
the balances due each of the officers also reflect the accrued interest on
the discounted cost of the liability.
15
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
13. Accounting for Stock-based Compensation
As permitted by SFAS 123, "Accounting for Stock-based Compensation," the
Company uses the intrinsic value based method, as prescribed by Opinion 25,
that measures compensation cost only to the extent that the option price is
lower than the quoted market price of the stock at the date of the award. Pro
forma disclosures of net income, and earnings per share are presented in Note
I as if the fair value based method of accounting defined in SFAS 123 had
been applied.
14. Earnings per share
In 1997 the Financial Accounting Standards Board issued Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share." This Statement replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly
to fully diluted EPS pursuant to Opinion 15. In complying with the
requirements of SFAS No. 128, the Company has restated all prior period EPS
data.
For purposes of computing the diluted EPS, the Company has dilutive stock
options as share equivalents using the treasury stock method. At December 31,
1997 and 1996, the Company's Stock Employee Compensation Trust (SECT), held
176,131 shares. These SECT shares have been excluded from the base of the EPS
calculations since they have not been allocated to individuals.
16
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
The following table reconciles basic and diluted EPS:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Numerator
Net income $ 645,900 $ 818,300 $ 520,100
---------- ---------- ----------
---------- ---------- ----------
Denominator
Denominator for basic EPS-weighted
average shares 1,439,193 1,395,397 1,349,331
Effect of Dilutive Securities
Stock options (1) 82,562 122,124 190,987
---------- ---------- ----------
Denominator for diluted EPS 1,521,755 1,517,521 1,540,318
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(1) Options to purchase 42,000 shares of common stock at prices ranging from
$7.50-$7.70 per share were outstanding during the second half of 1997 but
were not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common
shares.
15. New Accounting Standards
Reporting Comprehensive Income
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. This
Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS 130
does not require a specific format for that
17
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. The Statement requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement
of financial position. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company will
comply with the disclosure requirements of SFAS 130 in fiscal year 1998.
Disclosures about Segments of an Enterprise and Related Information
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information," effective for periods
beginning after December 15, 1997. This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers.
This Statement requires that a public business enterprise report financial
and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. This
Statement requires that a public business enterprise reports a measure of
segment profit or loss, certain specific revenue and expense items, and
segment assets and certain other related information; information about the
revenues derived from the enterprise's products or services (or groups of
similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of
whether that information is used in making operating decisions.
18
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A--SUMMARY OF ACCOUNTING POLICIES--Continued
However, this Statement does not require an enterprise to report information
that is not prepared for internal use if reporting it would be impracticable.
The Company will comply with the disclosure requirements of SFAS 131 in
fiscal year 1998.
NOTE B--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Accounts receivable
Current
U.S. Government
Billed $ 8,393,900 $ 9,403,800
Unbilled (including retentions
and indirect cost rate
variances of $1,392,300 and
$382,700 in 1997 and
$1,197,000 and $82,400
in 1996, respectively) 5,225,200 1,739,900
------------- -------------
13,619,100 11,143,700
Less reserve for unrecoverable
contract costs and doubtful
accounts (1,484,300) (2,112,800)
------------- -------------
$ 12,134,800 $ 9,030,900
------------- -------------
------------- -------------
</TABLE>
Of the December 31, 1997 billed and unbilled amounts, approximately $10 million
is expected to be collected in 1998 and the remainder in subsequent years.
19
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE B--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS--Continued
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
<S> 1997 1996
------------- -------------
<C> <C>
Equipment and leasehold improvements
Furniture and fixtures $ 2,858,600 $ 2,811,300
Machinery and equipment 3,975,900 3,486,300
Computer software 994,900 2,053,300
Equipment held under capital lease 586,600 312,600
Construction in progress 2,333,700 2,351,400
Leasehold improvements 982,900 905,300
------------- -------------
11,732,600 11,920,200
Less accumulated depreciation and
amortization (6,298,200) (6,967,600)
------------- -------------
$ 5,434,400 $ 4,952,600
------------- -------------
------------- -------------
</TABLE>
Included in machinery and equipment, and construction in progress above is
equipment with a carrying value of approximately $4.0 million which is to be
used in the Company's plastics manufacturing business. These carrying values
are based upon the Company's plans and intentions to expand its business in
this area by attracting new customers for various applications of its
patented container forming technology. If future economic conditions result
in changes in management's plans or intentions, the carrying values of the
affected assets will be reviewed and adjustments, if necessary, will be made.
Computer software consists primarily of costs associated with development of
software for internal use by the Company in its accounting and finance
function and its wide area network. Included in the amount capitalized is
approximately $575,000 in internal labor costs.
As of December 31, 1997, the aggregate net book value of leased office
equipment and certain leased assets included in construction in progress was
$2.3 million.
20
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE B--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS--Continued
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Other assets
Cash value of life insurance
policies $ 1,697,800 $ 1,453,200
Patents less accumulated amortization
of $99,200 and $82,700, respectively 216,000 224,200
Investment in a limited partnership 87,600 87,600
Deposits 77,000 67,700
Other 291,200 51,600
------------ ------------
$ 2,369,600 $ 1,884,300
------------ ------------
------------ ------------
</TABLE>
Other assets include cash values of corporate-owned participating life
insurance policies which the Company purchased as a means of investing salary
deferrals of the employees covered under the Officers and Managers' Deferred
Compensation Plan.
The Company expects to hold the related life insurance policies through terms
varying between 10 to 20 years. Earlier surrender of these policies could
cost the Company approximately $382,200 pre-tax, as a result of surrender
charges. See also Note A8.
Accounts Payable
During 1997 and 1996, included in accounts payable are $1,913,400 and
$1,879,900, resulting principally from the Company's use of zero balance bank
accounts where funds are transferred to these accounts from the Company's
line of credit when disbursements are presented for payment.
21
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE B--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS--Continued
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Accrued liabilities and Deferred credits
Accrued compensation and withholdings $ 1,821,200 $ 1,924,900
Accrued vacation 1,404,200 1,334,400
Amounts owed to certain subcontractors
and suppliers 1,093,400 1,324,300
Accrued legal expenses and commitments -- 505,600
Amounts due to related parties 428,700 373,500
Other 348,300 164,600
------------ ------------
Total accrued liabilities and deferred credits $ 5,095,800 $ 5,627,300
------------ ------------
------------ ------------
</TABLE>
NOTE C--LINE OF CREDIT
At December 31, 1997, the Company's remaining available line of credit (LOC)
through First Union Bank (formerly Signet Bank of Virginia) was $2.1 million.
The underlying credit agreement permits borrowings up to $6.0 million. The
Company has the option of paying interest on the principal amount of the
prime rate or at LIBOR (London Interbank Offered Rate) plus 2.70%. The
Company's borrowing rate at December 31, 1997 was 8.5% which was the prime
rate. All borrowings are secured by a first lien security interest in all
receivable accounts, contract rights, chattel paper, instruments, general
intangibles, equipment, inventory, and documents now owned and hereafter
acquired by the Company. The Company was in compliance with various financial
covenants, which require the maintenance of a maximum debt-to-net worth ratio
of 5 to 1 and a minimum tangible net worth of $3.0 million.
In addition to its revolving credit agreement, the Company has at its
disposal a $750,000 term loan facility which expires on March 31, 1998. As of
December 31, 1997, the Company had not borrowed any amounts on this facility.
The proceeds of the term loan are intended for the purchase of houses of
employees relocated by the Company. The entire principal amount
22
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE C--LINE OF CREDIT--Continued
of each term loan shall be due on the first to occur of (i) the sale of the
house securing such term loan and the (ii) maturity date.
As part of the borrowing arrangements, the Company is required to pay a
commitment fee of 3/8 of one percent of the average daily amount of the
unused portion of the credit facility.
The agreement provides for the issuance of letters of credit by the bank on
the Company's behalf.
The current agreement expires on May 31, 1998. Management expects the
commitment to be extended by an amendment at that time.
NOTE D--LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Notes payable
Non-interest bearing note payable, due based on the Company's proportionate share of
cash available for distribution as defined in a related partnership agreement, due
upon demand $ 10,600 $ 10,600
Capitalized lease obligations
Amounts due under capitalized lease obligations, payable in monthly installments
through 2001, collateralized by certain equipment 2,029,100 2,095,000
------------ ------------
2,039,700 2,105,600
Less current maturities (511,900) (373,200)
------------ ------------
Total long-term obligations $ 1,527,800 $ 1,732,400
------------ ------------
------------ ------------
</TABLE>
23
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE D--LONG-TERM OBLIGATIONS--Continued
The following is a schedule of future minimum lease payments under
capitalized lease obligations together with the present value of the net
minimum lease payments:
<TABLE>
<CAPTION>
Year ending December 31,
- ------------------------
<S> <C>
1998 $ 670,400
1999 613,600
2000 603,300
2001 484,800
2002 29,900
------------
Total minimum lease payments $ 2,402,000
Less amount representing interest
and taxes (372,900)
------------
Present value of minimum lease payments $ 2,029,100
------------
------------
Current portion $ 511,900
Noncurrent portion 1,517,200
------------
Capitalized lease obligations $ 2,029,100
------------
------------
</TABLE>
During 1996, the Company refinanced certain construction in progress in its
Newport News manufacturing plant under a sale/leaseback arrangement. The
machines were sold for a sum amount in excess of $2 million. The transaction
was accounted for as lease financing, wherein the property remains on the
books subject to depreciation. A financing obligation representing the
proceeds was recorded and is reduced based on payments under the lease.
24
<PAGE>
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE E--INCOME TAXES
A reconciliation of the effective tax rate and the Federal statutory income
tax rate applied to pretax income follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of Federal
income tax benefit .4 1.0 4.0
Amortization of goodwill 5.0 5.2 5.8
Other (.9) (3.3) (0.9)
Depreciation -- (13.0) --
Investment in a foreign subsidiary -- (5.4) --
--------- --------- ---------
Effective income tax rate 38.5% 18.5% 42.9%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax expense consists of the following for the year ended
December 31,
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Current $ (201,900) $ 432,700 $ 586,000
Deferred 606,500 (246,500) (195,700)
------------ ----------- -----------
Income tax expense $ 404,600 $ 186,200 $ 390,300
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
25
<PAGE>
NOTE E--INCOME TAXES--CONTINUED
The tax effect of significant temporary differences that gave rise to
deferred income taxes as of December 31, 1997:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSET LIABILITY
------------ ------------
<S> <C> <C>
Depreciation and Amortization $ $ 37,600
Retentions 537,200
Reserves against accounts
receivables 243,600
Deferred post-employment benefit 974,300
Deferred postretirement benefits 694,400
Accrued vacation 409,200
Miscellaneous 124,700
------------ ------------
Subtotal 2,446,200 574,800
Valuation allowance (262,000) --
------------ ------------
Deferred Tax $2,184,200 $ 574,800
------------ ------------
------------ ------------
</TABLE>
Based on an analysis of future operating income for the purpose of
realizing deferred tax assets, management believes that its net deferred tax
asset will be recoverable in future returns and that its valuation allowance
requires no further adjustment.
The Company's federal income tax return for 1995 is currently being
examined by the Internal Revenue Service. Management does not believe that
this or subsequent audits will have a material effect on the Company's
financial statements.
NOTE F--EMPLOYEE BENEFIT PLANS
1. PROFIT-SHARING AND PENSION PLAN
The Company has a profit-sharing plan pursuant to Section 401 of the
Internal Revenue Code, whereby participants may contribute up to 20% of their
compensation. Under the plan, the Company may make two types of
26
<PAGE>
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
contributions subject to the discretion of the Board of Directors: (1)
Employer matching contributions and (2) Profit-Sharing contributions. In
order to share in either contribution, an employee must complete 1,000 hours
of service during the Plan Year when the contribution is made. Generally,
contributions vest in the employees' accounts based on their length of
service.
During 1997, the employer contribution to the 401k plan was $221,500
compared to $103,700 for 1996. No employer contribution was made by the
Company during 1995.
2. DISCRETIONARY BONUS PLAN
Under the Officers and Managers Discretionary Bonus Plan for QuesTech and
subordinate units ("the Bonus Plan"), officers and managers of the Company
and its subsidiaries are selected by management for participation in the
Bonus Plan. Bonuses are apportioned as a percentage of the recipient's salary
and are based upon the Company's overall performance and upon the performance
of the business unit to which the recipient is assigned, subject to review
and approval by the Chief Executive Officer and/or Chief Operating Officer
and the Board of Directors.
Amounts charged to expense under this plan were $98,000, $452,200 and
$393,500 at December 31, 1997, 1996 and 1995, respectively.
3. POSTRETIREMENT BENEFITS
The Company has three separate postretirement benefit plans which fall
within the purview of SFAS 106: the Group Health Plan, the Executive Life
Insurance Plan, and the Deferred Compensation Plan.
27
<PAGE>
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
a. Group Health Plan
The Group Health Plan extends medical and dental benefit coverage to
employees, who upon retirement at the age of 65, have completed 20 years of
full-time employment with the Company, or retire with an individual employment
agreement which specifically grants coverage approved by the insurance carrier
of the subject group health policy. The Plan is contributory and contains
cost-saving features, such as deductibles and coinsurance. The accumulated
postretirement benefit obligation (APBO) represents the present value of
insurance claims expected to be presented by eligible employees during their
retirement years, based on the net premiums paid by the Company on behalf of
active employees.
For measurement purposes, the annual health care cost trend for 1997
benefits was 8%, grading down to 5% over four years. The 1% increase in health
care cost trend was 9% in 1997, grading down to 6% over four years. During 1995,
a 10% medical inflation rate was assumed, grading down to 5% over six years. The
measurement of the APBO for 1997 and 1996 was based on an assumed discount rate
of 7.5%.
b. Executive Life Insurance
The Company maintains life insurance policies, covering certain of its
officers, both former and active, through their lifetime, in accordance with
their respective employment agreements. The cost of the insurees' premiums is
treated as compensation expense.
c. Officers and Managers Deferred Compensation Plan (DEF COM)
DEF COM allows eligible employee participants to defer current compensation
and provides supplemental postretirement benefits along with certain specified
death benefits to the participants' beneficiaries. Postretirement benefits under
DEF COM are payable upon the participant's termination of employment (including
retirement), and are paid in equal installments over a period equal to the
length of time the employee deferred compensation, but no longer than ten years.
Termination or retirement benefits are based
28
<PAGE>
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
upon the employee's actual deferrals plus interest credited annually, as set
by the Administrator. Supplemental death benefits are payable in some cases
over a period of ten years provided death occurs while the employee
participant is actively employed with the Company.
The Company invests the amounts deferred by employees in life insurance
policies. Since DEF COM is a defined contribution plan, the accumulated
postretirement benefit obligation as of the transition date has been based on
the actual balances in each participant's account, which consists of
contributions and accrued interest.
The following tables present the funded status of the Company's benefit
plans and the 1997 periodic expense:
<TABLE>
<CAPTION>
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1997
---------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Accumulated Postretirement
Benefit Obligation:
Retirees $ (283,100) $ (295,400) $ (923,500) $ (1,502,000)
Fully eligible active
plan participants (65,200) -- -- (65,200)
Other Active Plan
participants (107,200) -- (1,970,900) (2,078,100)
----------- ----------- ------------- --------------
Total (455,500) (295,400) (2,894,400) (3,645,300)
Fair Value of Plan
Assets -- -- -- --
----------- ----------- ------------- --------------
APBO in excess of
plan assets: (455,500) (295,400) (2,894,400) (3,645,300)
Unrecognized
net gain/
(loss) (199,100) (4,900) 259,900 55,900
Unrecognized
Transition
Obligation 441,000 198,500 1,122,500 1,762,000
------------ ------------- ------------- --------------
Accrued postretirement
benefit cost in
the balance sheet $ (213,600) $ (101,800) $ (1,512,000) $ (1,827,400)
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
</TABLE>
29
<PAGE>
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1997
------------ ------------- -------------- --------------
<S> <C> <C> <C> <C>
Reconciliation of accrued
postretirement
benefit cost:
Accrued postretirement
benefit cost, at January 1, 1997 $ (174,300) $ (85,500) $ (1,251,900) $ (1,511,700)
Net periodic cost (60,000) (32,500) (473,600) (566,100)
Benefit payments 20,700 16,200 213,500 250,400
------------ ------------- -------------- --------------
Accrued postretirement benefit cost at
December 31, 1997 $ (213,600) $ (101,800) $ (1,512,000) $ (1,827,400)
------------ ------------- -------------- --------------
------------ ------------- -------------- --------------
Current portion (20,700) ( 16,200) (213,500) (250,400)
Long-term portion (192,900) ( 85,600) (1,298,500) (1,577,000)
------------ ------------- -------------- --------------
(213,600) (101,800) (1,512,000) (1,827,400)
------------ ------------- -------------- --------------
------------ ------------- -------------- --------------
</TABLE>
30
<PAGE>
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
The following tables present the funded status of the Company's benefit
plans and the 1996 periodic expense:
<TABLE>
<CAPTION>
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1996
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Accumulated Postretirement
Benefit Obligation:
Retirees $ (314,400) $ (298,800) $ (987,800) $ (1,601,000)
Fully eligible active plan participants (13,200) -- -- (13,200)
Other Active Plan participants (139,700) -- (1,761,900) (1,901,600)
------------ ------------ -------------- --------------
Total (467,300) (298,800) (2,749,700) (3,515,800)
Fair Value of Plan Assets -- -- -- --
------------ ------------ -------------- --------------
APBO in excess of plan assets: (467,300) (298,800) (2,749,700) (3,515,800)
Unrecognized net gain/ /loss) (177,400) 1,500 300,000 124,100
Unrecognized Transition Obligation 470,400 211,800 1,197,800 1,880,000
------------ ------------ -------------- --------------
Accrued postretirement benefit
cost in the balance sheet $ (174,300) $ (85,500) $ (1,251,900) $ (1,511,700)
------------ ------------ -------------- --------------
------------ ------------ -------------- --------------
</TABLE>
31
<PAGE>
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1996
------------ ----------- -------------- --------------
<S> <C> <C> <C> <C>
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)
------------ ----------- -------------- --------------
------------ ----------- -------------- --------------
</TABLE>
32
<PAGE>
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
The following tables represent the net periodic postretirement benefit cost
components for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1997
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Service cost $ 10,100 $ 1,300 $ 265,000 $ 276,400
Interest cost 30,400 18,000 130,800 179,200
Amortization -transition obliga. 29,400 13,200 75,300 117,900
Amortization--gain or loss (9,900) -- 2,500 (7,400)
---------- ----------- ----------- -----------
Net periodic post-retirement
benefit cost $60,000 $ 32,500 $ 473,600 $ 566,100
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Impact of One Percent
Increase in Medical
Trend Rate:
Aggregate impact on
1997 service cost and
interest cost $ 2,500
---------
---------
</TABLE>
33
<PAGE>
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Service cost $ 10,400 $ 4,300 $ 287,800 $ 302,500
Interest cost 31,800 17,700 127,100 176,600
Amortization --
transition obliga. 29,400 13,200 75,300 117,900
Amortization--gain or loss (7,600) -- 1,400 (6,200)
----------- ----------- ---------- ----------
Net periodic post-retirement
benefit cost $ 64,000 $ 35,200 $ 491,600 $ 590,800
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Impact of One Percent
Increase in Medical Trend Rate:
Aggregate impact on
1996 service cost and
interest cost $ 2,100
-----------
-----------
</TABLE>
<PAGE>
QuesTech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
GROUP EXECUTIVE DEFERRED
HEALTH LIFE COMP.
PLAN INSURANCE PLAN 1995
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Service cost $ 9,200 $ 4,000 $ 236,800 $ 250,000
Interest cost 33,900 17,200 106,400 157,500
Amortization--transition
obliga 29,400 13,200 75,300 117,900
Amortization--gain or
loss (6,000) -- 2,100 (3,900)
----------- ----------- ---------- ----------
Net periodic post-retirement
benefit cost $ 66,500 $34,400 $ 420,600 $ 521,500
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Impact of One Percent
Increase in Medical Trend
Rate:
Aggregate impact on
1995 service cost and
interest cost $ 3,300
----------
----------
</TABLE>
4. Stock Employee Compensation Trust
On February 1, 1994, the Company established a Stock Employee Compensation
Trust ("SECT") and financed the SECT's repurchase of 221,792 shares of common
stock owned by two of the Company's former founders.The Company's loan to the
SECT will be paid down from time to time as the employees exercise and pay
for their options under the Company's Incentive Stock Option Plan.At December
31, 1997 and 1996, there were 176,131 unallocated and uncommitted shares held
by the SECT.
35
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE G--OTHER LONG-TERM OBLIGATIONS
Amounts due to certain founders (no longer affiliated with the Company),
under a Confidential Settlement Agreement, are included in Other Long-Term
Obligations. Payments under the agreements will continue until 2004. During
1995, the Company entered into a similar agreement with another former
founder. Amounts under the latter agreement payable through 2006 are included
in Other Long-Term Obligations as well. The cost of the latter agreement was
included in Other Expense in the 1995 financial statements.
NOTE H--COMMITMENTS AND CONTINGENCIES
1. FUTURE MINIMUM RENTAL COMMITMENTS
The following is a schedule by years of the approximate future minimum
rental payments required under operating leases that have initial or
remaining noncancelable lease terms of one year or more as of December 31, 1996:
Year Ending December 31,
------------------------
1997 1,809,100
1998 1,723,200
1999 1,034,400
2000 884,800
2001 607,200
----------
Future minimum rental payments $6,058,700
==========
Net rent expense under operating leases amounted to approximately $2,053,400,
$1,744,000, and $1,739,900 for the years ended December 31, 1997, 1996 and
1995, respectively, after being reduced by rental income which was not
material during the last three years.
36
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE H--COMMITMENTS AND CONTINGENCIES - Continued
2. EMPLOYMENT AGREEMENTS
The Company has employment agreements with two executive officers which
stipulate salary continuation for a period of five years and two years, as a
result of voluntary or involuntary termination, regardless of the change in
control of the Company. The cost of accrued interest and the present value of
compensation changes for these agreements aggregated ($115,353 and $106,700)
during 1997 and 1996, respectively. None of these costs will be paid until
the subject officers change their employment status with the Company.
NOTE I--STOCK OPTIONS
The Company accounts for its incentive stock options under APB No. 5. The
Company has two incentive stock option plans--1994 and 1996. The 1994 and
1996 Stock Option Plans authorize the grant of up to 200,000 and 268,132
shares of the Company's common stock, respectively. These options which have
five-year terms vest at a rate of 20% per year from the date of grant. The
option price of all options granted to date represents the fair market value
of the Company's common stock at the date of grant. Options to purchase
10,000 and 72,882 shares are available for future grants under the 1994 and
1996 Plans, respectively.
Accordingly, no compensation cost has been recognized for the plan. Had
compensation cost for the plan been determined based on the fair value of the
options at the grant dates consistent with the method of SFAS 123, the
Company's net income and earnings per share would have been:
1997 1996 1995
---- ---- ----
Net Income As reported $ 645,900 $ 818,300 $ 520,100
Pro forma 527,100 705,600 419,000
Basic EPS As reported 0.45 0.59 0.39
Pro forma 0.37 0.48 0.28
Diluted EPS As reported 0.42 0.54 0.34
Pro forma 0.36 0.48 0.28
37
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE I -- STOCK OPTIONS - Continued
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995: expected
volatility of 67%, 71% and 71%, respectively; risk free interest rate of 6%;
and expected lives of four years. The pro forma effect on net income for
1997, 1996 or 1995 is not representative of the pro forma effect on net
income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1995.
A summary of the status of the Company's Incentive Stock Option Plans as of
December 31, 1997, 1996 and 1995, and changes during the years ending on
those dates is presented below.
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
-------------------- -------------------- --------------------
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 220,200 $ 4.63 277,500 $ 3.88 96,500 $ 1.82
Granted 175,500 6.99 44,000 6.90 219,000 4.41
Exercised (7,600) 4.00 (71,100) 2.21 (31,400) 1.75
Forfeited (13,800) 6.36 (30,200) 6.73 (6,600) 2.28
Outstanding at year-end 374,300 5.68 220,200 4.63 227,500 4.41
Options exercisable at year end 83,400 4.50 25,000 4.10 58,500 1.82
Weighted-average fair value of
options granted during the year 3.85 4.13 2.57
</TABLE>
38
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE I -- STOCK OPTIONS - Continued
The following information applies to options outstanding at December 31, 1997:
Number outstanding 374,300
Range of exercise prices $4.00 to $7.70
Weighted-average exercise price $5.68
Weighted-average remaining contractual life 3.61
The Company has also provided for the grant of non-qualified stock options to
the Company's non-employee directors. These options were granted to purchase
15,000 during 1996 at the stock's then fair market value, which was $7.25. Of
these options, 15,000 shares were outstanding at December 31, 1997.
39
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE J--FINANCIAL INFORMATION FOR BUSINESS SEGMENTS
The Company derived substantially all of its revenues under contracts with
agencies of the United States Government, either as a prime contractor or as
a subcontractor.
Currently, the Company operates in two industry segments: government
contracting and commercial (plastic container manufacturing). Performance
under government contracts includes scientific, engineering, and program
management services, primarily in the defense and intelligence arenas. Sales
provided by the commercial segment during 1997 were for reimbursable costs
under a small government contract and for pre-production costs reimbursable
under a contract with a Fortune 100 company.
Operating Profit/Loss is income from operations before general corporate
expense. General corporate expense consists primarily of headquarters
administrative costs and provisions for reserves and other allowances.
Identifiable assets by industry segment are those assets that are used in the
Company's operations in each industry segment. Corporate assets are
principally cash and cash equivalents, the deferred income tax asset, certain
fixed assets and leasehold improvements in the corporate office, patents, and
cash values of corporate-owned life insurance policies. Assets in the
commercial segment consist primarily of plant equipment and construction in
progress.
40
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE J--FINANCIAL INFORMATION FOR BUSINESS SEGMENTS (CONTINUED)
A summary of the Company's operations by industry segment follows:
<TABLE>
<CAPTION>
GOVERNMENT
1997 CONTRACTS COMMERCIAL CORPORATE CONSOLIDATED
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues $77,789,400 $ 686,700 $ -- $78,476,100
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Operating Profit/loss $ 5,603,500 (823,000) $(3,010,200) $ 1,770,300
Other income/expense -- -- -- --
Interest -- -- (719,800) (719,800)
----------- ----------- ----------- -----------
Earnings/loss before income
taxes $ 5,603,500 (823,000) ($3,730,000) $ 1,050,500
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Identifiable assets $17,263,600 $ 3,704,100 $ 3,001,100 $23,968,800
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Depreciation and amortization of
property, plant and equipment $ 392,200 $ 182,800 $ 430,800 $ 1,005,800
Amortization of goodwill and
other intangibles $ 143,800 $ -- $ 27,300 $ 171,100
Capital Expenditures $ 592,700 $ -- $ 908,900 $ 1,501,600
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT
1996 CONTRACTS COMMERCIAL CORPORATE CONSOLIDATED
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues $71,693,000 $ 677,100 $ -- $72,370,100
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Operating Profit/loss $ 6,290,500 $(1,813,900) $(2,893,800) $ 1,582,800
Other income/expense -- -- -- --
Interest -- -- (578,300) (578,300)
----------- ----------- ----------- -----------
Earnings/loss before income
taxes $ 6,290,500 $(1,813,900) $(3,472,100) $ 1,004,500
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Identifiable assets $12,236,700 $ 3,586,700 $ 4,794,700 $20,618,100
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
41
<PAGE>
Questech, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE J--FINANCIAL INFORMATION FOR BUSINESS SEGMENTS - Continued
<TABLE>
<S> <C> <C> <C> <C>
Depreciation and
amortization of property,
plant and equipment $ 371,400 $ 183,000 $ 200,000 $ 754,400
Amortization of goodwill and
other intangibles $ 154,500 $ -- $ 32,000 $ 186,500
Capital Expenditures $ 470,100 $ 2,615,100 $ 730,300 $ 3,815,500
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT
1995 CONTRACTS COMMERCIAL CORPORATE CONSOLIDATED
- ---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues $57,902,600 $ 48,600 $ -- $57,951,200
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Operating Profit/loss $ 6,309,100 $(1,176,100) $(3,104,700) $ 2,028,300
Other income/expense -- -- (722,100) (722,100)
Interest -- -- (395,800) (395,800)
----------- ----------- ----------- -----------
Earnings/loss before income
taxes $ 6,309,100 $(1,176,100) $(4,222,600) $ 910,400
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Identifiable assets $11,389,500 $ 1,135,400 $ 3,898,800 $16,423,700
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Depreciation and
amortization of property,
plant and equipment $ 250,700 $ 57,500 $ 199,100 $ 507,300
Amortization of goodwill and
other intangibles $ 154,500 $ -- $ 15,500 $ 170,000
Capital Expenditures $ 339,200 $ 1,212,800 $ 467,900 $ 2,019,900
</TABLE>
42
<PAGE>
SUPPLEMENTAL INFORMATION
43
<PAGE>
QuesTech, Inc. and Subsidiaries
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Reserve for unrecovered contract costs
and doubtful accounts
Balance at Beginning of Period $ 2,112,800 $ 2,053,100 $ 1,853,300
Additions:
Charged to Costs and Expenses -- 59,700 185,000
Charged to Other Accounts -- -- 17,600
Deductions: (628,500) -- (2,800)
------------ ------------ ------------
Balance at End of Period $ 1,484,300 $ 2,112,800 $ 2,053,100
------------ ------------ ------------
------------ ------------ ------------
Current $ 1,484,300(1) $ 2,112,800(1) $ 2,053,100(1)
------------ ------------ ------------
------------ ------------ ------------
Non-current $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
Valuation allowance for deferred
tax asset
Balance at Beginning of Period $ 262,000 $ 148,000 $ 148,000
Additions:
Charged to Income Tax Expense -- 114,000 --
Charged to Other Accounts -- -- --
Deductions:
Balance at End of Period $ 262,000 $ 262,000 $ 148,000
------------ ------------ ------------
------------ ------------ ------------
Current $ -- $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
Non-current $ 262,000 $ 262,000 $ 148,000(2)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(1) Included in accounts receivable--trade.
(2) Included in deferred tax asset--long-term.
44
<PAGE>
Exhibit 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Name of State of
Subsidiary Incorporation
----------- -------------
<S> <C>
QuesTech Service Company Virginia
QuesTech Packaging, Inc. Virginia
QuesTech Model Company (inactive) Virginia
QuesTech Information Sciences
Corporation (newly formed) Virginia
</TABLE>
107
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 108,500
<SECURITIES> 0
<RECEIVABLES> 13,619,100
<ALLOWANCES> 1,484,300
<INVENTORY> 69,200
<CURRENT-ASSETS> 13,584,500
<PP&E> 11,732,600
<DEPRECIATION> 6,298,200
<TOTAL-ASSETS> 23,968,800
<CURRENT-LIABILITIES> 11,722,900
<BONDS> 0
0
0
<COMMON> 82,800
<OTHER-SE> 6,621,100
<TOTAL-LIABILITY-AND-EQUITY> 23,968,800
<SALES> 300,000
<TOTAL-REVENUES> 78,476,100
<CGS> 0
<TOTAL-COSTS> 76,705,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 719,800
<INCOME-PRETAX> 1,050,500
<INCOME-TAX> 404,600
<INCOME-CONTINUING> 645,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 645,900
<EPS-PRIMARY> .45
<EPS-DILUTED> .42
</TABLE>
