PEC SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PEC SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
| | AS OF | | AS OF | |
| | SEPT. 30, | | DEC. 31, | |
| | 2001 | | 2000 | |
| | (UNAUDITED) | | | |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 66,325 | | $ | 14,655 | |
Short-term investments | | 17,499 | | 21,017 | |
Accounts receivable, net | | 28,730 | | 15,764 | |
Other current assets | | 1,590 | | 1,491 | |
Total current assets | | 114,144 | | 52,927 | |
| | | | | |
Property and equipment, net | | 3,170 | | 2,585 | |
Goodwill, net | | 2,824 | | 3,365 | |
Other assets | | 4,533 | | 2,523 | |
Total assets | | $ | 124,671 | | $ | 61,400 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | |
| | | | | |
Current liabilities: | | | | | |
Accounts payable and accrued expenses | | $ | 3,854 | | $ | 2,150 | |
Advance payments on contracts | | 1,116 | | 1,258 | |
Retirement plan contribution payable | | 851 | | 2 | |
Accrued payroll | | 4,474 | | 4,214 | |
Accrued vacation | | 1,697 | | 1,183 | |
Other current liabilities | | 1,087 | | 938 | |
Total current liabilities | | 13,079 | | 9,745 | |
| | | | | |
Long-term liabilities: | | | | | |
Supplemental retirement program liability | | 581 | | 482 | |
Deferred rent payable | | 806 | | 459 | |
Other long-term liabilities | | 5 | | 14 | |
Total long-term liabilities | | 1,392 | | 955 | |
Total liabilities | | 14,471 | | 10,700 | |
Commitments and contingencies | | | | | |
| | | | | |
Stockholders' equity: | | | | | |
Undesignated capital stock, 10,000,000 shares authorized | | -- | | -- | |
Common stock, $0.01 par value, 75,000,000 shares authorized, 25,892,908 and 22,345,440 shares issued and outstanding, respectively | | 259 | | 223 | |
Additional paid-in capital | | 78,565 | | 28,692 | |
Retained earnings | | 31,444 | | 21,779 | |
Accumulated other comprehensive income (loss) | | (68 | ) | 6 | |
Total stockholders' equity | | 110,200 | | 50,700 | |
Total liabilities and stockholders' equity | | $ | 124,671 | | $ | 61,400 | |
See notes to consolidated financial statements.
PEC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
| | THREE MONTHS ENDED | | NINE MONTHS ENDED | |
| | SEPT. 30, | | SEPT. 30, | | SEPT. 30, | | SEPT. 30, | |
| | 2001 | | 2000 | | 2001 | | 2000 | |
| | (UNAUDITED) | |
Revenues | | $ | 28,833 | | $ | 17,695 | | $ | 77,887 | | $ | 49,892 | |
Operating costs and expenses: | | | | | | | | | |
Direct costs | | 15,906 | | 9,337 | | 41,964 | | 27,267 | |
General and administrative expenses | | 6,164 | | 4,276 | | 17,254 | | 12,857 | |
Sales and marketing expenses | | 1,087 | | 935 | | 3,119 | | 2,070 | |
Amortization of goodwill | | 180 | | 76 | | 541 | | 76 | |
Total operating costs and expenses | | 23,337 | | 14,624 | | 62,878 | | 42,270 | |
Operating income | | 5,496 | | 3,071 | | 15,009 | | 7,622 | |
Other income, net | | 816 | | 673 | | 1,725 | | 1,261 | |
Income before income taxes | | 6,312 | | 3,744 | | 16,734 | | 8,883 | |
Provision for income taxes | | 2,600 | | 1,475 | | 6,894 | | 3,458 | |
Net income | | $ | 3,712 | | $ | 2,269 | | $ | 9,840 | | $ | 5,425 | |
Earnings per share: | | | | | | | | | |
Basic | | $ | 0.14 | | $ | 0.10 | | $ | 0.42 | | $ | 0.26 | |
Diluted | | $ | 0.13 | | $ | 0.09 | | $ | 0.36 | | $ | 0.22 | |
Weighted average shares used | | | | | | | | | |
in computing earnings per share: | | | | | | | | | |
Basic | | 25,840 | | 22,275 | | 23,672 | | 20,711 | |
Diluted | | 29,610 | | 25,285 | | 27,277 | | 24,140 | |
See notes to consolidated financial statements.
PEC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
| | NINE MONTHS ENDING | |
| | SEPT. 30, | | SEPT. 30, | |
| | 2001 | | 2000 | |
| | (UNAUDITED) | |
Cash flows from operating activities: | | | | | |
Net income | | $ | 9,840 | | $ | 5,425 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | | 781 | | 504 | |
Amortization of goodwill | | 541 | | 76 | |
Deferred rent payable | | 347 | | 337 | |
Deferred income taxes | | (183 | ) | -- | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable, net | | (12,966 | ) | (763 | ) |
Other current assets | | (31 | ) | (853 | ) |
Other assets | | (81 | ) | (239 | ) |
Accounts payable and accrued expenses | | 1,704 | | 746 | |
Advance payments on contracts | | (142 | ) | (1,260 | ) |
Retirement plan contribution payable | | 849 | | 757 | |
Accrued payroll | | 260 | | (1,329 | ) |
Accrued vacation | | 514 | | 267 | |
Other current liabilities | | 1,028 | | 573 | |
Supplemental retirement program liability | | 99 | | 158 | |
Other long-term liabilities | | (9 | ) | -- | |
Net cash provided by operating activities | | 2,551 | | 4,399 | |
Cash flows from investing activities: | | | | | |
Purchases of property and equipment | | (1,209 | ) | (1,283 | ) |
Net sales (purchases) of short-term investments | | 3,513 | | (17,434 | ) |
Investment in affiliate | | (1,500 | ) | -- | |
Purchase of marketable securities | | -- | | (9,469 | ) |
Purchase of subsidiary, net of cash acquired | | -- | | (1,855 | ) |
Capitalized software | | (540 | ) | (32 | ) |
Net cash provided (used) by investing activities | | 264 | | (30,073 | ) |
Cash flows from financing activities: | | | | | |
Dividends paid | | -- | | (413 | ) |
Proceeds from issuance of common stock | | 49,251 | | 28,429 | |
Common stock offering costs | | (396 | ) | (883 | ) |
Payments on notes payable | | -- | | (2,146 | ) |
Net cash provided by financing activities | | 48,855 | | 24,987 | |
Net increase (decrease) in cash | | 51,670 | | (687 | ) |
Cash and cash equivalents at beginning of period | | 14,655 | | 7,981 | |
Cash and cash equivalents at end of period | | $ | 66,325 | | $ | 7,294 | |
Income taxes paid | | $ | 6,625 | | $ | 3,371 | |
Interest paid | | $ | 3 | | $ | 143 | |
See notes to consolidated financial statements.
PEC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
1. Financial Statements
The accompanying consolidated financial statements, except for the December 31, 2000 balance sheet, are unaudited and have been prepared in accordance with accounting standards generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally in the United States have been omitted. In the opinion of management, all adjustments, consisting of normally recurring accruals, considered necessary for a fair presentation, have been included. It is suggested that these condensed financial statements be read in conjunction with the Company's audited financial statements included in the annual report on Form 10-K, as amended for the year ended December 31, 2000. The results of operations for the nine months ended September 30, 2001, are not necessarily indicative of the operating results to be expected for the full year.
2. Principles of Consolidation
The consolidated financial statements include all majority-owned or controlled subsidiaries. All significant intercompany balances and transactions have been eliminated.
3. Initial Public Offering and Follow-On Offering
The Company completed an initial public offering of common stock during April 2000. The Company sold 3,000,000 shares of common stock generating $25.6 million in proceeds to the Company, net of offering expenses. The Company completed a follow-on offering of common stock during June 2001. On June 27, 2001, the Company sold 3,000,000 shares of common stock, which closed on July 3, 2001. The Company generated $47.7 million in proceeds net of offering expenses.
4. Accounts Receivable
Accounts receivable consist of the following as of:
| | SEPTEMBER 30, 2001 | | DECEMBER 31, 2000 | |
| | (DOLLARS IN THOUSANDS) | |
Billed accounts receivable | | $ | 26,739 | | $ | 14,597 | |
Unbilled accounts receivable | | 3,285 | | 2,449 | |
Progress payments | | (1,116 | ) | (1,104 | ) |
| | 28,908 | | 15,942 | |
Allowance for doubtful accounts | | (178 | ) | (178 | ) |
Accounts receivable, net | | $ | 28,730 | | $ | 15,764 | |
Unbilled accounts receivable comprise recognized recoverable costs and accrued profits on contracts for which billings had not been presented to clients as of the balance sheet date. Management anticipates the collection of these amounts within 90 days of the balance sheet date. Payments to the Company on contracts with agencies and departments of the U.S. Government are subject to adjustment upon audit by the U.S. Government. All years subsequent to 1997 are subject to U.S. Government audit. Management believes the effect of audit adjustments, if any, on periods not yet audited, will not have a material effect on the financial statements.
5. Acquisition
On August 28, 2000, the Company acquired all of the outstanding capital stock of Viking Technology, Inc. ("Viking") for $2 million cash plus the assumption of debt in a business combination accounted for as a purchase. Viking is a provider of integrated software and advanced technology solutions for state and local law enforcement, fire and emergency medical service agencies. The excess of purchase price over the fair value of the net assets was approximately $3.6 million. At the time of the acquisition, Viking had 20 employees. Proforma results of operations, had the acquisition occurred on January 1, 2000, would not have been materially different than reported results for the three and nine months ended September 30, 2000.
6. Net Income Per Share
Basic and diluted earnings per share for the three months and nine months ended September 30, 2001 and 2000 were determined as follows:
| | THREE MONTHS ENDED SEPTEMBER 30,
2000 | | NINE MONTHS ENDED SEPTEMBER 30,
2000 | |
| | (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) | |
| | NET | | NET | | | | NET | | | | | |
| | INCOME | | SHARES | | PER SHARE | | INCOME | | SHARES | | PER SHARE | |
Basic EPS | | 2,269 | | 22,274,991 | | $ | 0.10 | | $ | 5,425 | | 20,711,124 | | $ | 0.26 | |
Effect of dilutive options | | -- | | 3,010,351 | | (0.01 | ) | -- | | 3,428,451 | | (0.04 | ) |
Diluted EPS | | $ | 2,269 | | 25,285,342 | | $ | 0.09 | | $ | 5,425 | | 24,139,575 | | $ | 0.22 | |
| | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED SEPTEMBER 30,
2001 | | NINE MONTHS ENDED SEPTEMBER 30,
2001 | |
| | (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) | |
| | NET | | | | | | NET | | | | | |
| | INCOME | | SHARES | | PER SHARE | | INCOME | | SHARES | | PER SHARE | |
Basic EPS | | $ | 3,712 | | 25,839,536 | | $ | 0.14 | | $ | 9,840 | | 23,672,101 | | $ | 0.42 | |
Effect of dilutive options | | -- | | 3,770,255 | | (0.01 | ) | -- | | 3,604,826 | | (0.06 | ) |
Diluted EPS | | $ | 3,712 | | 29,609,791 | | $ | 0.13 | | $ | 9,840 | | 27,276,927 | | $ | 0.36 | |
7. Comprehensive Income (Loss)
Other comprehensive loss, consisting of unrealized losses on securities, net of taxes, were ($58,000) and ($74,000) for the three and nine months ended September 30, 2001. There were no unrealized gains or losses recorded for the three and nine months ended September 30, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
PEC Solutions is a professional services firm specializing in high-end solutions that help government organizations capitalize on the Internet and other advanced technologies. We migrate paper-intensive procedures to web-enabled processes using eGovernment solutions that help our clients enhance their productivity and improve the services they offer to the public. As a total solutions provider, we address the full technology lifecycle, including formulating technology strategies, creating business solutions, performing long-term operational management and continuing enhancement of the solution.
We derive substantially all of our revenues from fees for consulting services. We generate these fees from various types of contracts, including time and materials contracts, fixed-price contracts and cost-reimbursable contracts. During the three months and nine months ended September 30, 2001, revenues from these contract types were approximately 66%, 10% and 24%, and 73%, 13% and 14% respectively, of total revenues. We typically issue invoices monthly to manage outstanding accounts receivable balances. We recognize revenues on time and materials contracts as the services are provided. We recognize revenues on fixed-price contracts using the percentage of completion method as services are performed over the life of the contract, based on the costs we incur in relation to the total estimated costs. We recognize and make provisions for any anticipated contract losses at the time we know and can estimate them. Fixed-price contracts are attractive to clients and, while subject to increased risks, provide opportunities for increased margins. We recognize revenues on cost-reimbursable contracts as services are provided. These revenues are equal to the costs incurred in providing these services plus a proportionate amount of the fee earned. We have historically recovered all of our costs on cost-reimbursable contracts, which means we have lower risk and our margins are lower on these contracts.
Our historical revenue growth is attributable to various factors, including an increase in the size and number of projects for existing and new clients. Existing clients from the previous year generated approximately 64% and 71% of our revenues in the three months and nine months ended September 30 2001, respectively. As of September 30, 2001, we had 871 personnel.
In the three months and nine months ended September 30, 2001, we derived approximately 48% and 43% respectively, of our revenues through relationships with prime contractors, who contract directly with the end-client and subcontract with us. In most of these engagements, we retain full responsibility for the end-client relationship and direct and manage the activities of our contract staff.
Our most significant expense is direct costs, which consist primarily of project personnel salaries and benefits, and direct expenses incurred to complete projects. Our direct costs as a percentage of revenues are also related to the utilization rate of our consulting personnel. We manage utilization by frequently monitoring project requirements and timetables. The number of consulting personnel assigned to a project will vary according to the size, complexity, duration and demands of the project.
General and administrative expenses consist primarily of costs associated with our executive management, finance and administrative groups, human resources, unassigned consulting personnel, personnel training, occupancy costs, depreciation and amortization, travel and all other branch and corporate costs.
Sales and marketing expenses include the costs of sales and marketing personnel and costs associated with marketing and bidding on future projects.
Other income consists primarily of interest income earned on our cash, cash equivalents and short-term investments.
Results of Operations
The following table sets forth certain financial data as a percentage of revenues for the periods indicated.
| | THREE MONTHS ENDED | | NINE MONTHS ENDED | |
| | SEPTEMBER 30, | | SEPTEMBER 30, | | SEPTEMBER 30, | | SEPTEMBER 30, | |
| | 2001 | | 2000 | | 2001 | | 2000 | |
| | (DOLLARS IN THOUSANDS) | |
Statement of Income: | | | | | | | | | |
Revenues | | $ | 28,833 | | $ | 17,695 | | $ | 77,887 | | $ | 49,892 | |
Direct costs | | 15,906 | | 9,337 | | 41,964 | | 27,267 | |
Gross profit (a) | | 12,927 | | 8,358 | | 35,923 | | 22,625 | |
Other operating costs and expenses: | | | | | | | | | |
General and administrative expenses | | 6,164 | | 4,276 | | 17,254 | | 12,857 | |
Sales and marketing expenses | | 1,087 | | 935 | | 3,119 | | 2,070 | |
Amortization of goodwill | | 180 | | 76 | | 541 | | 76 | |
Total other operating costs and expenses | | 7,431 | | 5,287 | | 20,914 | | 15,003 | |
Operating income | | 5,496 | | 3,071 | | 15,009 | | 7,622 | |
Other income, net | | 816 | | 673 | | 1,725 | | 1,261 | |
1Income before income taxes | | 6,312 | | 3,744 | | 16,734 | | 8,883 | |
Provision for income taxes | | 2,600 | | 1,475 | | 6,894 | | 3,458 | |
Net income | | $ | 3,712 | | $ | 2,269 | | $ | 9,840 | | $ | 5,425 | |
As a Percentage of Revenues: | | | | | | | | | |
| | | | | | | | | |
Revenues | | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Direct costs | | 55.1 | | 52.8 | | 53.9 | | 54.7 | |
Gross profit (a) | | 44.9 | | 47.2 | | 46.1 | | 45.3 | |
Other operating costs and expenses: | | | | | | | | | |
General and administrative expenses | | 21.4 | | 24.1 | | 22.1 | | 25.8 | |
Sales and marketing expenses | | 3.8 | | 5.3 | | 4.0 | | 4.1 | |
Amortization of goodwill | | 0.6 | | 0.4 | | 0.7 | | 0.1 | |
| | | | | | | | | |
Total other operating costs and expenses | | 25.8 | | 29.8 | | 26.8 | | 30.0 | |
Operating income | | 19.1 | | 17.4 | | 19.3 | | 15.3 | |
Other income, net | | 2.8 | | 3.8 | | 2.2 | | 2.5 | |
Income before income taxes | | 21.9 | | 21.2 | | 21.5 | | 17.8 | |
Provision for income taxes | | 9.0 | | 8.3 | | 8.9 | | 6.9 | |
Net income | | 12.9 | % | 12.9 | % | 12.6 | % | 10.9 | % |
(a) Gross profit represents revenues less direct costs, which consist primarily of project personnel salaries and benefits and direct expenses incurred to complete projects.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2000
REVENUES. For the three months ended September 30, 2001, our total revenues increased by 62.9%, or $11.1 million over the same period last year. The increase in revenues primarily reflects an increase in the volume of services to existing clients and services to new clients. Services to new clients represent approximately 36% of revenues.
DIRECT COSTS. For the three months ended September 30, 2001, direct costs increased by 70.4%, or $6.6 million, over the same period last year. The increase was due primarily to an increase in project personnel to 769 as of September 30, 2001 as compared to 428 as of September 30, 2000. Direct costs increased as a percentage of revenues for the period ended September 30, 2001, to 55.1% as compared to 52.8% in the same period last year, due to normal fluctuations in labor and other direct costs and the mix of contract types during the applicable periods.
GROSS PROFIT. Gross profit increased by 54.7% to $12.9 million in the three months ended September 30, 2001 from $8.4 million in the three months ended September 30, 2000. Gross profit as a percentage of revenues decreased to 44.9% in the three months ended September 30, 2001 from 47.2% in the three months ended September 30, 2000, as direct costs grew at a higher rate than revenues due to normal fluctuations in labor and other direct costs and the mix of contract types during the applicable periods .
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 44.2% to $6.2 million in the three months ended September 30, 2001 from $4.3 million in the three months ended September 30, 2000. Facility costs increased in the current quarter over last year due to the opening of new offices in Fairfax, Virginia, Norfolk, Virginia, San Antonio, TX and San Diego CA. Our total general and administrative headcount increased to 102 employees as of September 30, 2001 compared to 74 employees as of September 30, 2000, consistent with our plans.
SALES AND MARKETING. Sales and marketing expenses increased 16.3% to $1.1 million in the three months ended September 30, 2001 from $0.9 million in the three months ended September 30, 2000. This increase was due to an increase in our marketing efforts.
AMORTIZATION OF GOODWILL. In the three months ended September 30, 2001, we incurred $180,000 of amortization expense compared to $76,000 of amortization expense in the three months ended September 30, 2000 related to the $3.6 million of goodwill we recorded in connection with the August 2000 acquisition of Viking.
OPERATING INCOME. Operating income increased 79.0% to $5.5 million in the three months ended September 30, 2001 from $3.1 million in the three months ended September 30, 2000. This increase was due primarily to revenue increasing at a faster rate than cost.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2000
REVENUES. For the nine months ended September 30, 2001, our total revenues increased by 56.1%, or $28.0 million over the same period last year. The increase in revenues primarily reflects an increase in the volume of services to existing clients and services to new clients. Services to new clients represent approximately 29% of revenues.
DIRECT COSTS. For the nine months ended September 30, 2001, direct costs increased by 53.9%, or $14.7 million, over the same period last year. The increase was due primarily to an increase in project personnel to 769 as of September 30, 2001 as compared to 428 as of September 30, 2000. Direct costs decreased as a percentage of revenues for the period ended September 30, 2001, to 53.9% as compared to 54.7% in the same period last year, due to normal fluctuations in labor and other direct costs.
GROSS PROFIT. Gross profit increased by 58.8% to $35.9 million in the nine months ended September 30, 2001 from $22.6 million in the nine months ended September 30, 2000. Gross profit as a percentage of revenues increased to 46.1% in the nine months ended September 30, 2001 from 45.3% in the nine months ended September 30, 2000, as direct costs grew at a slower rate than revenues due to normal fluctuations in labor and other direct costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 34.2% to $17.3 million in the nine months ended September 30, 2001 from $12.9 million in the nine months ended September 30, 2000. Facility costs increased in the current period over last year due to the opening of new offices in Fairfax, Virginia, Norfolk, VA, San Antonio, TX and San Diego, CA. Our total general and administrative headcount increased to 102 employees as of September 30, 2001 compared to 74 employees as of September 30, 2000, consistent with our plans.
SALES AND MARKETING. Sales and marketing expenses increased 50.7% to $3.1 million in the nine months ended September 30, 2001 from $2.1 million in the nine months ended September 30, 2000. This increase was due to an increase in our marketing efforts.
AMORTIZATION OF GOODWILL. In the nine months ended September 30, 2001, we incurred $541,000 of amortization expense compared to $76,000 of amortization expense for the nine months ended September 30, 2000 related to the $3.6 million of goodwill we recorded in connection with the August 2000 acquisition of Viking.
OPERATING INCOME. Operating income increased 96.9% to $15.0 million in the nine months ended September 30, 2001 from $7.6 million in the nine months ended September 30, 2000. This increase was due primarily to revenue increasing at a faster rate than cost.
Our revenues and operating results may be subject to significant variation from quarter to quarter depending on a number of factors, including the progress of contracts, revenues earned on contracts, the number of billable days in a quarter, the timing of the pass-through of other direct costs, the commencement and completion of contracts during any particular quarter, the schedule of the government agencies for awarding contracts, the term of each contract that we have been awarded and general economic conditions. Because a significant portion of our expenses, such as personnel and facilities costs, are fixed in the short term, successful contract performance and variation in the volume of activity as well as in the number of contracts commenced or completed during any quarter may cause significant variations in operating results from quarter to quarter.
The federal government's fiscal year ends September 30. If a budget for the next fiscal year has not been approved by that date, our clients may have to suspend engagements that we are working on until a budget has been approved. Such suspensions may cause us to realize lower revenues in the fourth quarter of the year. Further, a change in Presidential administrations and in senior government officials may affect the rate at which the federal government purchases technology, although we have not seen an impact with the 2001 change in administration.
As a result of the factors above, period to period comparisons of our revenues and operating results may not be meaningful. You should not rely on these comparisons as indicators of future performance as no assurances can be given that quarterly results will not fluctuate, causing a material adverse effect on our operating results and financial condition.
Liquidity and Capital Resources
Prior to the IPO and follow-on offering, we funded our operations primarily through cash generated from operations and the sale of common stock to employees. Net cash provided by operating activities was $2.6 million for the nine months ended September 30, 2001. Cash provided by operating activities was primarily from net income, adjusted for working capital changes, which were principally increases in accounts receivable.
Net cash provided by investing activities was $0.3 million for the nine months ended September 30, 2001. During the nine months ended September 30, 2001, we purchased $1.2 million of property and equipment and incurred $0.5 million for capitalized software development costs. We had $3.5 million of net sales of short-term investments and invested $1.5 million in an affiliated company, which is building our new office building in Fairfax, Virginia. We have a 48% interest in this company.
Net cash provided by financing activities was $49.2 million from the sale of 3,000,000 shares of common stock in a follow-on offering in June 2001 and the sale of common stock to employees upon the exercise of their stock options for the nine months ended September 30, 2001. We paid $0.4 million of costs associated with the June 2001 offering of common stock in the nine months ended September 30, 2001.
Although dividends have been paid in prior years, including $0.4 million in the nine months ended September 30, 2000, which were accrued at December 31, 1999, we expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any further cash dividends in the foreseeable future.
We believe that our current cash position is adequate for our short-term and long-term working capital and capital expenditure needs.
We maintain a $6.0 million line of credit with Bank of America, bearing interest at the LIBOR Rate plus 250 basis points per annum, which expires on April 30, 2003. As of September 30, 2001, we had no borrowings outstanding under the line of credit. As of September 30, 2001, we had outstanding $3.09 million in letters of credit in lieu of rent deposits.
Under some of our fixed-price contracts, we receive advance payments for work to be performed in future months. If we do not perform the work, the unearned portion of these advances will be returned to our clients. At September 30, 2001, our accounts receivable turnover rate, net of advance payments on contracts, was approximately four times a year. This rate has decreased over the last eight quarters.
Recent Accounting Pronouncements
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142) was issued July 20, 2001. FAS 142 provides guidance on the treatment of goodwill and other intangible assets, and is effective for fiscal years beginning after December 15, 2001. Upon the adoption of FAS 142, goodwill and other intangible assets that have indefinite useful lives will not be amortized, but rather will be tested at least annually for impairment. We will adopt FAS 142 effective January 1, 2002, and discontinue quarterly amortization of goodwill of $180,000, related to the Viking acquisition.
In August 2001, the Financial Accounting Standards Board (FASB) issued FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. FAS 144 provides guidance on the accounting for the impairment or disposal of long-lived assets. FAS 144 supercedes FAS 121 and applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business. FAS 144 is effective for financial statements issued for fiscal years after December 15, 2001 and, generally, its provisions are to be applied prospectively. The Company will adopt FAS 144 effective January 1, 2002 and does not expect any financial impact.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
The matters discussed in this Form 10-Q include forward-looking statements that involve risks or uncertainties. While forward-looking statements are sometimes presented with numerical specificity, they are based on various assumptions made by management regarding future circumstances over many of which we have little or no control. Forward-looking statements may be identified by words including "anticipate," "believe," "estimate," "expect" and similar expressions. We caution readers that forward-looking statements, including without limitation, those relating to our future business prospects, revenues, working capital, liquidity, and income, are subject to certain risks and uncertainties that would cause actual results to differ materially from those indicated in the Forward-Looking Statements. Factors that could cause actual results to differ from Forward-Looking Statements include the concentration of our revenues from government clients, risks involved in contracting with the government, difficulties we may have in attracting, retaining and managing professional and administrative staff, fluctuations in quarterly results, risks related to acquisitions, risks related to competition and our ability to continue to win and perform efficiently on contracts, and other risks and factors identified from time to time in our reports filed with the SEC, including those identified under the section entitled "Risk Factors" in our Registration Statement on Form 10-K (SEC File No. 000-30271) as amended which hereby is incorporated by reference. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We invest our cash in a variety of financial instruments, including U.S. Treasury and Agency obligations, money market instruments of domestic and foreign issuers denominated in U.S. dollars of commercial paper, bankers' acceptances, certificates of deposit, euro-dollar time deposits and variable rate issues, corporate note and bonds, asset-backed securities, repurchase agreements, municipal notes and bonds and auction rate preferred securities.
Investments in both fixed and floating rate interest earning instruments carry a degree of interest rate risk. Fixed securities may have their fair market value adversely impacted because of a rise in interest rates, while floating rare securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations because of changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have seen a decline in market value because of changes in interest rates.
Our investments are made in accordance with an investment policy approved by the Board of Directors. Under this policy, no investment securities can have maturities exceeding one year and the average duration of the portfolio can not exceed nine months.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In April 2000, we commenced and completed a firm commitment underwritten initial public offering of 3,000,000 shares of our common stock at a price of $9.50 per share. The shares were registered with the Securities and Exchange Commission pursuant to a registration statement on Form S-1 (No. 333-95331), which was declared effective on April 19, 2000. The public offering was underwritten by a syndicate of underwriters led by Donaldson, Lufkin & Jenrette Securities Corporation; Chase Securities Inc.; Legg Mason Wood Walker, Incorporated; and DLJDIRECT Inc. as their representatives. After deducting underwriting discounts and commissions of approximately $2 million and expenses of approximately $0.9 million, we received net proceeds of $25.6 million.
The primary purposes of this offering were to create a public market for our common stock, to improve the incentive mechanism for our professionals through stock options, to obtain additional equity capital and to facilitate future access to public markets. We expect to use the net proceeds from this offering for general corporate purposes, including working capital. On August 28, 2000, we acquired all of the outstanding capital stock of Viking for $2 million cash plus the assumption of debt in a business combination accounted for as a purchase. Viking is a provider of integrated software and advanced technology solutions for state and local law enforcement, fire and emergency medical service agencies. Management will have broad discretion in the allocation of the net proceeds. From time-to-time, we may also use a portion of the net proceeds to acquire businesses, products and technologies that are complementary to ours. We do not currently have any agreements with respect to any such acquisitions. Pending their use, the proceeds of this offering have been invested in short-term, investment grade, interest-bearing securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6 (A) EXHIBITS
EXHIBIT | | |
NUMBER | | EXHIBIT DESCRIPTION |
3.1* | | Certificate of Incorporation |
3.2* | | By-Laws |
10.1* | | Office Lease Agreement between Building IV Associates L.P. and the Registrant |
10.2* | | Amendment No. 1 to Office Lease Agreement between Building IV Associates L.P. and the Registrant |
10.3* | | Office Lease Agreement between Building V Associates L.P. and the Registrant |
10.4* | | Employment Agreement between the Registrant and David C. Karlgaard, dated January 1, 2000 |
10.5* | | Employment Agreement between the Registrant and Paul G. Rice, dated January 1, 2000 |
10.6* | | Employment Agreement between the Registrant and Alan H. Harbitter, dated January 1, 2000 |
10.7* | | Employment Agreement between the Registrant and Stuart R. Lloyd, dated December 31, 1998 |
10.8* | | 2000 Stock Incentive Plan |
10.9* | | 1995 Nonqualified Stock Option |
10.10* | | 1987 Stock Option Agreement, as amended |
10.11* | | Nonqualified Executive Supplemental Retirement Program Agreement dated December 1998 |
10.12* | | 2000 Employee Stock Option Plan |
10.13* | | Amended and Restated Loan Agreement between the Registrant and NationsBank, N.A. |
10.14** | | Amendment No. 2 to Office Lease Agreement between Building IV Associates L.P. and PEC Solutions, Inc. |
10.15** | | Amendment No. 3 to Office Lease Agreement between Building IV Associates L.P. and PEC Solutions, Inc. |
10.16** | | Office Lease Agreement between Building VI L.C. and PEC Solutions, Inc. |
10.17*** | | First Amendment to Lease Agreement between Building VI L.C. and PEC Solutions, Inc. |
10.18*** | | Second Amendment to Lease Agreement between Building VI L.C. and PEC Solutions, Inc. |
10.19*** | | Operating Agreement between Building VI Investment L.C. And PEC Solutions, Inc. |
10.20*** | | First Amendment to Operating Agreement between Building VI Investment L.C. and PEC Solutions, Inc. |
10.21*** | | Bank of America Financing and Security Agreement |
10.22*** | | Bank of America Promissory Note |
10.23*** | | Bank of America Revolving Note |
21.1** | | Subsidiaries of PEC Solutions, Inc. |
* Incorporated herein by reference to the Company's Registration Statement on
Form S-1, No. 333-95331.
** Incorporated herein by reference to the Company's Annual Report on Form
10K/A filed on April 19, 2001.
*** Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the quarter period ended June 30, 2001, filed on August 13, 2001.
(b) Reports on Form 8-K
None.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
| BY: /s/ STUART R. LLOYD |
DATE: NOVEMBER 12, 2001 | STUART R. LLOYD |
| CHIEF FINANCIAL OFFICER, SENIOR |
| VICE PRESIDENT AND DIRECTOR |
| (PRINCIPAL FINANCIAL AND |
| ACCOUNTING OFFICER) |
