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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 - 0001
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Form 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
Or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-30271
PEC SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1339972
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12750 FAIR LAKES CIRCLE, FAIRFAX, VA 22033
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 679-4900
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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 the
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 1, 2000, 22,295,070 of the registrant's Common Stock, par
value $.01 per share, were outstanding.
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PEC SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -- September 30, 2000 and December 31, 1999................. 3
Consolidated Statements of Income -- Three months and nine months ended September
30, 2000 and 1999................................................................ 4
Consolidated Statements of Cash Flows -- Nine months ended September 30, 2000
and 1999........................................................................ 5
Notes to Consolidated Financial Statements.............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 8
Item 3. Qualitative and Quantitative Disclosure about Market Risk...................... 13
PART II. OTHER INFORMATION
Items 1 -- 6........................................................................... 14
Signatures............................................................................. 16
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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,
2000 1999
---------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 7,294 $ 7,981
Short-term investments .......................... 17,434 --
Accounts receivable, net ........................ 14,448 13,241
Other current assets ............................ 1,785 924
------- -------
Total current assets ................................. 40,961 22,146
Property and equipment, net .......................... 2,401 1,507
Marketable securities 9,469 --
Goodwill, net 4,524 --
Other assets ......................................... 1,860 747
------- -------
Total assets ......................................... $59,215 $24,400
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........... $ 3,430 $ 2,425
Advance payments on contracts ................... 1,250 1,473
Dividends payable ............................... -- 413
Retirement plan contribution payable ............ 757 --
Accrued payroll ................................. 2,084 3,249
Accrued vacation ................................ 1,239 903
Other current liabilities ....................... 613 373
------- -------
Total current liabilities ............................ 9,373 8,836
Long-term liabilities:
Supplemental retirement program liability ....... 439 281
Deferred rent payable ........................... 337 --
Other long-term liabilities 15 --
------- -------
Total long-term liabilities .......................... 791 281
------- -------
Total liabilities .................................... 10,164 9,117
======= =======
Commitments and contingencies:
Stockholders' equity
Undesignated capital stock, 10,000,000 shares
authorized ................................ -- --
Common stock, $0.01 par value, 75,000,000 shares
authorized, 22,288,170 and 17,706,372 shares
issued and outstanding, respectively ....... 223 177
Additional paid-in capital ...................... 28,584 601
Retained earnings ............................... 20,244 14,505
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Total stockholders' equity ........................... 49,051 15,283
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Total liabilities and stockholders' equity ........... $59,215 $24,400
======= =======
See notes to consolidated financial statements.
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PEC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ ----------------
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
2000 1999 2000 1999
(Unaudited)
Revenues ................................... $17,695 $13,394 $49,892 $38,593
------- ------- ------- -------
Operating costs and expenses:
Direct costs .......................... 9,337 7,618 27,267 22,069
General and administrative expenses ... 4,276 2,759 12,857 8,797
Sales and marketing expenses .......... 935 549 2,070 1,455
Amortization of goodwill 76 -- 76 --
------- ------- ------- -------
Total operating costs and expenses 14,624 10,926 42,270 32,321
------- ------- ------- -------
Operating income ........................... 3,071 2,468 7,622 6,272
Other income, net .......................... 673 63 1,261 141
------- ------- ------- -------
Income before income taxes ................. 3,744 2,531 8,883 6,413
Provision for income taxes ................. 1,475 962 3,458 2,437
------- ------- ------- -------
Net income ................................. $ 2,269 $ 1,569 $ 5,425 $ 3,976
======= ======= ======= =======
Earnings per share:
Basic ................................. $ 0.10 $ 0.09 $ 0.26 $ 0.23
======= ======= ======= =======
Diluted ............................... $ 0.09 $ 0.08 $ 0.22 $ 0.20
======= ======= ======= =======
Weighted average shares used in
computing earnings per share:
Basic ................................. 22,275 17,039 20,711 17,057
======= ======= ======= =======
Diluted ............................... 25,285 20,113 24,140 20,019
======= ======= ======= =======
See notes to consolidated financial statements.
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PEC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDING
-------------------------
SEPT 30, SEPT 30,
2000 1999
(Unaudited)
Cash flows from operating activities:
Net income ..................................................... $ 5,425 $ 3,976
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 504 536
Deferred rent ............................................. 337 --
Gain/(loss) on disposal of assets -- 3
Amortization of goodwill 76 --
Changes in operating assets and liabilities:
Accounts receivable, net .................................. (763) 966
Other current assets ...................................... (853) 5
Other assets .............................................. (239) (189)
Accounts payable and accrued expenses ..................... 746 179
Advance payments on contracts ............................. (1,260) (14)
Retirement plan contribution payable ...................... 757 (733)
Accrued payroll ........................................... (1,329) (554)
Accrued vacation .......................................... 267 202
Other current liabilities ................................. 573 (103)
Supplemental retirement program liability ................. 158 127
-------- --------
Net cash provided by operating activities ............. 4,399 4,401
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ....................... (1,283) (540)
Capitalized software....................................... (32) --
Proceeds from sale of property and equipment ............. -- 6
Purchases of short-term investments, net .................. (17,434) --
Purchases of marketable securities ........................ (9,469) --
Purchase of subsidiary, net of cash acquired .............. (1,855) --
-------- --------
Net cash used by investing activities ................. (30,073) (534)
-------- --------
Cash flows from financing activities:
Dividends paid ............................................ (413) (348)
Proceeds from issuance of common stock .................... 28,429 199
Repurchases of common stock ............................... -- (1,291)
Common stock offering costs ............................... (883) --
Proceeds from notes payable ............................... -- 830
Payments on notes payable ................................. (2,146) (631)
-------- --------
Net cash provided (used) by financing activities .... 24,987 (1,241)
-------- --------
Net increase (decrease) in cash ..................................... (687) 2,626
Cash and cash equivalents at beginning of period .................... 7,981 5,367
-------- --------
Cash and cash equivalents at end of period .......................... $ 7,294 $ 7,993
======== ========
Income taxes paid ................................................... $ 3,371 $ 2,475
======== ========
Interest paid ....................................................... $ 143 $ 33
======== ========
See notes to consolidated financial statements.
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PEC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. Financial Statements
The accompanying consolidated financial statements, except for the December
31, 1999 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 for the years ended December 31, 1998
and 1999 and for each of the three years in the period ended December 31, 1999
included on Form S-1, as amended, as filed with the Securities and Exchange
Commission. The results of operations for the three months and nine months ended
September 30, 2000, 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
The Company completed an initial public offering of common stock during
April 2000. The Company sold 3,000,000 shares of common stock generating $25,605
million in proceeds to the Company, net of offering expenses.
4. Accounts Receivable
Accounts receivable consist of the following as of:
SEPTEMBER 30, DECEMBER 31,
2000 1999
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(Dollars in thousands)
Billed accounts receivable $ 12,754 $ 11,854
Unbilled accounts receivable 2,222 2,225
Progress payments (350) (645)
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14,626 13,434
Allowance for doubtful accounts (178) (193)
----------- -----------
Accounts receivable, net $ 14,448 $ 13,241
=========== ===========
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 1995 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.
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5. Acquisitions
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 leading 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 $4.6 million. The fair value of the assets acquired and
liabilities assumed has been based on preliminary estimates and may be revised
at a later date.
6. Goodwill
Goodwill represents the excess purchase price paid over the fair value of
the net assets acquired in the acquisition of Viking. The amortization of
goodwill is provided on a straight-line basis over a 5-year period. Accumulated
amortization of goodwill was $76,000 at September 30, 2000. Management regularly
evaluates its accounting for goodwill by comparing the estimated future
undiscounted operating cash to the carrying value, and believes that the asset
is realizable and the amortization period remains appropriate.
7. Software Research and Development Costs
The Company capitalizes research and development costs for marketable
software incurred from the time the product is determined to be technologically
feasible. It has also acquired marketable software which it has capitalized.
Acquired software and software development costs are amortized using the
straight-line method over a period of three years, but not exceeding the
expected life of the product.
The carrying value of software development costs is regularly reviewed by
management, and a loss is recognized when the value of estimated undiscounted
cash flows related to the asset falls below the unamortized cost.
8. Net Income Per Share
Basic and diluted earnings per share for the three months and nine months
ended September 30, 1999 and 2000 were determined as follows:
Three Months Ended September 30, 1999 Nine Months Ended September 30,1999
(Dollars in thousands, except for per share amounts)
-------------------------------- ------------------------------
Net Shares Per Share Net Shares Per Share
Income Income
---------- ---------- --------- ---------- ---------- ---------
Basic EPS ................ $ 1,569 17,038,556 $ 0.09 $ 3,976 17,056,644 $ 0.23
Effect of dilutive options -- 3,074,017 (0.01) -- 2,962,125 (0.03)
---------- ---------- -------- ---------- ---------- --------
Diluted EPS .............. $ 1,569 20,112,573 $ 0.08 $ 3,976 20,018,769 $ 0.20
========== ========== ======== ========== ========== ========
Three Months Ended September 30, 2000 Nine Months Ended September 30,2000
(Dollars in thousands, except for per share amounts)
-------------------------------- ------------------------------
Net Shares Per Share Net Shares Per Share
Income Income
---------- ---------- --------- ---------- ---------- ---------
Basic EPS ................ $ 2,269 22,274,911 $ 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
========== ========== ======== ========== ========== ========
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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.
As part of our growth strategy, we have completed our acquisition of Viking
Technology, Inc. ("Viking") on August 28, 2000. The business combination was
accounted for as a purchase. See "Acquisitions".
We derive substantially all of our revenues from fees for consulting
services. We generate these fees from contracts with various payment
arrangements, including time and materials contracts, fixed-price contracts and
cost-reimbursable contracts. During the three months and nine months ended
September 30, 2000, revenues from these contract types were approximately 69%,
19% and 12%, and 66%, 22% and 12%, 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 93% and 95% of
our revenues in the three months and nine months ended September 30, 2000,
respectively. As of September 30, 2000, we had 502 employees, including 20
Viking employees.
In the three months and nine months ended September 30, 2000, we derived
approximately 24% and 36%, 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 employees. We manage utilization by
frequently monitoring project requirements and timetables. The number of
consulting employees 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 employees, employee 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 marketable securities.
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Acquisitions
On August 28, 2000, the Company 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 leading provider of
integrated software and advanced technology solutions to 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 $4.6
million. The fair value of the assets acquired and liabilities assumed has been
based on preliminary estimates and may be revised at a later date. At the time
of the acquisition, Viking had 20 employees.
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
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SEPT 30, SEPT 30, SEPT 30, SEPT 30,
2000 1999 2000 1999
(Dollars in thousands)
Statement of Income:
Revenues ........................................ $ 17,695 $ 13,394 $ 49,892 $ 38,593
Direct costs .................................... 9,337 7,618 27,267 22,069
---------- ---------- ---------- ----------
Gross profit (a) ................................ 8,358 5,776 22,625 16,524
---------- ---------- ---------- ----------
Other operating costs and expenses
General and administrative expenses ............. 4,276 2,759 12 857 8,797
Sales and marketing expenses .................... 935 549 2,070 1,456
Amortization of goodwill ........................ 76 -- 76 --
---------- ---------- ---------- ----------
Total other operating costs and expenses 5,287 3,308 15,003 10,253
---------- ---------- ---------- ----------
Operating income ................................ 3,071 2,468 7,622 6,272
Other income, net ............................... 673 63 1,261 141
---------- ---------- ---------- ----------
Income before income taxes ...................... 3,744 2,531 8,883 6,413
Provision for income taxes ...................... 1,475 962 3,458 2,437
---------- ---------- ---------- ----------
Net income ...................................... $ 2,269 $ 1,569 $ 5,425 $ 3,976
========== ========== ========== ==========
As a Percentage of Revenues:
Revenues ........................................ 100.0% 100.0% 100.0% 100.0%
Direct costs .................................... 52.8 56.9 54.7 57.2
---------- ---------- ---------- ----------
Gross profit (a) ................................ 47.2 43.1 45.3 42.8
---------- ---------- ---------- ----------
Other operating costs and expenses:
General and administrative expenses ........ 24.1 20.6 25.8 22.8
Sales and marketing expenses ............... 5.3 4.1 4.1 3.8
Amortization of goodwill ................... 0.4 -- 0.1 --
---------- ---------- ---------- ----------
Total other operating costs and expenses 29.8 24.7 30.0 26.6
---------- ---------- ---------- ----------
Operating income ................................ 17.4 18.4 15.3 16.2
Other income, net ............................... 3.8 0.5 2.5 .4
---------- ---------- ---------- ----------
Income before income taxes ...................... 21.2 18.9 17.8 16.6
Provision for income taxes ...................... 8.3 7.2 6.9 6.3
---------- ---------- ---------- ----------
Net income ...................................... 12.9% 11.7% 10.9% 10.3%
========== ========== ========== ==========
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(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, 2000 COMPARED
WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1999
REVENUES. For the three months ended September 30, 2000, our total revenues
increased by 32.1%, or $4.3 million over the same period last year. The increase
in revenues primarily reflects an increase in the volume of services to existing
clients. It also includes revenue of $140,000 from Viking for the one month
subsequent to the closing of the acquisition.
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DIRECT COSTS. For the three months ended September 30, 2000, direct costs
increased by 22.6%, or $1.7 million, over the same period last year. The
increase was due primarily to an increase in project personnel to 428 as of
September 30, 2000, including 16 Viking employees, as compared to 364 as of
September 30, 1999. Direct costs decreased as a percentage of revenues for the
period ended September 30, 2000, to 52.8% as compared to 56.9% in the same
period last year, due to normal fluctuations in labor and other direct costs.
GROSS PROFIT. Gross profit increased by 44.7% to $8.4 million in the three
months ended September 30, 2000 from $5.8 million in the three months ended
September 30, 1999. Gross profit as a percentage of revenues increased to 47.2%
in the three months ended September 30, 2000 from 43.1% in the three months
ended September 30, 1999, 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 55.0% to $4.3 million in the three months ended September 30, 2000
from $2.8 million in the three months ended September 30, 1999. Facility costs
increased in the current quarter over last year due to the opening of our new
offices in Fairfax, Virginia. Our total general and administrative headcount
increased to 74 employees as of September 30, 2000, including 4 Viking
employees, compared to 46 employees as of September 30, 1999, consistent with
our plans.
SALES AND MARKETING. Sales and marketing expenses increased 70.3% to $0.9
million in the three months ended September 30, 2000 from $0.5 million in the
three months ended September 30, 1999. This increase was due to an increase in
our marketing efforts.
AMORTIZATION OF GOODWILL. In the quarter ended September 30, 2000, we
incurred $76,000 of amortization expense related to the $4.6 million of goodwill
we recorded in connection with the acquisition of Viking.
OPERATING INCOME. Operating income increased 24.6% to $3.1 million in the
three months ended September 30, 2000 from $2.5 million in the three months
ended September 30, 1999. This increase was due primarily to increased revenues
and decreased costs as a percentage of revenues.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH
THE NINE MONTHS ENDED SEPTEMBER 30, 1999
REVENUES. For the nine months ended September 30, 2000, our total revenues
increased by 29.3%, or $11.3 million, over the same period last year. The
increase in revenues primarily reflects an increase in the volume of services to
existing clients. It also includes $140,000 of revenue from Viking for the one
month subsequent to the closing of the acquisition.
DIRECT COSTS. For the nine months ended September 30, 2000, direct costs
increased by 23.6%,or $5.2 million, over the same period last year. The increase
was due primarily to an increase in project personnel to 428 as of September 30,
2000, including 16 Viking employees, as compared to 364 as of September 30,
1999. Direct costs decreased as a percentage of revenues to 54.7% due to normal
fluctuations in labor and other direct costs.
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GROSS PROFIT. Gross profit increased by 36.9% to $22.6 million in the nine
months ended September 30, 2000 from $16.5 million in the nine months ended
September 30, 1999. Gross profit as a percentage of revenues increased to 45.3%
in the nine months ended September 30, 2000 from 42.8% in the nine months ended
September 30, 1999, 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 by 46.2% to $12.9 million in the nine months ended September 30, 2000
from $8.8 million in the nine months ended September 30, 1999. Facility costs
increased in the nine months ended September 30, 2000 due to the opening of both
phases I & II of our new offices in Fairfax, Virginia. Our total general and
administrative headcount increased to 74 employees as of September 30, 2000,
including 4 Viking employees, compared to 46 employees as of September 30, 1999,
consistent with our plans.
SALES AND MARKETING. Sales and marketing expenses increased 42.2% to $2.1
million in the nine months ended September 30, 2000 from $1.5 million for the
nine months ended September 30, 1999. This increase was due to an increase in
our marketing efforts.
AMORTIZATION OF GOODWILL. For the nine months ended September 30, 2000, we
incurred $76,000 of amortization expense related to the $4.6 million of goodwill
we recorded in connection with the acquisition of Viking.
OPERATING INCOME. Operating income increased 21.6% for the nine months
ended September 30, 2000 compared to the nine months ended September 30, 1999.
This increase was due primarily to increased revenues during the period.
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 negatively affect the rate at which the federal
government purchases technology.
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, we funded our operations primarily through cash generated
from operations and the sale of common stock to employees. Net cash used by
operating activities was $4.4 million for the nine months ended September 30,
2000. Cash used by operating activities was primarily from net income, adjusted
for working capital changes.
Net cash used by investing activities was $30.1 million for the nine months
ended September 30, 2000. During the nine months ended September 30, 2000, we
purchased $1.3 million of property and equipment and $17.4 million of short-term
investments and $9.5 million of marketable securities. We also purchased Viking
for $2.0 million in cash plus approximately $0.1 million in acquisition costs.
We received approximately $0.2 million in cash which Viking had at the time of
the transaction.
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Net cash provided by financing activities was $25.0 million for the nine
months ended September 30, 2000. During the nine months ended September 30,
2000, we sold $28.4 million of common stock and incurred $0.9 million of
associated costs in the IPO. We paid off approximately $2.1 million of debt
which we assumed in the acquisition of Viking.
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. Under the terms of our stock option
agreement and plan, we have purchased shares of stock from employees upon their
termination of employment. We terminated these terms at the time of the IPO and
we will no longer acquire shares from terminating employees.
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 $2.7 million line of credit with Bank of America, which bears
interest at the bank's prime rate and expires on April 30, 2001. We expect to
renew our line of credit when it expires. As of September 30, 2000, we had no
borrowings outstanding under the line of credit. We did have outstanding $1.29
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. By September
30, 2000, our accounts receivable turn over rate, net of advance payments on
contracts, was approximately five times a year. This rate has improved over the
last eight quarters, thus increasing our cash flow.
Year 2000 Compliance
Although we have not experienced any significant failures or problems in
connection with the Year 2000 date change in either our software or the systems
we have developed for our clients, our clients may still experience significant
problems that may require them to divert significant resources to remediation
instead of to new eGovernment solutions. This could delay our ability to
generate new business and additional revenues.
Furthermore, undiscovered Year 2000 problems may also affect software or
code that we develop or third-party software products that are incorporated into
the information systems solutions we create for our clients. Our clients license
software directly from third parties, and we do not guarantee that the software
licensed from these suppliers is Year 2000 compliant. However, if we fail to
provide our clients Year 2000 compliant information systems solutions we could
suffer financial loss, harm to our reputation and liability to others and could
seriously harm our business, financial condition and operating results.
Recent Accounting Pronouncements
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101) was issued on December 3, 1999. SAB 101 provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB 101, as amended, delays the implementation
date until no later than the fourth quarter of fiscal year 2000. We do not
believe that the implementation of SAB 101 will have any impact on our operating
results.
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
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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
S-1 (SEC File No. 333-95331) 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
None
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2000, we sold an aggregate of
18,150 shares of common stock at purchase prices ranging from $0.78 to $1.68 per
share, for an aggregate consideration of $41,689 upon exercise of stock options
granted under our stock option agreement and our nonqualified stock option plan.
For the nine months ended September 30, 2000, we sold an aggregate of 1,559,398
shares of common stock at purchase prices ranging from $0.78 to $3.05 per share,
for an aggregate consideration of $1,922,248 upon exercise of stock options
granted under our stock option agreement and our nonqualified stock option plan.
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 leading 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. We may also use a portion of the net proceeds to
acquire businesses that are complementary to ours. We have no current plans,
agreements or commitments for, and are not currently engaged in any negotiations
with respect to, any such transaction. 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
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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.
27* Financial Data Schedule
* Filed herewith
All other exhibits incorporated herein by reference to the Company's
Registration Statement on Form S-1, No. 333-41517.
(b) Reports on Form 8-K
None.
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Signatures
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
BY: /s/ STUART R. LLOYD
-----------------------------------------------
Stuart R. Lloyd
CHIEF FINANCIAL OFFICER, SENIOR VICE PRESIDENT AND
DIRECTOR (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
November 1, 2000
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