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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 - 0001
-----------------------
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 JUNE 30, 2001
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)
<Table>
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)
</Table>
Registrant's telephone number, including area code: (703) 679-4900
-----------------------
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 August 10, 2001, 25,865,833 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 SIX MONTHS ENDED JUNE 30, 2001
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 2001 and December 31, 2000.................................... 3
Consolidated Statements of Income - Three and six months ended June 30, 2001 and 2000................ 4
Consolidated Statements of Cash Flows -- Six months ended June 30, 2001 and 2000..................... 5
Notes to Consolidated Financial Statements........................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 7-11
Item 3. Qualitative and Quantitative Disclosure about Market Risk.................................... 11
PART II. OTHER INFORMATION
Items 1 -- 6......................................................................................... 12-14
Signatures........................................................................................... 15
</Table>
2
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PEC SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
AS OF AS OF
JUNE 30, DEC. 31,
2001 2000
----------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 10,534 $ 14,655
Short-term investments .................................................. 20,392 21,017
Common stock subscription receivable .................................... 48,330 --
Accounts receivable, net ................................................ 28,185 15,764
Other current assets .................................................... 1,596 1,491
--------- ---------
Total current assets ...................................................................... 109,037 52,927
Property and equipment, net ............................................................... 2,684 2,585
Goodwill, net ............................................................................. 3,004 3,365
Other assets .............................................................................. 4,448 2,523
--------- ---------
Total assets .............................................................................. $ 119,173 $ 61,400
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................................... $ 3,068 $ 2,150
Advance payments on contracts ........................................... 1,027 1,258
Retirement plan contribution payable .................................... 567 2
Accrued payroll ......................................................... 4,643 4,214
Accrued vacation ........................................................ 1,685 1,183
Other current liabilities ............................................... 1,328 938
--------- ---------
Total current liabilities ................................................................. 12,318 9,745
--------- ---------
Long-term liabilities:
Supplemental retirement program liability ............................... 591 482
Deferred rent payable ................................................... 688 459
Other long-term liabilities ............................................. 4 14
--------- ---------
Total long-term liabilities ............................................................... 1,283 955
--------- ---------
Total liabilities ......................................................................... 13,601 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,
25,668,371 and 22,345,440 shares issued and
outstanding, respectively ...................................... 257 223
Additional paid-in capital .............................................. 77,560 28,692
Retained earnings ....................................................... 27,765 21,779
Accumulated other comprehensive income (loss) ........................... (10) 6
--------- ---------
Total stockholders' equity ................................................................ 105,572 50,700
--------- ---------
Total liabilities and stockholders' equity ................................................ $ 119,173 $ 61,400
========= =========
</Table>
See notes to consolidated financial statements.
3
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PEC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
(UNAUDITED)
Revenues $27,134 $16,614 $49,054 $32,196
------- ------- ------- -------
Operating costs and expenses:
Direct costs............................ 14,261 9,027 26,058 17,930
General and administrative expenses .... 5,722 4,640 11,090 8,581
Sales and marketing expenses............ 1,136 594 2,032 1,134
Amortization of goodwill................ 180 -- 360 --
------ ------ ------- -------
Total operating costs and expenses........................ 21,299 14,261 39,540 27,645
------ ------ ------- -------
Operating income.......................................... 5,835 2,353 9,514 4,551
Other income, net......................................... 441 473 909 588
------ ------ ------- -------
Income before income taxes................................ 6,276 2,826 10,423 5,139
Provision for income taxes................................ 2,585 1,082 4,294 1,982
------ ------ ------- -------
Net income................................................ $3,691 $1,744 $ 6,129 $ 3,157
====== ====== ====== ======
Earnings per share:
Basic................................... $0.16 $0.08 $0.27 $0.16
====== ====== ====== ======
Diluted................................. $0.14 $0.07 $ 0.24 $0.14
====== ====== ====== ======
Weighted average shares used
in computing earnings per share:
Basic................................... 22,658 21,583 22,565 19,916
====== ====== ====== ======
Diluted................................. 26,386 24,879 26,074 23,346
====== ====== ====== ======
</Table>
See notes to consolidated financial statements.
4
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PEC SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDING
------------------------
JUNE 30, JUNE 30,
2001 2000
---- ----
(UNAUDITED)
Cash flows from operating activities:
Net income................................................................... $ 6,129 $ 3,157
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization....................................... 527 329
Amortization of goodwill............................................ 360 --
Deferred rent payable............................................... 229 215
Deferred income taxes............................................... (137) --
Changes in operating assets and liabilities:
Accounts receivable, net............................................ (12,421) 1,413
Other current assets................................................ (62) (1,053)
Other assets........................................................ (32) (270)
Accounts payable and accrued expenses............................... 378 (175)
Advance payments on contracts....................................... (231) (518)
Retirement plan contribution payable................................ 565 502
Accrued payroll..................................................... 428 (446)
Accrued vacation.................................................... 502 337
Other current liabilities........................................... 976 532
Supplemental retirement program liability........................... 109 110
Other long-term liabilities......................................... (10) --
-------- --------
Net cash provided (used) by operating activities........... (2,690) 4,133
-------- --------
Cash flows from investing activities:
Purchases of property and equipment................................. (520) (856)
Net sales (purchases) of short-term investments..................... 637 (7,580)
Investment in affiliate............................................. (1,500) --
Capitalized software................................................ (431) --
-------- --------
Net cash used by investing activities...................... (1,814) (8,436)
-------- --------
Cash flows from financing activities:
Dividends paid...................................................... -- (413)
Proceeds from issuance of common stock.............................. 441 28,387
Common stock offering costs......................................... (58) (878)
-------- --------
Net cash provided by financing activities.................. 383 27,096
-------- --------
Net increase (decrease) in cash................................................................ (4,121) 22,793
Cash and cash equivalents at beginning of period............................................... 14,655 7,981
-------- --------
Cash and cash equivalents at end of period..................................................... $ 10,534 $ 30,774
======== ========
Income taxes paid.............................................................................. $3,820 $ 171
======== ========
Interest paid.................................................................................. $ 2 $--
======== ========
</Table>
See notes to consolidated financial statements.
5
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PEC SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 for the years ended December 31, 1999
and 2000 and for each of the three years in the period ended December 31, 2000
included on Form 10-K, as amended, as filed with the Securities and Exchange
Commission. The results of operations for the six months ended June 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 issued 3,000,000 shares of common stock, which closed on July
3, 2001. The Company has recorded the issuance of such shares as a common stock
subscription receivable in the amount of $48.3 million. Net of offering
expenses, proceeds to the Company were $47.7 million.
4. Accounts Receivable
Accounts receivable consist of the following as of:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
---- ----
(DOLLARS IN THOUSANDS)
Billed accounts receivable $26,659 $ 14,597
Unbilled accounts receivable 2,731 2,449
Progress payments (1,027) (1,104)
------- --------
28,363 15,942
Allowance for doubtful accounts (178) (178)
------- --------
Accounts receivable, net $28,185 $ 15,764
======= ========
</Table>
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
6
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results of operations, had the acquisition occurred on January 1, 2000, would
not have been materially different than reported results for the three and
six months ended June 30, 2000.
6. Net Income Per Share
Basic and diluted earnings per share for the three months and six months
ended June 30, 2001 and 2000 were determined as follows:
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 2000
-------------------------------- ------------------------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NET NET
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
------ ------ --------- ------ ------ ---------
Basic EPS........................ $1,744 21,583,476 $0.08 $3,157 19,916,353 $0.16
Effect of dilutive options -- 3,295,376 (0.01) -- 3,429,728 (0.02)
------ ---------- ----- ------ ---------- -----
Diluted EPS...................... $1,744 24,878,852 $0.07 $3,157 23,346,081 $0.14
====== ========== ===== ====== ========== =====
</Table>
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, 2001 SIX MONTHS ENDED JUNE 30, 2001
-------------------------------- ------------------------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NET NET
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
------ ------ --------- ------ ------ ---------
Basic EPS............ $3,691 22,658,042 $0.16 $6,129 22,565,252 $0.27
Effect of dilutive options......... -- 3,727,965 (0.02) -- 3,509,042 (0.03)
------ ---------- ----- ------ ---------- -----
Diluted EPS........................ $3,691 26,386,007 $0.14 $6,129 26,074,294 $0.24
====== ========== ===== ====== ========== =====
</Table>
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 six months ended June 30, 2001,
revenues from these contract types were approximately 79%, 13% and 8%, and
77%, 14% and 9% 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.
7
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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 68% and 73% of
our revenues in the three months and six months ended June 30 2001. As of June
30, 2001, we had 832 personnel.
In the three months and six months ended June 30, 2001, we derived
approximately 44% and 40% 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 marketable securities.
Results of Operations
The following table sets forth certain financial data as a percentage of
revenues for the periods indicated.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Statement of Income:
Revenues ....................................... $ 27,134 $ 16,614 $ 49,054 $ 32,196
Direct costs ................................... 14,261 9,027 26,058 17,930
--------- --------- --------- ---------
Gross profit (a) ............................... 12,873 7,587 22,996 14,266
--------- --------- --------- ---------
Other operating costs and expenses:
General and administrative expenses ....... 5,722 4,640 11,090 8,581
Sales and marketing expenses .............. 1,136 594 2,032 1,134
Amortization of goodwill .................. 180 -- 360 --
--------- --------- --------- ---------
Total other operating costs and expenses 7,038 5,234 13,482 9,715
--------- --------- --------- ---------
Operating income ............................... 5,835 2,353 9,514 4,551
Other income, net .............................. 441 473 909 588
--------- --------- --------- ---------
Income before income taxes ..................... 6,276 2,826 10,423 5,139
Provision for income taxes ..................... 2,585 1,082 4,294 1,982
--------- --------- --------- ---------
Net income ..................................... $ 3,691 $ 1,744 $ 6,129 $ 3,157
========= ========= ========= =========
As a Percentage of Revenues:
Revenues ....................................... 100.0% 100.0% 100.0% 100.0%
Direct costs ................................... 52.6 54.3 53.1 55.7
--------- --------- --------- ---------
Gross profit (a) ............................... 47.4 45.7 46.9 44.3
--------- --------- --------- ---------
Other operating costs and expenses:
General and administrative expenses ....... 21.1 27.9 22.6 26.7
Sales and marketing expenses .............. 4.2 3.6 4.2 3.5
Amortization of goodwill .................. 0.6 -- 0.7 --
--------- --------- --------- ---------
8
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Total other operating costs and expenses 25.9 31.5 27.5 30.2
--------- --------- --------- ---------
Operating income ............................... 21.5 14.2 19.4 14.1
Other income, net .............................. 1.6 2.8 1.8 1.8
--------- --------- --------- ---------
Income before income taxes ..................... 23.1 17.0 21.2 15.9
Provision for income taxes ..................... 9.5 6.5 8.7 6.1
--------- --------- --------- ---------
Net income ..................................... 13.6% 10.5% 12.5% 9.8%
========= ========= ========= =========
</Table>
(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 JUNE 30, 2001 COMPARED WITH THE
THREE MONTHS ENDED JUNE 30, 2000
REVENUES. For the three months ended June 30, 2001, our total revenues
increased by 63%, or $10.5 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 32% of revenues.
DIRECT COSTS. For the three months ended June 30, 2001, direct costs
increased by 58.0%, or $5.2 million, over the same period last year. The
increase was due primarily to an increase in project personnel to 742 as of June
30, 2001 as compared to 408 as of June 30, 2000. Direct costs decreased as a
percentage of revenues for the period ended June 30, 2001, to 52.6% as compared
to 54.3% in the same period last year, due to normal fluctuations in labor and
other direct costs.
GROSS PROFIT. Gross profit increased by 69.7% to $12.9 million in the three
months ended June 30, 2001 from $7.6 million in the three months ended June 30,
2000. Gross profit as a percentage of revenues increased to 47.4% in the three
months ended June 30, 2001 from 45.7% in the three months ended June 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 23.3% to $5.7 million in the three months ended June 30, 2001 from
$4.6 million in the three months ended June 30, 2000. Facility costs increased
in the current quarter over last year due to the opening of new offices in
Fairfax, Virginia. Our total general and administrative headcount increased to
90 employees as of June 30, 2001 compared to 69 employees as of June 30, 2000,
consistent with our plans.
SALES AND MARKETING. Sales and marketing expenses increased 91.4% to $1.1
million in the three months ended June 30, 2001 from $0.6 million in the three
months ended June 30, 2000. This increase was due to an increase in our
marketing efforts.
AMORTIZATION OF GOODWILL. In the three months ended June 30, 2001, we
incurred $180,000 of amortization expense related to the $3.6 million of
goodwill we recorded in connection with the acquisition of Viking.
OPERATING INCOME. Operating income increased 147.9% to $5.8 million in the
three months ended June 30, 2001 from $2.4 million in the three months ended
June 30, 2000. This increase was due primarily to increased revenues and
decreased costs as a percentage of revenues.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH THE
SIX MONTHS ENDED JUNE 30, 2000
REVENUES. For the six months ended June 30, 2001, our total revenues
increased by 52.4%, or $16.9 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 27% of revenues.
DIRECT COSTS. For the six months ended June 30, 2001, direct costs
increased by 45.3%, or $8.1 million, over the same period last year. The
increase was due primarily to an increase in project personnel to 742 as of June
30, 2001 as compared to 408 as of June 30, 2000. Direct costs decreased as a
percentage of revenues for the period ended June 30, 2001, to 53.1% as compared
to 55.7% in the same period last year, due to normal fluctuations in labor and
other direct costs.
GROSS PROFIT. Gross profit increased by 61.2% to $23.0 million in the six
months ended June 30, 2001 from $14.3 million in the six months ended June 30,
2000. Gross profit as a percentage of revenues increased to 46.9% in the six
months
9
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ended June 30, 2001 from 44.3% in the six months ended June 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 29.2% to $11.1 million in the six months ended June 30, 2001 from $8.6
million in the six months ended June 30, 2000. Facility costs increased in the
current period over last year due to the opening of new offices in Fairfax,
Virginia. Our total general and administrative headcount increased to 90
employees as of June 30, 2001 compared to 69 employees as of June 30, 2000,
consistent with our plans.
SALES AND MARKETING. Sales and marketing expenses increased 79.1% to $2.0
million in the six months ended June 30, 2001 from $1.1 million in the six
months ended June 30, 2000. This increase was due to an increase in our
marketing efforts.
AMORTIZATION OF GOODWILL. In the six months ended June 30, 2001, we
incurred $360,000 of amortization expense related to the $3.6 million of
goodwill we recorded in connection with the acquisition of Viking.
OPERATING INCOME. Operating income increased 109.0% to $9.5 million in the
six months ended June 30, 2001 from $4.6 million in the six months ended June
30, 2000. This increase was due primarily to increased revenues and decreased
costs as a percentage of revenues.
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 used by operating activities was $2.7 million for the six
months ended June 30, 2001. Cash used by operating activities was primarily from
net income, adjusted for working capital changes, which were principally
increases in accounts receivable.
Net cash used by investing activities was $1.8 million for the six months
ended June 30, 2001. During the six months ended June 30, 2001, we purchased
$0.5 million of property and equipment and incurred $0.4 million for capitalized
software development costs. We had $0.6 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 $0.4 million from the sale of
common stock to employees upon the exercise of their stock options for the six
months ended June 30, 2001. We paid $0.1 million of costs associated with the
June 2001 offering of common stock in the six months ended June 30, 2001.
Although dividends have been paid in prior years, including $0.4 million in
the six months ended June 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.
10
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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 June 30, 2001, we had no borrowings outstanding under the
line of credit. As of June 30, 2001, we had 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. At June 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.
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 six months.
11
<Page>
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. 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
(a) The Company held its Annual Meeting of Stockholders on May 23, 2001
(the "Annual Meeting").
(b) n/a
(c) The following matters were voted upon at the Annual Meeting:
(i) To elect three directors to serve until the 2004 annual meeting
of stockholders, and until their successors are elected and duly
qualified, with 94.8% of the Common Stock present and voting at
the meeting voting for Messers Rice, Brown and Carr as follows:
<Table>
<Caption>
NOMINEE FOR AGAINST OR WITHHELD
------- --- -------------------
Paul G. Rice 21,336,640 750
Jesse Brown 21,336,640 750
Frank J. Carr 21,179,423 157,967
</Table>
(ii) To ratify the appointment of PricewaterhouseCoopers LLP as our
independent auditors for the year ended December 31, 2001 was
ratified by 94.8% of the shares of Common Stock present and
voting at the meeting. (Votes for: 21,332,446; votes against or
withheld: 3,525; abstain: 1,399; broker non-votes: 0).
ITEM 5. OTHER INFORMATION
None
12
<Page>
ITEM 6 (A) EXHIBITS
<Table>
<Caption>
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.
</Table>
13
<Page>
<Table>
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.
</Table>
* 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.
(b) Reports on Form 8-K
None.
14
<Page>
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: AUGUST 10, 2001 STUART R. LLOYD
CHIEF FINANCIAL OFFICER, SENIOR
VICE PRESIDENT AND DIRECTOR
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
15