<PAGE>
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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, 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
---------------
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 4, 2000, 22,270,020 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 JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements:
Unaudited Balance Sheets -- June 30, 2000 and December 31, 1999......................... 3
Unaudited Statements of Income -- Three months ended June
30, 2000 and 1999................................................................ 4
Unaudited Statements of Income -- Six months ended June 30, 2000 and 1999............... 5
Unaudited Statements of Cash Flows -- Six months ended June 30, 2000
and 1999........................................................................ 6
Notes to Financial Statements........................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 9
Item 3. Qualitative and Quantitative Disclosure about Market Risk.................... 17
PART II. OTHER INFORMATION
Items 1 -- 6........................................................................... 18
Signatures............................................................................. 20
</TABLE>
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<PAGE>
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PART I: FINANCIAL INFORMATION
Item 1: Unaudited Financial Statements
PEC SOLUTIONS, INC.
UNAUDITED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DEC. 31,
2000 1999
---------- ----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ....................... $30,774 $ 7,981
Short-term investments .......................... 7,580 --
Accounts receivable, net ........................ 11,828 13,241
Other current assets ............................ 1,977 924
------- -------
Total current assets ....................... 52,159 22,146
Property and equipment, net .......................... 2,034 1,507
Other assets ......................................... 1,017 747
------- -------
Total assets ............................... $55,210 $24,400
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........... $ 2,250 $ 2,425
Advanced payments on contracts ................. 955 1,473
Dividends payable ............................... -- 413
Retirement plan contribution payable ............ 502 --
Accrued payroll ................................. 2,803 3,249
Accrued vacation ................................ 1,240 903
Other current liabilities ....................... 421 373
------- -------
Total current liabilities .................. 8,171 8,836
Long-term liabilities:
Supplemental retirement program liability ....... 391 281
Deferred rent payable ........................... 215 --
======= =======
Total long-term liabilities ................ 606 281
======= =======
Total liabilities .......................... 8,777 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, 22,252,620 and 17,706,372 shares
issued and outstanding, respectively ....... 223 177
Additional paid-in capital ...................... 28,548 601
Retained earnings ............................... 17,662 14,505
------- -------
Total stockholders' equity .................. 46,433 15,283
------- -------
Total liabilities and stockholders' equity .. $55,210 $24,400
======= =======
</TABLE>
See notes to financial statements (unaudited).
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PEC SOLUTIONS, INC.
UNAUDITED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues ................................... $16,614 $13,386 $32,196 $25,199
------- ------- ------- -------
Operating costs and expenses:
Direct costs .......................... 9,027 7,462 17,930 14,451
General and administrative expenses ... 4,640 3,143 8,581 6,038
Sales and marketing expenses .......... 594 432 1,134 907
------- ------- ------- -------
Total operating costs and expenses 14,261 11,037 27,645 21,396
------- ------- ------- -------
Operating income ........................... 2,353 2,349 4,551 3,804
Other income, net .......................... 473 31 588 78
------- ------- ------- -------
Income before income taxes ................. 2,826 2,380 5,139 3,882
Provision for income taxes ................. 1,082 905 1,982 1,475
------- ------- ------- -------
Net income ................................. $ 1,744 $ 1,475 $ 3,157 $ 2,407
------- ------- ------- -------
Earnings per share:
Basic ................................. $ 0.08 $ 0.09 $ 0.16 $ 0.14
------- ------- ------- -------
Diluted ............................... $ 0.07 $ 0.07 $ 0.14 $ 0.12
------- ------- ------- -------
Weighted average shares used in
computing earnings per share:
Basic ................................. 21,583 16,979 19,916 17,066
------- ------- ------- -------
Diluted ............................... 24,879 19,907 23,346 19,901
------- ------- ------- -------
</TABLE>
See notes to financial statements (unaudited).
<PAGE>
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PEC SOLUTIONS, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDING
-------------------------
JUNE 30, JUNE 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 3,157 $ 2,407
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation .............................................. 329 358
Deferred rent ............................................. 215 --
Changes in operating assets and liabilities:
Accounts receivable, net .................................. 1,413 164
Other current assets ...................................... (1,053) (463)
Other assets .............................................. (270) (168)
Accounts payable and accrued expenses ..................... (175) (210)
Advance payments on contracts ............................. (518) 125
Retirement plan contribution payable ...................... 502 (899)
Accrued payroll ........................................... (446) (163)
Accrued vacation .......................................... 337 226
Other current liabilities ................................. 532 113
Supplemental retirement program liability ................. 110 81
-------- --------
Net cash provided by operating activities ............. 4,133 1,571
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ....................... (856) (351)
Proceeds from sale of property and equipment ............. -- 6
Purchases of short-term investments ....................... (7,580) --
-------- --------
Net cash used by investing activities ................. (8,436) (345)
-------- --------
Cash flows from financing activities:
Dividends paid ............................................ (413) (348)
Proceeds from issuance of common stock .................... 28,387 58
Repurchases of common stock ............................... -- (1,262)
Common stock offering costs ............................... (878) --
Notes payable ............................................. -- 398
-------- --------
Net cash provided (used) by financing activities .... 27,096 (1,154)
-------- --------
Net increase in cash ................................................ 22,793 72
Cash and cash equivalents at beginning of period .................... 7,981 5,367
-------- --------
Cash and cash equivalents at end of period .......................... $ 30,774 $ 5,439
======== ========
Income taxes paid ................................................... $ 2,227 $ 1,794
-------- --------
Interest paid ....................................................... $ -- $ 25
-------- --------
</TABLE>
See notes to financial statements (unaudited).
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PEC SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
1. Financial Statements
The accompanying unaudited financial statements 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 six months ended June 30, 2000, are not necessarily indicative of the
operating results to be expected for the full year.
2. 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
in proceeds to the Company, net of offering expenses.
3. Accounts Receivable
Accounts receivable consist of the following as of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
(Dollars in thousands, unaudited)
<S> <C> <C>
Billed accounts receivable $ 11,153 $ 11,854
Unbilled accounts receivable 1,436 2,225
Progress payments (583) (645)
----------- -----------
12,006 13,434
Allowance for doubtful accounts (178) (193)
----------- -----------
Accounts receivable, net $ 11,828 $ 13,241
=========== ===========
</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 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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4. Net Income Per Share
Basic and diluted earnings per share for the three months and six months
ended June 30, 1999 and 2000 were determined as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
-------------------------------- ------------------------------
Net Shares Per Share Net Shares Per Share
Income Income
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ................ $ 1,475 16,978,573 $ 0.09 $ 2,407 17,066,086 $ 0.14
Effect of dilutive options -- 2,928,399 (0.02) -- 2,834,880 (0.02)
---------- ---------- -------- ---------- ---------- --------
Diluted EPS .............. $ 1,475 19,906,972 $ 0.07 $ 2,407 19,900,966 $ 0.12
========== ========== ======== ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 Six Months Ended June 30, 2000
-------------------------------- ------------------------------
Net Shares Per Share Net Shares Per Share
Income Income
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
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>
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<PAGE>
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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.
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 six months ended June
30, 2000, revenues from these contract types were approximately 67%, 21% and
12%, and 65%, 23% 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 six months ended June 30, 2000,
respectively. As of June 30, 2000, we had 477 employees.
In the three months and six months ended June 30, 2000, we derived
approximately 41% 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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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, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
(Dollars in thousands)
<S> <C> <C> <C>
Statement of Income:
Revenues............................................. $16,614 $13,386 $32,196 $25,199
Direct costs......................................... 9,027 7,462 17,930 14,451
------- ------- ------- -------
Gross profit (a)..................................... 7,587 5,924 14,266 10,748
------- ------- ------- -------
Other operating costs and expenses:
General and administrative expenses.................. 4,640 3,143 8,581 6,038
Sales and marketing expenses......................... 594 432 1,134 907
------- ------- ------- -------
Total other operating costs and expenses..... 5,234 3,575 9,715 6,945
------- ------- ------- -------
Operating income..................................... 2,353 2,349 4,551 3,804
Other income, net.................................... 473 31 588 78
------- ------- ------- -------
Income before income taxes............................ 2,826 2,380 5,139 3,882
Provision for income taxes............................ 1,082 905 1,982 1,475
------- ------- ------- -------
Net income............................................ $ 1,744 $ 1,475 $ 3,157 $ 2,407
======= ======= ======= =======
As a Percentage of Revenues:
Revenues............................................... 100.0% 100.0% 100.0% 100.0%
Direct costs........................................... 54.3 55.7 55.7 57.3
------- ------- ------- -------
Gross profit (a)....................................... 45.7 44.3 44.3 42.7
------- ------- ------- -------
Other operating costs and expenses:
General and administrative expenses............... 27.9 23.5 26.7 24.0
Sales and marketing expenses...................... 3.6 3.2 3.5 3.6
------- ------- ------- -------
Total other operating costs and expenses...... 31.5 26.7 30.2 27.6
------- ------- ------- -------
Operating income....................................... 14.2 17.6 14.1 15.1
Other income, net...................................... 2.8 0.2 1.8 .3
------- ------- ------- -------
Income before income taxes............................. 17.0 17.8 15.9 15.4
Provision for income taxes............................. 6.5 6.8 6.1 5.8
------- ------- ------- -------
Net income............................................. 10.5% 11.0% 9.8% 9.6%
======= ======= ======= =======
</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, 2000 COMPARED WITH
THE THREE MONTHS ENDED JUNE 30, 1999
REVENUES. For the three months ended June 30, 2000, the Company's total
revenues increased by 24.1%, or $3.2 million over the same period last year.
The increase in revenues primarily reflects an increase in the volume of
services to existing clients.
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DIRECT COSTS. For the three months ended June 30, 2000, direct costs
increased by 21.0%, or $1.6 million, over the same period last year. The
increase was due primarily to an increase in project personnel to 408 as of
June 30, 2000 as compared to 358 as of June 30, 1999. Direct costs decreased
as a percentage of revenues for the period ended June 30, 2000, to 54.3% due
to normal fluctuations in labor and other direct costs.
GROSS PROFIT. Gross profit increased by 28.1% to $7.6 million in the three
months ended June 30, 2000 from $5.9 million in the three months ended June 30,
1999. Gross profit as a percentage of revenues increased to 45.7% in the three
months ended June 30, 2000 from 44.3% in the three months ended June 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 47.6% to $4.6 million in the three months ended June 30, 2000 from
$3.1 million in the three months ended June 30, 1999. Facility costs increased
in the current quarter due to the opening of the second phase of our new offices
in Fairfax, Virginia. Our total general and administrative headcount increased
to 69 employees as of June 30, 2000 compared to 42 employees as of June 30,
1999, consistent with the Company's plans.
SALES AND MARKETING. Sales and marketing expenses increased 37.5% to $0.6
million in the three months ended June 30, 2000 from $0.4 million in the three
months ended June 30, 1999. This increase was due to an increase in our
marketing efforts.
OPERATING INCOME. Operating income remained constant compared to the three
months ended June 30, 1999. This was due primarily to increased revenues and
increased costs during the period.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH
THE SIX MONTHS ENDED JUNE 30, 1999
REVENUES. For the six months ended June 30, 2000, the Company's total
revenues increased by 27.8%, or $7.0 million, over the same period last year.
The increase in revenues primarily reflects an increase in the volume of
services to existing clients.
DIRECT COSTS. For the six months ended June 30, 2000, direct costs
increased by 24.1%,or $3.5 million, over the same period last year. The increase
was due primarily to an increase in project personnel to 408 as of June 30, 2000
as compared to 358 as of June 30, 1999. Direct costs decreased as a percentage
of revenues to 55.7% due to normal fluctuations in labor and other direct costs.
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<PAGE>
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GROSS PROFIT. Gross profit increased by 32.7% to $14.3 million in the six
months ended June 30, 2000 from $10.7 million in the six months ended June 30,
1999. Gross profit as a percentage of revenues increased to 44.3% in the six
months ended June 30, 2000 from 42.7% in the six months ended June 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 42.1% to $8.6 million in the six months ended June 30, 2000 from
$6.0 million in the six months ended June 30, 1999. Facility costs increased in
the six months ended June 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 69 employees as of June 30, 2000 compared to 42 employees
as of June 30, 1999, consistent with the Company's plans.
SALES AND MARKETING. Sales and marketing expenses increased 25.0% to $1.1
million in the six months ended June 30, 2000 from $0.9 million for the six
months ended June 30, 1999. This increase was due to an increase in our
marketing efforts.
OPERATING INCOME. Operating income increased 19.6% for the six months ended
June 30, 2000 compared to the six months ended June 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. For example, revenues in the
first quarter of 1999 were lower than the fourth quarter of 1998 due to two
fewer billable days in the first quarter, and the inclusion in the fourth
quarter's revenues of a larger than usual amount of other direct costs to be
passed through to clients. 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
We have funded our operations since inception primarily through cash
generated from operations and the sale of common stock to employees. Net cash
provided by operating activities was $4.1 million for the six months ended June
30, 2000. Cash provided by operating activities was primarily from net income,
adjusted for working capital changes.
Net cash used by investing activities was $8.4 million for the six months
ended June 30, 2000. During the six months ended June 30, 2000, we purchased
$0.9 million of property and equipment and $7.6 million of short-term
investments.
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Net cash provided by financing activities was $27.1 million for the six
months ended June 30, 2000. During the six months ended June 30, 2000, we sold
$28.4 million of common stock. We incurred $0.9 million of costs associated with
the April 2000 offering of common stock in the six months ended June 30, 2000
Although dividends have been paid in prior years, including $0.4 million in
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. Under the terms of our stock option agreement and plan, we
have purchased shares of stock from employees upon their termination of
employment. We have terminated these terms and 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 June 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 the end
of the second quarter of 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. At
this collection rate management believes cash generated through operations will
be sufficient to fund short and long-term cash needs.
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. The Company
does not believe that the implementation of SAB 101 will have any impact on its
operation 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
the Company has little or no control. Forward-looking statements may be
identified by words including "anticipate," "believe," "estimate," "expect" and
similar expressions. The Company cautions readers that forward-looking
statements, including without limitation, those relating
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<PAGE>
-12-
to the Company's 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 the Company's
revenues from government clients, risks involved in contracting with the
government, difficulties the Company may have in attracting, retaining and
managing professional and administrative staff, fluctuations in quarterly
results, risks related to acquisitions, risks related to competition and the
Company's ability to continue to win and perform efficiently on contracts, and
other risks and factors identified from time to time in the Company's reports
filed with the SEC, including those identified under the section entitled "Risk
Factors" in the Conpany's Registration Statement on Form S-1 (SEC File No.
333-95331) 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 quarter ended June 30, 2000, we sold an aggregate of
65,700 shares of common stock at purchase prices ranging from $0.78 to
$1.68 per share, for an aggregate consideration of $80,133 upon exercise
of stock options granted under our stock option agreement and our
nonqualified stock option plan. For the six months ended June 30, 2000, we sold
an aggregate of 1,541,248 shares of common stock at purchase prices ranging from
$0.78 to $3.05 per share, for an aggregate consideration of $1,880,559 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. 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)
August 4, 2000
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